Apologies for being late in sending our performance results. There wasn’t really too much to write about in Q2 and the opposite appeared to be the case in Q3. We’re very focused on making the most of the recent correction to take a number of new positions for the investment portfolio. We, as well as most investors we know, will agree that the markets are in expensive territory today. No news here. Some value investors will do nothing and stick to a self-imposed discipline of not committing capital in these markets. On average, a day will be spent keeping a close eye on a watchlist combined with lots of reading, culminating in a bigger watchlist. We know this all too well; our own watchlist has over 200 names. Others will feel drawn into discovering new reasons to invest in new economy companies. Companies they were never going to invest in years ago when the prices were a fraction of what they are today. But we remain convinced that the fund’s long-term returns will be best served by a disciplined focus on high quality companies with predictable cash-flows AND attractive valuations, new or old. The fund’s earlier letters explain the characteristics of our target companies. When opportunities are too scarce to be fully invested, the fund stays in cash and we focus on extending our circle of competence. Today, markets might be expensive on average, but in our view, not all regions, industries and companies are expensive at the same time. Investors like ourselves, with the flexibility to invest globally in both small and large companies have a better chance of identifying good opportunities. Over the course of the fund’s life, we have been successful in finding investment opportunities because we looked for lesser known names, often smaller peers of well-known companies with proven business models that trade too expensive to our liking. In prior letters we profiled Taiwan Sakura, the dominant domestic water boiler manufacturer and also Golden Friends Corporation, which occupies a leading position in the local Taiwan elevator industry. You could call them the Viessmann and Schindler of Taiwan. The attractive valuation of the equity markets of Taiwan and South Korea motivated us to do some deeper analysis and we offered internships to two Master’s in Finance students with local roots in both countries. A screening process allowed us to identify ten companies in each country based on their business models and historical financials. The next phase was to read up more on these companies and to establish contact with the management. From this point on, the project started taking on different directions. Whereas in Korea, which as a reminder has a very developed and prosperous economy, deeply rooted in manufacturing and home to engineering and technology titans, we found it difficult to speak openly with our identified targets. We knew in advance that South Korea is not known to be a beacon of good corporate governance. Still, the conversations were random and difficult at best; hardly transparent and plenty of topics to avoid if we wanted to get a straight and honest answer. We sensed a hierarchical influence in the corporate culture similar to what Malcolm Gladwell wrote in his book Outliers. Gladwell describes the authoritarian relationship in Korean Air cockpits, where co-pilots used to bow to their captains and failed to intervene when critical in-flight errors were made and left unattended, sometimes leading to disastrous endings. We don’t want to overdramatise our personal experience here, but suffice to say that for example, questions on executive compensation and policy setting were generally frowned upon in our calls with middle management. Opaque investor communication makes it very hard for us to thoroughly analyse a company’s potential and risk. While South Korea could still be of interest to us in the future, we decided to prioritise more actionable ideas. Our efforts in Taiwan could not be more different from our experience in Korea. With an identical approach, we were greeted in Taiwan with helpful and transparent conversations. We witnessed initial signs of good corporate governance and found enough worthy companies within our strict criteria. Particularly impressive is the number of companies with high insider ownership that we give top marks for looking after the interests of minority shareholders with very modest compensation for senior management and high dividend pay-out ratios. This is in stark contrast to the excessive compensation and poor capital allocation we often see in the US and Europe. After a very productive research trip to Taiwan and Hong Kong, we added three companies to the portfolio, two of which were a result of the project. We succeeded in accumulating these meaningful positions for the portfolio which we will discuss in our Q3 letter.

During the second quarter the portfolio activity of the fund was very limited. In our 2016 Q4 letter we described a new position in Japan, C. Uyemura & Co Ltd. Uyemura is active in the niche market of electroplating chemicals of printed circuit boards, for example in smartphones and the car industry. This industry operates with high barriers to entry and has very sticky customers. At the time of our investment, we had 80% of the balance sheet covered by cash and excess real estate assets. This provided us with a high margin of safety as we were able to buy the operating part of the business for a low implied valuation. However, this margin of safety is also cash or capital which is tied up in the company, unnecessary for normal operating activities. Over the course of our holding period the share price increased by approximately 60%. If you consider that the value of the excess assets remained unchanged in value during the share price increase, then our analysis went from assigning little value to the operating part of the company, to valuing this excellent part close to our intrinsic value. We decided to reduce the position by half with more to follow.

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For the quarter ended June 30, 2018, the fund had 11 listed equity positions. The five largest positions in the fund represented 31.28% 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 from each other. 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 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.

Compugroup Medical AG:

We purchased this Koblenz-based medical software vendor at approx. 8x cash earnings. It was one of the first investments of the fund. We think this medical software business is of very high quality with high barriers to entry and a dominant position in virtually all the markets it operates in. It has very sticky customers (mostly doctors) with extremely low churn rates, no cyclicality and high free cash flow generation due to the low capital requirements to run the business. The business model is also helped by the continuous pressure from governments to cut public health spending by increasing connectivity. Despite a strong increase of the share price we maintained a substantial position because we got more comfortable with a German initiative that was recently turned into Law. It will further connect all the public health stakeholders with compatible software. Compugroup, being a leader in this field, was part of the government development initiative and once implemented, we believe the company will secure years of sustainable growth.

Hamilton Thorne Ltd:

U.S.-based Hamilton Thorne Ltd (HTL) is a C$100m company that supplies equipment, software and disposables to In Vitro Fertilisation Labs (IVF), a $1b niche market segment inside the $15b global fertility industry. The fertility market is interesting because it exhibits characteristics of a high-quality industry, combined with long-term demographic growth potential, as the maternal age has increased over the last decennia and couples are increasingly relying on assisted reproductive technology (ART) to fulfil their wish for children. HTL is facing more regulation and increased demands on the medical standards of their product offerings and industry consolidation leads to rising barriers to entry, working as a deterrent to potential competitors from entering into this niche market. In September 2016, HTL made the first of two transforming acquisitions by buying US-based Embryotech Labs, a provider of medical device toxicology testing services for less than 5x EBITDA. This business has low capital requirements and very sticky customers. Then, in the spring of 2017, they made a second acquisition to enlarge the IVF portfolio by purchasing Gynemed GmbH. A German company that manufactures and distributes consumables for the IVF labs, most importantly the cell culture media. Gynemed is known in the industry for producing the best cell culture with a shelf life double that of the competition. Gynemed supplies 98,5% of all fertility labs in Germany, Switzerland and Austria. This is also a low capex, high margin business (+75% gross) and has very loyal customers. IVF labs that use cell culture media in their certified processes rarely switch suppliers because this requires the whole process to be re-certified. HTL’s market is expected to grow at 5-10%. The introduction of new products, cross-selling opportunities from the acquired businesses and gaining market-share from smaller and less competitive companies should allow HTL to grow organically at 10% or more for many years to come. We estimate that we bought into the new HTL at 12x forward EBITDA. HTL’s only listed peer is (the much larger) Vitrolife AB, trading for 32x EBITDA.

Judges Scientific plc:

Judges Scientific (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. JDG specialises in the acquisition and development of a portfolio of scientific instrument businesses. JDG designs, assembles and sells high quality scientific instruments with a focus on material sciences and vacuum environments. 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. The 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. Since its IPO in 2005 it generated a total return to shareholders of approx. 28% per annum over the 12-year period. 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.

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% p.a., 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.