The fund ended 2016 with a net performance of 13.39% for the year. We are satisfied with the result, but are mindful of the fact that given our time horizon, performance over 12 months is not very relevant. Brexit and the election of Trump were two important events during the year. Experts from media and finance were proven wrong in both their predictions of the events as well as the impact on the equity markets. As economist J.K. Galbraith once famously pointed out: “We have two classes of forecasters: Those who don’t know - and those who don’t know they don’t know”. Fortunately for peace of mind, we are convinced that we do not need to be able to predict such outcomes to compound our capital at attractive rates over a long period of time. The occurrence of unexpected events creates volatility in share prices and we aim to take advantage of this volatility to purchase high quality businesses or assets at attractive valuations. The stocks that contributed most to our return last year had fallen to our purchase level because of either political uncertainty (Sberbank) or due to company specific issues (ALS Ltd, STI Education Systems, Thai Wah Public Company, EM Systems Ltd). The fund recently added two new companies to its portfolio; in this quarterly letter we describe one in long- and another in short-form.

Judges Scientific PLC

During the past quarter the fund made an investment in Judges Scientific PLC (JDG). JDG is listed on AIM, a sub-market of the London Stock Exchange and home to smaller companies with less regulatory burden than the main market. We found JDG to be one of the best companies we analysed in 2016. When the company came with two negative trading updates to announce poor operating results for reasons we believe to be of temporary nature, the share price declined to a level we found attractive.

JDG specialises in the acquisition and development of a portfolio of scientific instrument businesses. Most of these companies originate either from within or around universities and cater for these institutions’ needs. The majority are mature companies, though small, and run by scientists or engineers that excel in producing quality instruments or equipment that allows universities & industry to test, measure and research to exacting standards. JDG designs, assembles and sells high quality scientific instruments with a focus on material sciences and vacuum environments. The company designs most components and outsources manufacturing unless they are readily available. The only exceptions to this are two large subsidiaries: UHV Design, which manufactures everything in-house and Armfield, which subcontracts everything including the assembly. JDG generates sales of approx. £56m; 60% from universities, 10% from testing firms and the rest from a diverse group of researchers with pharma, biotech, commercial and industrial backgrounds. More than 80% of sales are exported. Whilst most of the company's products have a long lifecycle, many of these products are sold into diverse markets and into different countries. For competitive reasons, JDG does not disclose figures of the underlying subsidiaries, but we believe the following five to be the largest contributors:

Quorum Technologies

manufactures market-leading scientific instruments primarily used for the preparation of electron microscopy samples. JDG acquired Quorum in 2009 for £1.5m when the company did £0.5m EBIT and £4m of sales. Quorum has grown substantially since then and regularly produces operating profits of £2m.

Armfield

is an innovative engineering, teaching and research equipment designer. They aim for the broad disciplines of civil-, chemical- and mechanical engineering at universities, colleges and schools. Armfield is a market leader with 15% market share and was acquired in 2015 for £10.1m. The company’s EBIT at the time was £2.1m on £14m revenue. JDG has identified Armfield as one of the companies having a challenging 2016.

Scientifica

is a world leader in micro-positioning equipment for microscopes and advanced imaging systems used in electrophysiology and neuroscience. Their products are in use at most of the top scientific laboratories throughout the world, some of these products have significant market shares. JDG acquired Scientifica in 2013 for £12m; EBIT was £2.2m on £12m revenue.

FTT

is the world leader with a 66% market share in the design, manufacture and service of instruments that measure the reaction of materials to fire. Over the last 20 years, FTT has developed its own technology and expertise to become the global benchmark for fire testing. FTT was acquired in 2005. A small competitor, F.I.R.E., was acquired and integrated in 2016.

GDS

designs, develops and manufactures equipment and software used for computer-controlled testing of soils and rocks. JDG acquired GDS in 2012 for £7.6m. EBIT and revenues were respectively £1.27m and £4.9m at that time.

All these businesses share the following characteristics: sustainable profits and cash flows, high operating margins, high returns on capital, high and stable market shares in small niches, high fixed costs (mostly specialised personnel, many PhD’s), low capital requirements and asset light.

JDG was founded by its current CEO, 66-year old David Cicurel. We spent time with David and he came across as transparent, honest and very focussed on price discipline for his acquisitions. The model is for obvious reasons not comparable in size, but there are certain similarities to Berkshire Hathaway, where each company has its own CEO and is managed from the top by Warren Buffett who is focussed on capital allocation. David Cicurel has created a lot of value for shareholders; since 2005 the share price increased from 105p to 1404p with cumulative dividends per share of 165p, generating a total return to shareholders of approx. 28% per annum over the 12-year period.

But as we mentioned before, JDG is having a very bad year due to a combination of production issues and a slower demand at some of their most profitable businesses. The company believes the reasons for the disappointing sales are cyclical and not structural in nature, a view they say is confirmed by the large microscope manufacturers such as Hitachi and Zeiss. Fluctuations in demand are inherent to their business, but in 2016 the impact was unusually large because it hit two of their largest businesses simultaneously. JDG also suffered from production issues in one large subsidiary where the ERP system (Enterprise Resource Planning) created problems with the timely ordering of parts. The company has taken action to rectify these internal issues, and we expect them to be solved within a reasonable time-frame. The decline of the share price after the poor results allowed us to invest in JDG at 10x next years’ estimated cash earnings. We believe this is an attractive valuation for a company with growth potential and the characteristics we described above. Long-term growth drivers of this business are based on the expansion of global higher-education and a continued drive across science and industry for improved measurement and optimisation. The potential for growth through acquisitions is also substantial. The market for scientific instruments is very fragmented with approx. 2000 private companies in the UK alone. Historical acquisition multiples range from 3x to 6x EBIT, which we think is exceptionally cheap. Companies with operating profits of less than £1m are too small for private equity funds, and too small for the larger companies in the sector of scientific instruments. JDG is generally the only buyer of acquisition targets of that size and this explains the attractive prices they can achieve. JDG is still a small company and therefore each acquisition has a significant enough impact on the bottom-line.

***

For the quarter ended December 31, 2016, the fund had 17 listed equity positions. The five largest positions in the fund represented 29.88% of assets under management.

Summary of the five largest positions of the fund:

Boustead Singapore Ltd:

This Singapore-based company is a conglomerate of three quality businesses, which are fundamentally different. The underlying divisions simultaneously went through headwinds, which allowed us to invest at an attractive valuation. Boustead Singapore consists of the following three businesses: 1/ a 51.2% participation in recently spun-off Boustead Projects Ltd; a design-build-lease real estate business that owns a portfolio of new and recently build high-end fully let industrial buildings. It counts IBM, Airbus, Bombardier, Rolls-Royce, SD Schenker and SDV amongst its tenants. 2/ an asset light, global engineering business active in the niche market of direct-fired process heater systems, mainly for oil & gas refineries. 3/ a distribution business of Esri Geospatial Software, which has a 60% market share in geographic information systems (best explained as a professional Google Maps, mainly for governmental use). These three businesses have high operating margins and generate high returns on invested capital. They are led by a chairman who focuses his entrepreneurship on shareholder value creation. We were able to purchase this conglomerate for respectively 5x and 12x the normalised earnings of the energy and geospatial businesses, and paid 55% of intrinsic value for the real estate assets. A potential catalyst exists in moving the real estate assets into a REIT structure and the conservative balance sheet also allows for opportunistic acquisitions.

EM Systems Co Ltd:

This Osaka-based medical software business is the leader in pharmacy software in Japan.  The company sells soft- and hard-ware to 23% of pharmacies in Japan. The country is not as advanced yet in its implementation of medical software to control and cut public health spending as compared to Western countries. However, our experience in this industry gives us confidence in the future recurring revenue stream. The company is led by an owner-operator with a good track record as both an operator and a capital allocator. When the company recently moved over to a cloud-based subscription model, the market punished the share price, ignoring years of stable future cash flows once the transition was complete. In addition, the company owns a prime office building in central Osaka. We purchased the shares at roughly the value of the real estate, covering our margin of safety. If the company makes good on its promise to sell the real estate, then we will have received this great company almost for free.

Judges Scientific: (described above)‍

Sberbank Rossi PAO:

The fund invested through the London-listed ADR’s in the equity of the largest bank in Russia. The opportunity presented itself following President Putin’s 2014 forays into Ukraine and the subsequent international pressure on the Russian Federation. For the record, we are not particularly big fans of financials, mainly for two reasons; we avoid leverage and we find bank balance sheets typically too opaque for our fundamental analysis. But the strength of Sberbank’s balance sheet, its exceptional historical profitability, its durable competitive advantages, it’s very strong management, its long runway for growth and finally a depressed valuation, all contributed to our conviction of investing in a very controversial situation. For the 10-year period to December 2015, Sberbank’s book value per share in Euro terms compounded at 14.3% per annum, despite the financial crisis in 2008 and the Ukraine crisis. The Ruble also lost about 58% of its value against the Euro over that period. Sberbank dominates the Russian banking sector with >40% of all deposits and a retail branch network over 10x the size of its nearest competitor, resulting in a significant funding cost advantage. On the lending side, the bank focuses on the higher quality borrowers. Viewed in a global context Russia remains substantially underbanked, based on the low percentage of GDP for banking products such as deposits, lending, insurance products and credit cards. We believe Sberbank is very well positioned to benefit from this long-term growth potential. We made our first investment in Q1 2014 at 4x trailing earnings and 80% of book value. We subsequently made further investments as the share price declined when the economic situation deteriorated. Griffin Fund’s current country limit for Russia is 4% of AUM at cost.

C.Uyemura & Co Ltd.:

Uyemura is a new investment for the fund which we made in Q3 2016. The company is active in a niche market of the Electroplating Chemicals Industry and is not particularly small (market capitalisation = ¥51b~US$446m) but does a great job of hiding itself. The company is listed on the Second Section of the Tokyo Stock Exchange, usually reserved for small caps with extremely low transaction volumes. Although the company has a 20-year history of growth and profitability, they never made an effort to get onto the First Section of the Tokyo Stock Exchange, unlike their two main Japanese competitors (JCU & MEC). Whilst the industry is consolidating and at best growing in the single digits, it has very high barriers to entry. The industry has seen no new players for several decades due to product complexity, know-how, customer service capabilities and reputation. There are only a small dozen companies active in this space. The three largest making out 60% of the market and Uyemura, together with three Japanese players have about 20% market share. Electroplating Chemicals are an attractive niche in the surface treatment industry and an important component in the production of printed circuit boards. Whilst the process is critical in the production of mainly mobile phones, PC’s and car electronics, the expense to the client is small in comparison to its overall manufacturing cost. This is a balance we like to see because rational customers don’t act penny wise and pound foolish on the small but critical components of their end-products. Uyemura is either a supplier or sub-supplier to most smartphones including iPhones and also for example for Toyota Motors in the car industry. Even in an environment of slowing demand for mobile phones does Uyemura manage to keep margins high because of the higher specification requirements in the latest smartphones like the iPhone 8 & 9. This business has a very high customer retention rate, is asset-light, operates with high margins and has limited need of extra capital and thus is generating lots of cash. At our purchase price, the company’s market capitalisation is 2/3 covered by cash and 4/5 covered by cash + owned leased-out real estate. These excess assets give us good downside protection. The Uyemura family still owns 25% of the company. If we back out net cash & real estate, then we are paying 1.3x EV/EBITDA. We believe this is a very cheap valuation for a good company with a long history of profitability, a stable market share in an industry with very high barriers to entry and the other characteristics we described above.