VALUE INVESTING
Farewell To Anglo Pacific

By Stephen Bland (TMFPyad)
March 4, 2004

I bid a fond farewell to Anglo Pacific (LSE: APF) last week. Well a farewell anyway, I never get fond of shares, that would be fatal.

Anglo came up in my regular trawls for value shares in April last year and I bought a very small holding for two reasons. Firstly, I was fully invested elsewhere. Secondly, the company was a small cap of around £30m at the time. However, I had a few quid available from some dividend income on my other holdings so, as the fundamentals looking good, I went into Anglo with that money.

For some time now I have avoided small caps, which I define as under £100m. Primarily because I see them as much riskier than large caps for several reasons. Since I prefer to hold a small number of shares, sometimes only one,  I was not willing to accept the higher risks involved. However, I have had a change of heart with these and am now much more inclined to invest in them for the simple reason that larger cap pyad shares hardly ever appear.

Don't get me wrong, a good big one is always going to be better than a good little one. Given a large or small pyad, I would go for the former every time. Size matters. But the luxury of choice just does not occur very often. The wheel has now turned almost full circle, from my near completely small cap period, to an exclusively large cap period, and now back to at least a consideration of small caps, should a good one appear.

I doubt very much though that I would bet the farm on a very small cap, even if sufficient shares were available, which as many may know is often not the case.

Anyway, Anglo looked good. It was a pyad share with the added attraction of a good smell. The smell of Australian coal. Filthy stuff, nevertheless coal has had something of a resurgence. Anglo, though is a mining investor, does not own a single pick or shovel. It is just a financial operation. Anyway who cares what it does, it was just selling too cheap on the fundamentals in my view. Another thing that appealed, a smell factor if you like, was the fact that it has probably one of the fewest numbers of employees of any share. There were only a handful, almost literally. Running lean like this is a sign of business competence. Bloated employee numbers is a sign of the opposite.

It is quite amazing how large companies going through a bad patch can sometimes sack large numbers of staff and still offer more or less the same products and services as before. So what were all those redundant staff doing there in the first place then? The answer is that corporate culture encourages empire building. For many managers it is a status thing to have as many staff as possible under their control. This becomes an end in itself rather than what should be the true end, corporate profitability. These managers have become bureaucrats and not business people. When things get tough, some people at the top can then suddenly see large numbers of superfluous staff, which they never noticed before. Well they should have noticed them before, it is not competent to employ vastly greater numbers of staff than you need.

Anglo hung together nicely so in I went at about 36p including costs. Last week, I sold at about 63p after costs for a profit of some 76%. In true pyad style the share delivered decent dividends of 1.95p whilst I was waiting, making a total return of roughly 81% in all. The actual cash profit was modest because of the small initial investment but nevertheless it demonstrates yet again how value works.

It won't work every single time of course, no trading strategy can do that, but it does so with sufficient frequency to be a winning approach. All you need to do is understand something about fundamental share analysis, and to understand what to reject as unimportant, then possess the necessary personality to see it through. This applies to only a very limited number of small investors and consequently value will always be something for the small minority. Suits me. I've never wanted to be in the majority of anything.

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