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It’s early days yet but, rather serendipitously, I managed to complete the valuation stage of The Great Irish Share Valuation Project by quarter-end. That deserves a performance review, I guess..?!

Let’s first take a look at individual stock performance. btw I mentioned I’ve completed 72 Irish stock valuations, but I’ll continue to include AGI Therapeutics (which was taken over) as a 73rd stock for performance purposes. And remember, Gainers/Losers are based on quarter-end prices vs. the original market prices I noted (as I worked my way through each stock’s valuation in Jan-March). Therefore, this is a TGISVP specific performance snapshot, I’m not attempting a full Q1 stock performance ranking here (though I’d expect they would be pretty similar):

TGISVP Q1 2012 Top 10 Gainers:

Stock Ticker Gain %
Merrion Pharm MERR 122%
Siteserv SSV 95%
Providence Resources PVR 72%
Prime Active Capital PACC 67%
AIB ALBK 48%
Aer Lingus AERL 47%
Datalex DLE 39%
B/I BKIR 38%
Greencore GNC 35%
Irish Life & Permanent IPM 33%

TGISVP Q1 2012 Top 10 Losers:

Stock Ticker Loss %
Zamano ZMNO (8)%
Connemara Mining CON (9)%
Smurfit Kappa SKG (10)%
Minco MIO (14)%
Clontarf Energy CLON (14)%
Great Western Mining GWMO (20)%
Karelian Diamond KDR (20)%
Conroy Gold CGNR (34)%
Petroneft PTR (42)%
Worldspreads WSPR (100)%

I’m bemused to see two recent scandal stocks, Siteserv (SSV:ID) and Worldspreads (WSPR:LN), at/near the top & bottom of the charts…

The shit finally looks like it’s ready to hit the fan with Siteserv. I’m always keen on Event Driven situations, but I wouldn’t touch this stock with a f**king bargepole..! Liquidity is crap, so it’s somewhat theoretical anyway, but I thought we’d see a wave of investor selling on the news of the sale. Why? As I’ve said before, I find it hard to invest in (what looks like) a low risk/easy reward transaction when I can’t confirm the underlying value… And with this deal, I just don’t see the 3.92 cts per share that’s been promised as a shareholder payout… All I see are worthless shares in a hopelessly insolvent company – and I thought some shareholders would see the same thing and bail out at any price.

Looks like the media’s ready to run now with this flawed Siteserv sale process story. So it can’t be long before they (or even a people’s representative!) finally ask why shareholders are getting EUR 5 mio from this sale!? Money the IBRC should clearly have grabbed for the taxpayer! Or maybe it could have been quietly stuffed in a bunch of envelopes…and poor Enda could have claimed another 50,000 had paid the household charge! Anyway, if this line of questioning heats up, the whole sale process could be thrown into disarray, and could even put the kibosh on a shareholder payout…

Worldspreads (WSPR:LN) is a whole other piece of shit… The share price is suspended @ GBP 37p, but I’m assuming (safely, I think!) the shares are now worthless. I think I correctly identified that a key source of their growing troubles was their reckless race for growth. But I thought this would lead to consolidation & sale as an end-game, not abrupt fraud and collapse… It will be interesting to see what/how many type(s) of criminal fraud are involved here, if the authorities don’t take their usual 5-10 years to nail their case. And it would be v instructive to learn the exact details – I must sit down and read the latest reports five times over, but I struggle to see how one could have identified this fraud in advance..?

And speaking of instructive, I’m also bemused to see only 1 resource stock in the Top 10 Gainers, versus 7 resource stocks in the Top 10 Losers..!?! And this is despite a great tailwind from oil & commodity prices! Let’s revisit this later in the year, but it suggests my usual opinion (and valuation) of the average junior resource stock is hitting the mark…

I’m reminded of that cliched, but v true, judgement on short selling stocks: ‘Be careful, you’re fighting a rising tide..!‘ Junior resource stocks are the opposite – sure, you can be a smart analyst, make some good stock picks, but over time (due to their rather unique ‘attributes’) you’re generally fighting a whirlpool.

OK, let’s move on to our benchmark index performance:

ISEQ:   This is a bit of a toughie, what exactly should I use? Why on earth didn’t I just get those 73 stock valuations done over the Xmas break and have them ready for Jan 1st..?! I think the fairest, and most comparable, benchmark to use is the ISEQ’s performance since Feb-6th. The valuation stage of the Project was stretched out over Jan-March, but on that date I reached the half-way point, so this is a good average starting point for a benchmark comparison. It’s not perfect, but I think it’s the simplest and most obvious solution. And I think any potential differences in benchmark choice(s) would pretty much iron themselves out over the course of the year anyway.

Against this, I have 2 different approaches (and 4 different portfolios), to measure. Please reference the accompanying file(s) – the 1st sheet will be familiar, just look to the right for the performance breakdown of the 4 portfolios. The performance(s) listed for each stock reflects its individual return contribution to each portfolio, and look to the bottom of the sheet for total portfolio returns:

TGISVP (Original Vals & Prices)     (xlsx file)

TGISVP (Original Vals & Prices)     (xls file)

Beta Portfolio:   For this portfolio, we shall assume an investor goes equally long all 36 stocks with positive Upside Potential (e.g. invests say EUR 1 in each stock, for a total of EUR 36). The 37 other stocks which were identified as neutral (2) or over-valued (35) are ignored. Gain/Loss% on each stock’s measured from the share price at the time of valuation/publication to the end of the quarter. The portfolio return contribution for each stock’s simply its Gain/Loss%/36. For example, Prime Active Capital (PACC:ID) was tagged as the most under-valued stock in the Irish universe. It actually rose 67% by quarter-end, and this translates into a 67%/36 = 1.9% portfolio return.

Smart Beta Portfolio:   Stocks are chosen on the same basis as the Beta Portfolio, but with one key twist: All 36 stocks are divided into 4 quartiles, and it’s assumed that say EUR 4 is invested in each of the top quartile stocks, 3 EUR in the next quartile, and so on down to EUR 1 in the bottom quartile stocks (for a total of EUR 90). This preserves the diversification in the portfolio, but increases the weighting/concentrates your bets on the stocks with the most Upside Potential. Taking PACC again, we can see this more aggressive approach being rewarded: The contribution in this case will increase to a 67%*4/90 = 3.0% portfolio return.

Alpha Portfolio:   This portfolio’s exactly the same as the Beta Portfolio, on the Long side… But we’re also going to assume a Short overlay (yes, rather theoretical I know..!) of all 35 over-valued stocks. We’ll invest say EUR (1) in a short position in each of these stocks, so essentially we’re adding a (different) inverse Beta Portfolio. Conroy Gold (CGNR:LN) is a good short example – it declined 34% by quarter-end, which produces a shorting profit. This amounts to a 34.4%/36 = 1.0% portfolio return.

Smart Alpha Portfolio:   This portfolio’s the same as the Smart Beta Portfolio on the Long side. But again we’ll assume a Short overlay of all 35 over-valued stocks. In a similar manner, we’ll divide these into quartiles also, and invest from EUR (1) to EUR (4) (for the most over-valued quartile) in short positions in these stocks. Let’s look at CGNR again: Its 34% decline is magnified into a 34%*4/90 = 1.5% portfolio return.

Now, how does performance actually stack up..?! The chart speaks for itself:

Portfolio TGISVP Q1 Performance
ISEQ 3.7%
Beta Portfolio 11.4%
Smart Beta Portfolio 11.8%
Alpha Portfolio 2.1%
Smart Alpha Portfolio 1.6%

The Alpha Portfolios are obviously hedge fund portfolios. In fact, they’re basically market-neutral portfolios – though, we’ll need a lot more time and data to confirm that. Conceptually, though, they offer low risk portfolios that are designed to extract stock picking alpha, while minimizing the beta impact of a falling (or rising) market. Therefore, their returns should NOT be compared with the ISEQ – and returns will likely be much more consistent than the ISEQ. One can reasonably expect, however, that the Alpha Portfolios would under-perform against a rising ISEQ (as we see here), and out-perform a falling ISEQ index.

If I had to hazard a guess, I’d estimate the Alpha Portfolio is capable of returning something like a low volatility 5-10% (maybe even 12%) absolute return per annum, with the Smart Alpha Portfolio returning slightly more (at the cost of more volatility). With a 2.1% absolute return for the Alpha Portfolio, the Smart Alpha Portfolio has not out-performed (with a 1.6% absolute return) to date, but returns appear broadly in line with the potential annual returns I’ve highlighted.

On the other hand, the Beta Portfolios are obviously exposed to a rising/falling ISEQ. But we can hope for superior relative performance – which, of course, is dependent on superior stock picking..!

So far, things are looking good, with the Beta Portfolio out-performing the ISEQ by 7.7% in the period. As might (therefore) be expected, the Smart Beta Portfolio has put on an even (slightly) better show, with an 8.1% out-performance. All in all, it’s too soon to judge, but I think we can be (tentatively) pleased with the out-performance shown by The Great Irish Share Valuation Project to date.

Best of Luck!

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