This is the first public quarterly report of the Nintai Charitable Trust. The Trust is a legacy portfolio of Nintai Partners that ceased operations earlier in 2015. I personally manage the Trust Portfolio and serve as chief investment officer.
The third quarter saw some dramatic movement leaving the markets down significantly during the quarter. The Standard & Poor's 500TR was down by 6.4%, the Morningstar Total U.S. Equity Index was down 7.5%, and the Nintai Proxy (70% Vanguard U.S. Equities Total Market Index, 15% Vanguard Global Equities Total Market Index, and 15% Cash) was down 8.8%. The Nintai Charitable Trust Portfolio was down 7.8% net all fees. Through Sept. 30 year to date, the S&P 500TR is down 6.4%, the Morningstar Total U.S. Equity Index is down 7.8%, and the Nintai Proxy is down 9.8%. The Nintai Charitable Trust Portfolio is up 2.1% YTD net all fees.
Several stocks have driven our outperformance YTD. Morningstar (MORN, Financial) was up 26%, Novo Nordisk (NVO, Financial) was up 44%, and Synaptics (SYNA, Financial) was up 27%. Several companies have produced significant drag through Q3 including Computer Programs and Systems (CPSI, Financial) down 21%, Collectors Universe (CLCT, Financial) down 22% and Qualcomm (QCOM, Financial) down 22%.
The following is the breakdown of returns by one year, three years, five years,10 years and since inception.
* Includes management fee of 0.75% of AUM
Portfolio changes
I made two changes in the portfolio in Q3. Both were made during the “mini-crash” in late August. The first is Paychex (PAYX, Financial), a holding we previously owned but sold in 2013 due to valuation concerns. On Aug. 28 the price dropped briefly by 11%, and we purchased shares at a roughly 20% discount to our estimated intrinsic value. Earlier this year I wrote about Paychex and our thesis for keeping it on our watch list. In that article I wrote:
“Two companies on our watch list represent another area – payroll outsourcing in Paychex and Automatic Data Processing (NASDAQ:ADP). Both companies provide outsourced payroll services. While this area has been relatively stagnant over the past five years, both companies have created cross-selling models that include PEO services, retirement plans, HR services and several others. We expect these to drive growth as well as the return of normalized interest rates that provide significant “float” revenue.” We would gladly add either to the portfolio if a greater discount to our estimated fair value could be obtained.”
The second change to the portfolio was the purchase of Linear Technology (LLTC, Financial). Similar to Paychex, a revision in our estimated intrinsic value combined with a severe drop in price on Aug. 28 gave me the opportunity to establish a position. Earlier this year I wrote about the business case for Linear Technology:
“Linear is the type of company we love to purchase and hold for as long Mr. Market will allow. The company is the leader in high-performance analog (HPA) chips. These require extreme precision and very high reliability in devices used across multiple sectors. Currently, their highest need is in the automobile and industrial sectors. Because of the stress on reliability of the chip (combined with the small cost related to the entire piece of equipment), many of Linear’s clients are happy to pay top dollar for their chips.
"What we truly love about Linear’s chips is their long product life helping the business maintain extraordinarily low capital requirements. The inability for other competitors to create similar chips at cheaper prices, the depth of Linear’s relationships with key customers and the skill of their work force give the company a wide competitive moat in our opinion.
"We are also very impressed with Linear’s management. They have done an extraordinary job at maintaining a laserlike focus on the very profitable HPA market. They are quite willing to let projects go by if clients are unwilling to recognize the value of Linear’s product quality.
"With gross and net margins of 76% and 35% respectively, management has demonstrated their commitment to long-term profitability. In addition, over the past five years the company has generated an average ROE of 80%, free cash flow/total sales of 40% and ROC of 38%. This is a company that is a true cash machine. Finally, the company has no short- or long-term debt, $1.2 billion of cash on the balance sheet and yields roughly 3%.”
We couldn’t be more happy as owners of these outstanding businesses with excellent management and capital allocators.
Other holdings
I would be remiss if I didn’t take the time to write about three small-cap holdings that have performed very poorly since our purchase earlier in the year. These include Collectors Universe (CLCT, Financial), Computer Modelling Group (CMDXF, Financial) and Computer Programs and Systems (CPSI, Financial). These three stocks are down 21% 7%, and 22% since our initial purchase. In each case we still believe in our investment thesis and don’t believe our estimates are impaired in any significant way.
We think Seth Klarman (Trades, Portfolio) had it right when he said, “Buying early on the way down looks a great deal like being wrong, but it isn’t. It turns out you won’t be able to accurately tell who’s been swimming naked until after the tide comes back in.”
In this case, we eagerly wait for the next phase of the moon. With yields of 8.9%, 3.7%, and 5.7%, I am more than happy to stay invested with management and utilize dividends to compound our returns over the long term.
Portfolio positioning
The current P/E ratio of the portfolio is 18 or roughly equal to the current Standard & Poor's 500 ratio. Projected earnings growth over the next five years is 12%, or roughly 20% greater than the S&P 500. Additional measures can be seen here on the Nintai Abacus report:
Thoughts on the quarter
While disappointed with the portfolio performance this quarter, I am pleased with year-to-date results (beating the broader indices by roughly 7%) and its long-term performance. I put a considerable dent in the portfolio’s cash position reducing from 15% at the beginning of the quarter to roughly 8% by quarter end. The benefits of holding so much cash became evident when we saw the markets swoon in August, and I was able to put some capital to work purchasing outstanding assets at fair prices.
Notice I say fair prices. Even with the roughly 8% drop in the S&P 500 the vast majority of equities are trading at fair – or slightly above fair – values. There simply aren’t many opportunities in today's market. That said the Charitable Trust has partial ownership in a selection of outstanding companies I would love to own for an extended period of time. Management that wisely allocates capital combined with such a long time horizon should provide the Trust with more than adequate compounding investment returns.
As always, I look forward to your thoughts and comments.
