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Now H1 2012 is over, it’s time to revisit The Great Irish Share Valuation Project. Here’s my Q1 2012 performance post – well worth revisiting as background, but I’ll recap some important points below.

Let’s first look at individual stocks. I count 4 de-listings (which I’ll continue to include for performance purposes, at their final values): AGI Therapeutics (AGI:ID/LN) was a profitable Event-Driven investment for me, and inspiration for some detailed Risk Arb. posts. Siteserv (SSV:ID/LN) & Worldspreads (WSPR:LN/ID) both exited amid scandal – possibly criminal in the case of the latter, with alleged charges now including share price manipulation, in addition to accounting/actual fraud. Finally, Readymix (RYX:ID) succumbed to a Cemex (CX:US) bid, illustrating that the right investment thesis (an eventual takeout by the controlling shareholder) is not enough. Timing & the price you pay are equally important – despite the bid premium, RYX’s multi-year operational & price decline meant v few long term shareholders made any profit. Looking ahead, Cove Energy (COV:LN) seems set to follow the de-listers, but promises to provide some final drama!

Note H1 performance for each stock is TGISVP specific, i.e. performance is measured from the specific date (during Q1) that I set a target price for each stock. [If I measured actual H1 performance for all stocks, I suspect there would be a high degree of overlap in the winners & losers].

I’ve treated the ISEQ benchmark in a similar fashion, providing the following justification at the last quarter-end: ‘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.

TGISVP H1 2012 Top 10 Winners:

TGISVP H1 2012 Top 10 Losers:

No big surprise to see the Losers board mostly populated with natural resource/penny stocks… Boy, a lot of the muppets who infest the natural resource message boards must be really hurting! Think they’ll ever learn? Buying/praying over 5 different natural resource/penny stocks is not a bloody diversified portfolio…in fact, it’s not a fucking portfolio at all!

This bodes well for the TGISVP Alpha Portfolios!

So how did we actually do? First, as a reminder, at end-Q1 the benchmark clocked up a 3.7% return. By comparison, the TGISVP Beta Portfolios offered up a block-busting 11.4% & 11.8%, while the TGISVP Alpha Portfolios trailed with 1.6% & 2.1%. Broadly speaking (and it’s early days yet), this all made sense. The whole premise of TGISVP is that the Beta Portfolios would outperform – ideally, we’d see the same with the Alpha Portfolios. Realistically though, being market-neutral, the Alpha Portfolios would probably deliver a lower return (particularly in a rising market), but at a lower level of volatility. btw See my Q1 Performance post and/or the Notes on this post for a quick reminder re the construction of each portfolio.

H1 2012 performance actually looks v different! I’m v pleased to see significant out-performance across the board for all TGISVP Portfolios now:

The benchmark ISEQ performance of 0.3% is barely noticeable (note the actual full H1 ISEQ return was 8.5% – illustrating that most ISEQ gains came earlier, in the first 5 weeks of the year). Out-performance of the portfolios now ranges from 2.0% to a colossal 11.0%. Interestingly, the Alpha Portfolios are now the clear leaders, with short positions contributing most of the performance.

This likely illustrates a quirk of the (small) Irish market, and the construction of the Alpha portfolios themselves. If the Irish market offered a larger/broader universe of stocks, and I had all the blog-time in the world, the Alpha Portfolios would have been constructed in a more genuinely market-neutral fashion. This would mean structuring long-short positions on a true pairs trading basis, i.e. matching off longs & shorts by sector, market cap, market beta etc. The Irish market (and my time) unfortunately offered v little opportunity to construct a true market-neutral portfolio..!

In my defence, a lot of expensive L/S hedge funds don’t seem to offer anything superior to their investors. They boast of being market-neutral, but often don’t come close… Sure, portfolio shorts should dampen volatility over time, but the way some hedge funds go about it, they seem to end up increasing their leverage! As investors occasionally discover, to their chagrin. When they receive one of those infamous hedge fund letters: ‘…We’re in a tough market. We experienced losses on most of our key long positions. Er, um…we also managed to lose money on most of our shorts. But I did close on that 15 million townhouse I’ve been eying up, so you’ll be pleased to hear things are looking up on the home front!

So yes, the Alpha Portfolios were a little rough-and-ready in the market-neutral dept., with the (most aggressive) shorts concentrated on natural resource/penny stocks. But this has turned out to be a boon for performance! Somewhat predictable when you read up on how worthless I considered some of those stocks. I suspect portfolio composition (remember, no changes will be made for the year) will continue to support Alpha performance in 2012. However, relative valuations of stocks/sectors can change significantly, so I’d still assert the Alpha Portfolios should be lower volatility/return longer-term vs. the Beta Portfolios. This poses an interesting question: Which Portfolio do I prefer?

Well, there’s a two part answer to that question, I guess. First, I’m fairly confident my valuation approach adds value, so I’d obviously consistently prefer the Smart Portfolios. Second, my default Smart Portfolio choice would be the Smart Alpha Portfolio – it offers lower volatility over time, but returns should still prove pretty decent in absolute terms. However, depending on how low the market P/E is in absolute terms (& the Irish macro-climate), I’d opt for the Smart Beta Portfolio if I became more aggressively bullish.

For now, as I hinted above, I’d opt for the Smart Alpha Portfolio.


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 H1. The portfolio return contribution for each stock’s simply its Gain/Loss%/36.

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.

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.

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.

For reference, here’s my complete H1 2012 TGISVP file:

TGISVP H1 2012     (xlsx file)

TGISVP H1 2012     (xls file)