CHOU EUROPE FUND
August 20, 2019
Dear Unitholders of Chou Europe Fund,
The net asset value per unit (“NAVPU”) of a Series A unit of Chou Europe Fund at June 30, 2019 was $8.44 compared to $9.06 at December 31, 2018, an decrease of 6.8%; during the same period, the MSCI AC (Morgan Stanley Capital International All Country) Europe Total Return Index in Canadian dollars increased 12.0%. In U.S. dollars, a Series A unit of Chou Europe Fund was down 2.9% while the MSCI AC Europe Total Return Index increased 16.6%.
The table shows our one-year, three-year, five-year and 10-year annual compound rates of return.
Factors Influencing the First Six-Month Results
The major positive contributors to the Fund’s performance in the first half of 2019 were the equity holdings of Eurobank Ergasias and Intralot.
The largest decliners in the same period were the equity holdings of Endo International (NASDAQ:ENDP), Teva Pharmaceutical Industries (NYSE:TEVA), and Ryanair Holdings. The Euro depreciated against the Canadian currency during the period, which also contributed negatively to the performance of the Fund.
The Fund initiated an equity position in CPL Resources PLC.
The Fund bought back call options of Endo International PLC expiring in January 2020 with a strike price of US$15.00. The Fund did not write any new covered call options during the first half of 2019.
We believe pharmaceutical stocks as a group are selling at attractive valuations. The companies generate their earnings in cash and were selling at less than 10 times earnings at the time of our purchase. Some companies were down more than 50% from their highs, which is what initially caught our attention. As discussed in past reports, we invested in more than two pharmaceutical companies (that is, we utilized a so-called “basket approach”) to reduce the potential risks from issues relating to Food and Drug Administration approval and patent expiration that may be faced by a single company.
However, opioid related lawsuits continue to hit the pharmaceutical industry. Pharmaceutical manufacturers and distributors have been in part blamed for the U.S. opioid crisis, accused of deceptively marketing opioids in ways that downplayed their risks. The legal uncertainties stemming from these lawsuits, combined with the companies’ large debt balances have led to a decrease in their stock prices. As a result, Teva Pharmaceutical is trading at less than three times normalized 2018 earnings and Endo International PLC is trading at less than one times normalized 2018 earnings.
Eurobank Ergasias SA
Eurobank Ergasias SA (ATH:EUROB) (“Eurobank”) is the third largest bank in Greece by total assets with more than 650 branches globally. Greek banks face continuing challenges with the non-performing loans left over from the multi-year debt crisis. Eurobank’s management team has embarked on a plan to face the issue head on. By securitizing some of the loans and entering a deal to buy real estate firm, Grivalia Properties, Eurobank will increase its capital and reduce its non-performing loan portfolio significantly. Eurobank’s stock price increased 60% from €0.54 as of December 31, 2018 to €0.87 on June 30, 2019. We think the stock continues to be undervalued when compared to its book value of approximately €2.30 – €2.50 per share.
Caution to the Investors
Investors should be advised that we run a highly focused portfolio, frequently just three to five securities may comprise close to 50% of the assets of the Fund. In addition, the Fund has securities that are non-U.S. and could be subjected to geopolitical risks, which may trump or at least negatively influence the financial performance of the company. Also, we may enter into some derivative contracts, such as credit default swaps when we feel that the market conditions are right to use those instruments. Because of any or all of these factors, the net asset value of the Fund can be from time to time more volatile than at other times. However, we are not bothered by this volatility because our focus has always been, and continues to be, on how inexpensive we believe the Fund’s portfolio holdings are relative to what we believe to be their intrinsic value.
Also, the Fund’s cash position was approximately 30% of net assets as at June 30, 2019. This large cash position may depress returns for a while as we hunt for undervalued securities. Obviously, if there is a severe correction in the market in the near future, it will cushion the Fund against losses while providing us with the wherewithal to find good investment opportunities.
But for now, it could be a drag on returns. If we cannot find any bargains, the large cash position may stay for a long time.
FOREIGN CURRENCY CONTRACTS: None existed at June 30, 2019.
CREDIT DEFAULT SWAPS: None existed at June 30, 2019.
U.S. DOLLAR VALUATION: Any investor who wishes to purchase the Chou Funds in U.S.
dollars may do so.
REDEMPTION FEE: We have a redemption fee of 2% if unitholders redeem their units in less than 3 months. None of this fee goes to the Fund Manager. It is put back into the Fund for the benefit of the remaining unitholders.
INDEPENDENT REVIEW COMMITTEE: The Manager has established an IRC as required by NI 81-107. The members of the IRC are Sandford Borins, Peter Gregoire and Joe Tortolano. The 2018 IRC Annual Report is available on our website www.choufunds.com.
As of August 20, 2019, the NAVPU of a Series A unit of the Fund was $7.83 and the cash position was approximately 36.6% of net assets. The Fund is down 7.1% from the beginning of the year. In U.S. dollars, it is down 8.7%.
Except for the performance numbers of the Chou Europe Fund, this letter contains estimates and opinions of the Fund Manager and is not intended to be a forecast of future events, a guarantee of future returns or investment advice. Any recommendations contained or implied herein may not be suitable for all investors.
- The alternative method of purchasing Chou Europe Fund in $US has been offered since September 2005. Performance for years prior to September 2005 is based on the $US equivalent conversion of the results of the Chou Europe Fund ($CAN). The investments in the Chou Europe Fund ($CAN) are the same as the investments in Chou Europe Fund ($US) except for the currency applied.
About the author:
I’m a financial journalist with a Master of Science in journalism from Medill at Northwestern University.