One of our clients recently expressed a request that periodically we take profits to preserve the gains made. It made us explain to him that there is an active process of doing this currently in place for our portfolios.

The purpose of this blog update is to reiterate how this works and what it means for our clients.


Most of our clients do have debt either relating to their house or to their investments.

Generally it is accepted wisdom that at the point of retirement it is desirable to have paid off all debt in order to have a true passive income to fund your lifestyle.

So it becomes a motivation of ours to guide our clients to eventually have this debt paid off.

Profit taking and De Risking

We choose to invest the majority of our client’s money through actively managed investment funds (actively managed means that they make a call on what companies they invest in and what ones they avoid and review this constantly). Please see our recent blog post regarding the pro’s and con’s of this investment style.

Our managers focus on ensuring the money they manage is invested in quality companies who have the ability to grow their dividend income profitability over time. They also aim to ensure this money is invested in companies that they believe are undervalued, which means they may achieve share price gains when the true value is more widely appreciated and recognised

The nature of this selection criteria means that a company may be purchased at a good price but then at some future point the share price may have risen above what the managers believe is a fair valuation, so they may choose to sell the company.

Due to the tax legislation in Australia, these investment trusts must pay out any net profit received each financial year which means they pay the cash out to investor’s bank accounts.

And for a recent example…

One of our Australian Share Funds that clients hold paid out a high level of income in July.

It was largely due to the takeover of Coal Allied which is a stock they had held for many years. It assisted the fund manager to make an income payout of 12.38% for that managed investment fund.

Importantly the Capital Gain portions will receive the 50% discount that applies to assets held for more than 12 months.

From here we determined the best use of this cash in your upcoming review workshop. For some it will reduce debt, for others it will be invested again and others it may fund the Christmas holiday away.

Another older example is that of one of our preferred International funds that paid out an income payment of 18% to investors in 2008, which largely came from the profit it made short selling the US financial stocks it felt would eventually fail due to the unsustainable sub prime lending activities.

Capturing Private Equity Upside in a lower risk way

Mike wrote an article in a pre Global Financial Crisis (GFC) 2007 newsletter outlining how we were participating in the activities of the Private Equity firms without actually investing in their funds which often carry a high degree of risk.

He commented on the high risk activities of these private equity funds at the time which often involved paying high prices for companies using high debt levels and then using financial engineering and restructuring to create higher profits before selling the company. The type of companies they focused on were often good quality companies who were run conservatively and were relatively undervalued.

In those years prior to the GFC many of the companies owned by our quality managers became takeover targets and were purchased for prices well above prices they were trading at. This meant that our clients were making profits from the activities of the private equity players without taking on the risk. This strategy was rewarded throughout the GFC with our clients experiencing lower investment losses than the broader markets and continued strong income payouts.

This same takeover activity is starting to occur again now.

One of our Australian Funds held Spotless Group which was taken over by a private equity firm this year at $2.71 per share and was trading at $1.90 just 18 months earlier.

Also held in our funds, Connect East and Clearview were taken over at a large premium last year.

Those who attended our presentation from our international fund managers in 2011 will remember the analyst saying that TNT Express (Largely European based) would not remain at the prices he was buying it at because it would re-rate or be taken over. This year one of the likely buyers named launched a takeover at a substantial premium to the forecasted buying price.

We are very happy to be holding good quality conservatively run companies who are fairly valued. The fact that some of these companies will be taken over at large premiums to the current price is a wonderful way to profit from the activities of the more aggressive companies and private equity players.

We hope that this has provided a deeper understanding of the positioning of our core investment portfolio strategy and the inbuilt profit taking structure that allows a conscious decision on how profits and income are put to use.

If you would like to discuss how we can actively manage your portfolio, contact us today.

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