A short primer on Enterprise Value

The enterprise value (which can also be called firm value, or asset value) is the total value of the assets of the business (excluding cash).

If you already know the firm’s equity value as well their total debt and cash balances, you can use them to calculate enterprise value.

Enterprise values is more commonly used in valuation techniques as it makes companies more comparable by removing their capital structure from the equation.

In investment banking, for example, it’s much more common to value the entire business (enterprise value) when advising a client on an M&A process.

In equity research, by contrast, it’s more common to focus on the equity value, since research analysts are advising investors on buying individual shares, not the entire business.


Everyone has a plan, until they get hit in the mouth

One is reminded of a well known boxer's observation on plans and experienced reality, after the last week of extraordinary market volatility.

Last Friday, the US 10-year Treasury yield surged 0.443 of a percentage point on Feb. 2, to a four-year high of 2.85%, on the threat of higher inflation, after the January US jobs report, released that morning, showed that wage growth had increased by the highest monthly rate since 2009.

A sharp reminder that essentially all assets worldwide are priced in relation to 10 year US Treasuries. In the period since the great financial crisis, investors had grown used to a world of muted inflation, low bond yields and slow, but steady growth. But everything seemingly has now changed. Higher growth, higher inflation, higher bond yields, higher volatility. This was a very long time in coming, the painful re-adjustment when risk is re-calibrated back to something resembling normality.

The real key to making money in stocks is not to get scared out of them.”
— Peter Lynch

This will eventually play out, over time. Overall it should be seen as a positive change. Positive relative to a fantasy world of excessively cheap money and mis-priced risk. Positive as well if this allows dedicated, patient managers to find outstanding companies selling at outstanding prices. This after all is the essence of long term, value orientated investing.

Across the globe, money managers who are paid to seek out value, who have waited patiently for this, will now be redoubling their efforts to find those rare opportunities.

As Peter Lynch once noted, “the real key to making money in stocks is not to get scared out of them.”

This is indeed what the investment business should really be substantially concerned with (as opposed to the business of following a trend by tracking an index, or worse, fiddling around with exotic and impossible to understand 'products'): making judgments on valuation, exercising patience and guile, understanding your investment inside and out, adding on weakness, and yes, trimming on excess. Doing this over and over again in a consistent manner. Then, when you get 'hit in the mouth', you are more able to remember your plan and to stay the course.

New EU fund disclosure regulations

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New EU fund disclosure regulations have caused quite a stir in the fund world. 

Since 3 January, a new EU regulation called MIFID II requires investment managers to disclose additional transaction costs that are charged to their funds, separately from the ongoing charges figure.

According to industry sources, across the top 20 selling funds of 2016,
investors in 13 funds are shown to be paying on average 30 per cent in transaction costs, and as much as 85 per cent more in additional transaction fees than previously disclosed.
— Lang Cat report - January 2018

The directive also requires IFAs to report all the costs back to their clients.

We have consistently maintained that the costs of dealing, ie portfolio turnover, were an obvious hidden factor.

Hence on the Arcturus Focus List of funds the majority have low, and in some cases, very low turnover. We are paying managers to take a decision, then have the courage to see the idea play out over an extended period.

Higher than average turnover is a tell-tale sign of a lack of conviction, or even worse of a manager trying to play the 'momentum game'.

The City of London Investment Trust plc

We are heartened to see a most positive review of Job Curtis' City of London investment trust on Morningstar:

"In the investment trust space, City of London (CTY) has had a manager at the helm for 26 years. This is exceptionally rare and under Job Curtis, we see investors as being in safe and accomplished hands. The process is little changed over that time, too.