Investment idea: Terravest Income Fund

Market's ability to ignore fundamentals and be a completely emotional animal astounds me. I am forever grateful to Benjamin Graham's idea of Mr. Market, the very emotional personification of the market who swings between pessimistic and optimistic extremes in the short term, but is rational in the long run.

One example of this behaviour would be Terravest Income Fund (TI.UN), a small fund based in Canada that holds a number of businesses. When I came across it, it was selling at half the book value. There was a lot of debt on their books and they had to suspend distributions. It appears that that was when the market stopped paying attention to this business.

Since then, the management has started selling various portfolio businesses to raise capital. They have paid off all their debt and have openly declared the intention to sell even more businesses. I suspect that the unsaid intention is that they want to wind down the fund by selling all the portfolio businesses.

The following was published in the fund's press release, in December 2010:

The Fund's management continues to evaluate each of the portfolio businesses in order to determine fair value. The board of trustees and management have also reviewed the future strategic direction of the Fund, and, as a result of this review, the board of trustees has determined that it is appropriate that management continue the on-going process of testing the value of each portfolio business. This process may result in the future sale of one or more portfolio businesses or the assets thereof. Subject to the Fund's cash requirements at the relevant times, the Fund plans to use proceeds received from the sale of portfolio businesses to pay one or more special distributions to unitholders.

(emphasis added by me)

In spite of this excellent news, the market hasn't given this fund the respect it deserves. As of this writing, the fund continues to sell at 0.68 price to book. Company's intrinsic value is likely much higher than stated book value. Based on the sum of parts calculation, my conservative estimated intrinsic value comes to just over $5/share.

Until Mr. Market wakes up to realize the value in this business, I will continue to hold, and collect any special distributions that come my way.

Disclosure: I am an owner of Terravest Income Fund (TI.UN) at the time of this writing.

Market Climate Update

I realize that I haven't posted in some time. It isn't because there is a shortage of excitement in the market. It certainly isn't because there isn't any news-- turmoil in the middle east and the triple disaster in Japan are enough to make anyone wake up. In spite of these disruptions in the rise of the market, there has been a shortage of interesting opportunities.

As I discussed in a previous post, the market is too expensive for me to be comfortable. Over the last few months, I have been selling into the rally.

I am not selling indiscriminately, I have been selling only securities that reached and exceeded their fair value. Since the US Fed induced rally began in fall 2010, practically anyone who owned stocks, as benefited greatly.

Rising tide, does indeed, lift all boats.

However, some boats rose higher than others. Commodities based stocks have greatly out-performed some of the more boring, stable businesses. Essentially, classically "risky" investments have benefited more from the rally than boring ones.

So where does that leave me?

I find myself holding about 45% of my portfolio in cash, due to lack of juicy opportunities. The other 55% is in stocks that have an excellent to decent margin of safety still intact at current market prices.

The one [minor] fear that I have for the cash portion of my portfolio is the onslaught of inflation. Holding gold or other inflation hedges are too risky for my taste. If I can't value it, I don't want to be owning them. Gold clearly falls in that category.