Alternative Asset Opportunities, Avangardco, checklists, CLOs, correlation, European Islamic Investment Bank, FBD Holdings, Fortress Investment Group, German property, home bias investing, KWG Kommunale Wohnen, Petroneft Resources, portfolio allocation, portfolio performance, quantitative easing, Richland Resources, risk aversion, Sirius Real Estate, Tetragon Financial Group
I remain (somewhat) uncomfortable with performance reviews. Inevitably, they produce a pretty meaningless snapshot…but we just can’t help ourselves, eh? 😉 [I covered this whole topic in greater depth here, in my 2012 Performance Review, so that may be worth another look]. OK, once more unto the breach, dear friends, once more…
Let’s first check how the indices performed in H1-2013:
The performance of Ireland & the UK nicely supports my theory that the northern periphery (inc. Scandinavia – lots of interesting stocks there right now) offers some of the best (& lower-risk) plays on Europe. Then we have the US, which continues to demonstrate how much further along it is (vs. Europe) in the cycle – as Bernanke reminded the market recently, to its (feigned?) consternation! [And to the genuine consternation of the ECB & BoE – oh boy, there’s going to be plenty of playing chicken, on all sides, in the months & year to come]. I’m profoundly suspicious of the US market now – it’s not that rising bond yields can cause much damage, they’ll obviously remain low in absolute terms for a v long time. But the market’s a discounting machine – when buying stocks gets easy & the economic outlook starts to look rosy for the average investor, that’s when things turn dangerous: Because how much of that’s already been priced in? Too many times, this scenario leaves you at break-even for a couple of years (if you’re lucky), or much worse…
And if you think this time is different – well, I actually agree, but not in a good way! There’s no free lunch – you can’t just print your way to prosperity & expect to escape scot-free, there are always (unpredictable) consequences. So, has that been priced in also..?
Now, here’s how my portfolio performed in H1-2013:
[NB: I’ve tried to (simply) reflect incremental buys & sells by calculating an average stake size. This also allows me to calculate a weighted average gain for the portfolio, to reflect the contribution of my specific portfolio weightings. I haven’t included dividends for the moment, and I continue to ignore foreign exchange rate changes. Not to suggest FX is unimportant – in fact, I encourage you track & diversify your currency exposure – but it’s a separate exercise & readers have multiple base currency perspectives anyway. If you wish to drill down, I’ll include a copy of my Excel file below – it will also include links to each corporate website].
I’m v pleased with this relative 5.5% out-performance, but my wallet’s even more delighted with the 14.4% absolute performance! It also comes as a bit of a surprise, as I’ve primarily focused on the monetary value of my portfolio this year (not percentage gains). [In fact, now I check, my total portfolio delivered a significantly better return – my undisclosed holdings have out-performed & FX has also made a positive contribution]. But for most of us, this is where the coulda/woulda/shouldas usually kick in, like:
Why didn’t I just buy into the best market(s)?
Er, how..? Very few of us can actually manage that bloody feat! In fact, I’m resigned to generally being in the middle of the pack – there will always be markets & investors who outperform me, sometimes substantially. But many of those investors are simply enjoying the fruits of a gigantic dose of home bias, and they forget how savagely this bias can treat them on other occasions. I can’t & don’t want to take that kind of risk, knowingly or unknowingly – my aim is to diversify my portfolio as much as possible. In fact, ideally, I’d like to diversify away from the stock market & the economic cycle altogether (with Alternative Asset Opportunities (TLI:LN), for example). This inevitably means selective under-performance in the short-term, but will hopefully produce superior & consistent performance in the long run.
Why didn’t I buy more of my best stocks?
Again, how? Weighting your portfolio towards your best ideas is generally a good idea, but one is always surprised by the best & worst performers in any one period! This is one of the best arguments there is for a widely diversified portfolio, regardless of your conviction level in your best ideas. You also have to think about the risk & correlation implications of each stock within your portfolio. For example, I limited my holding in Sirius Real Estate (SRE:LN) because of my already large exposure to German (residential) property, via KWG Kommunale Wohnen (BIW:GR). I also sold down my stake in Livermore Investments Group (LIV:LN) because their core portfolio’s focused on CLO residual equity tranches – this is a highly leveraged investment, and LIV’s also potentially highly correlated with my holdings in Tetragon Financial Group (TFG:NA) & Fortress Investment Group (FIG:US).
On the other hand, the large gains in FIG, LIV & FBD Holdings (FBH:ID) in both 2012 & 2013 are a (galling) reminder to actually believe in & bet on your strongest convictions (& price targets)! Once they get started, shares often run far higher & longer than you might ever expect… Also, averaging up is usually far better than averaging down – definitely a difficult (but v profitable) lesson for any value investor to learn!
Why on earth didn’t I just avoid my dud stocks?
Another tough proposition… And for many years this is where most investors’ greatest failures (& lessons) will be realized – because, in reality, faulty analysis and/or poor judgement are usually to blame. The solution for both is pretty simple, but difficult: Checklists, and reading, reading & more reading!
My obvious failures are Petroneft Resources (PTR:LN) & Richland Resources (RLD:LN) (fortunately, and somewhat deliberately, they’re both small holdings). PTR’s obviously got the 2P reserves, but that’s irrelevant when the share price is getting hammered by the lack of cashflow, and cash! RLD also has decent resource backing, and even looked cheap on an earnings/cashflow basis, but foreign companies digging/drilling in emerging markets seem to inevitably attract local politicians’ xenophobic wrath (or neglect, to often devastating effect). And both are a great reminder that stocks can simply keep declining, no matter how much they collapsed last year – it’s never too late to sell! Which I should really tell myself again…
Fortunately, with my other stocks, I believe I’m mostly just seeing noise. However, Avangardco (AVGR:LI) is a classic example (rightly, or wrongly) of a particularly reviled & neglected company – while I clearly think it’s a cheap high growth stock, it’s probably a good idea to limit such holdings unless you’re prepared to absorb significant pain & losses (ideally, on an interim basis!).
Of course, once/if you solve those problems, you’ll still have to deal with those ever-present enemies of all investors – fear & greed. These are far tougher to beat. 😉
But enough of the navel-gazing, let’s finish on a far more positive note:
I look at my entire portfolio & continue to be hugely enthused about its prospects. I particularly focus on KWG Kommunale Wohnen, Alternative Asset Opportunities & European Islamic Investment Bank (EIIB:LN). These are my largest holdings & comprise a full third of my disclosed portfolio, but ironically they’ve produced pretty much zero returns year to date!? However, this hasn’t affected my evaluation of their respective fundamentals an iota – I still believe each stock offers substantial (unrealized) upside potential, while also providing exceptional low(er)-risk diversification.
Wexboy Mid-Year 2013 Performance (xlsx file)
Wexboy Mid-Year 2013 Performance (xls file)
Here an article about light covenants: http://soberlook.com/2013/11/covenant-light-loans-on-rise.html
“TFG invested $46.4 million into the equity tranches of new CLO issues in the first three quarters of 2013, $45.5 million of it in the first quarter, as the new issue CLO market slowed (and proved to be less attractive compared to other TFG investment opportunities) in the second and third quarters.[…]
TFG continued to add to its investments in equities, credit and convertible bonds primarily via Polygon branded in-house managed funds and in real estate vehicles managed by GreenOak.”
It’s amazing, that tetragon seems to avoid further CLOs at the right time and their share price underperforms. I might consider tetragon if price falls further. management seems to be prudent.
Yes, these boys are pretty smart – if you look back, their historical CLO selection was also much better than average (in terms of defaults, etc.). Unfortunately, the TFG chart continues to look a little sickly. And now it looks like key $9.95 support’s breached – we might see $9.25 next. But that would put them on a 0.56 Price/Book – pretty silly in absolute & relative terms!
But long-term, the stock remains very cheap & may well offer very significant upside potential. See their latest presentation:
Click to access TFG-Investor-Day-Presentation-30-09-2013.pdf
Very exciting stuff, esp. page 26!
Avangardco announced in their Q3 update dividend: 25% of net income.
Click to access AVGR_3Q_and_9months_TU_25_10_2013_ENG_Final.pdf
Yes, good news Stefan – and a pretty attractive dividend yield! I’d prefer to see a share buyback myself, but at this point I think the payment of a dividend will provide a more effective signal to the market re AVGR’s underlying intrinsic value.
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Do you know why Ovostar http://www.ovostar.ua/en/press-center/press-releases/
is more expensive than avangardco? Business model is very similiar, but leverage is much lower than at Avangardco.
Avangardco is bigger, cheaper and more profitable so far in 2013.
Martin – to answer another way, no I don’t know why Avangardco is trading so cheaply (but $11 is a lot nicer than $8!) – the usual reason cited is, of course, Bakhmatyuk’s controlling stake. I’ve noted a few Polish-listed agri-companies, but haven’t really analyzed or contemplated buying anything on that exchange as of yet. Thanks, though, I’ll take a note of Ovostar.
Wexboy, thanks for your reply. Ovostar is not polish. It describes itself as one of the leading egg and egg products producers in Ukraine.
“All production sites operated by the Group are located in close proximity to each other in Kyiv and Cherkasy Regions (within 130 km). The Group’s production facilities comprise of one breeder farm, one hatchery, two farms for growing young laying hens, two farms for laying hens, two fodder mills producing poultry feed, and one grain storage facility. Egg processing plant Ovostar is located on the territory of one of the laying hens farms.”
Main shareholder is Prime One Capital with 72% – it can’t be the controlling stake argument. Ovostar is very very simliar to Avangardco and the best peer by far I could find. I am long Avangardco, but I am puzzled by the different price of these two businesses. Ovostar has no leverage but premium is too high to justify. Ovostar seems to have the better domestic egg brand, too. Insider Prime One Capital sold 2% recently. I may simply double up my avangardco position or find a way to short Ovostar.
Yes, I know it’s not Polish – actually there’s at least half a dozen Ukrainian/Russian agri-businesses that listed on the Polish exchange. I simply haven’t contemplated buying anything Polish (or Russian/Ukrainian) listed as of yet, for a couple of reasons – my loss, I guess.
The production sites description is interesting – Avangardco highlights the geographical diversity of its sites across the Ukraine, which I think is another key point in their favour. I’m not as concerned about relative domestic market share, as I ultimately view Avangardco as a lowest-cost export play. [I’m impatiently waiting for an update on EU approval/entry, but at least they continue to report excellent growth in existing & other new export markets].
I wouldn’t be so puzzled about the relative market valuations – sometimes they’re justified, but market often throws up crazy anomalies…it’s not that efficient! 😉 However, spending more time using Ovostar financials to compare & contrast with Avangardco is time well spent – either confirms Avangardco’s margins & metrics, or challenges you to discover why they’re different – I’ll be looking at Ovostar next time I take a closer look at Avangardco, thanks.
02-Aug-13: Trimmed my Sirius Real Estate $SRE:LN portfolio stake from 3.3% to 2.8%
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best luck in H2!!
Thanks, Joe – yes, here’s hoping!