AIM stocks, Alternative Asset Opportunities, Asta Funding, benchmarking, correlation, fear and greed, hedge funds, home bias investing, KWG Kommunale Wohnen, Petroneft Resources, portfolio allocation, portfolio performance, Richland Resources, Saga Furs, Tetragon Financial Group, Titanium Asset Management, US Oil & Gas
Yup, it’s that time of year again… [For reference, here’s my mid-year 2013 performance report, plus my FY-2012 report]. Right off the bat, I have to admit assessing annual performance isn’t my most favourite of activities (as I’ll explain). It also reminds me how easily our (personal) fear & greed equation can magically transform itself as we finish an old year & head into a new one. While most traders tend to start a new year cautiously, investors often set out brimming with over-confidence – which can prove pretty hazardous…
The UK’s AIM market, for example, has enjoyed significantly positive returns in 14 of its last 18 Januaries. This annual love-fest is even more remarkable when you realize the AIM index has declined 17% since its 1995 inception. [Growth and value investors, take note!] My favourite muppets provide a more ludicrous example: Shareholders of US Oil & Gas (USOP:G4) (I’m presuming no new suckers are buying at this point) hailed the new year by immediately buying/running up the price 60% from its yr-end close! Sure, hope springs eternal…but with most USOP investors having lost 95%+ of their investment to date, this kind of new year exuberance is wildly irrational.
Thinking about & tracking your stocks (& portfolio) on some kind of calendar basis is yet another fixated version of tracking individual stock gains/losses. And that’s how fear & greed grabs hold & encourages you to play the ‘if…‘ game. I’ve already recommended you Forget Your Purchase Price – now I recommend forgetting your Year-to-Date Gains. Free yourself of those deadly anchors, and you’ll be forced instead to look afresh at your holdings every single day. For each stock, that’s an exercise in assessing upside potential (i.e. current share price vs. your latest estimate of intrinsic value), and then weighing that reward against the level & range of risk(s) involved. Which boils down to one simple question for each of your portfolio holdings: Should I buy, sell or hold this stock today? And your cumulative or calendar gains/losses on a stock are irrelevant to that question – no matter how small, large or goddamn painful they might be…
That being said, we really can’t ignore the angry investment blog lords – they demand at least an annual performance report! 😉 So, let’s begin with a look at my benchmark markets:
Jesus Christ – 23.1%?! That’s a tough bloody benchmark to take on…
The ISEQ’s gains were pretty evenly distributed between H1 & H2-2013 – which makes sense, the Irish market was still evolving from a special situation last year & enjoyed relative immunity from international developments. On the other hand, Europe, the UK & the US enjoyed (on average) over two-thirds of their annual gains in H2-2013. The market’s initial taper tantrum contributed to this effect, marking down the major markets at mid-year by a sudden 5-10% (from their mid-May highs). But in the second half, the markets romped ahead as investors grew increasingly comfortable with the idea of tapering. I didn’t…
OK, ‘Don’t Fight the Fed’ is probably the most reliable stock market rule going (& perhaps the most difficult for value-minded investors to swallow). And nothing’s really changed – tapering simply means the Fed’s now increasing its balance sheet at a slightly less accelerated pace. Anyway, they also renewed their promise of no rise in money rates pretty much from here to eternity. So regardless of any nagging anxieties one might have, the only logical response was to keep buying stocks. [Want a somewhat terrifying glimpse of what’s really happening below the surface? Check out the slope of the charts for US & European CPI over the past couple of years]. But still nobody addresses my simple but inconvenient question: If you believe this unprecedented monetary (& ever-ongoing fiscal) experiment can genuinely (& sustainably) kick-start developed market economies, how could a reversal of this stimulus produce anything but an equal & opposite impact? Some markets (particularly the US, now sporting a 25 CAPE ratio) increasingly remind me of a roller-coaster held together with spit & glue – sure, people will still enjoy a fun ride for God knows how long. Well, until they don’t…
I’m certainly not fighting the Fed (c’mon, I’m still buying!), but I couldn’t stomach the pricing & the risks I saw in the US market. This disdain for US stocks really handicapped me – I missed out on a near-30% gain. Maybe I should have focused totally on the Irish market – I mean, I was clearly bullish! Yes, but unfortunately I couldn’t escape the fact Ireland’s GDP is less than 0.5% of world GDP. So devoting 15-20% of my portfolio to Irish stocks was already a massively over-weight allocation. Of course, my bullishness was completely justified, so again my prudence severely handicapped me. That left me generally biased towards UK & (less so) European stocks – no cause for complaint there, both racked up very nice performance in absolute/historical terms.
Unfortunately, I can still see another couple of reasons for under-performance. First, Cash holdings are always a drag for investors vs. their benchmark. But rather deliberately, my cash allocation remained in the low-mid single digits (in % terms) last year, so I missed a bullet there. However, the real damage came from my major allocation to Emerging/Frontier Markets. I don’t break out my respective allocations, but assuming a 50:50 split their average 2013 benchmark return barely surpassed +7%. [Masking a marked divergence in performance, with frontier markets earning just over +20%, vs. a negative emerging markets performance].
It was bloody silly of me not to see that coming. Duhhhh, markets closest to the dark heart of monetary abandon obviously out-perform, don’t they?! And emerging/frontier markets are the furthest away – in every sense of the word, as many are conducting the exact opposite in terms of fiscal/monetary policy. As developed market investors ignore the cracks in the ice & enjoy increasingly easy gains, they have less & less desire to re-direct their money into exotic & dangerous markets…like Korea! [I mean S Korea, of course…N Korea is obviously also murderous]. Which prompts a feedback loop where the media, the brokers & the talking heads progressively extrapolate this emerging market under-performance into eternal loathing. Here’s a great example, hot off the presses. And you gotta love there’s so many of these markets – haters can always cherry-pick a few bad apples!
But what I actually see is the market spending most of its time focusing on relative rates of change (vs. expectations, of course, just to complicate matters) – which is why Main Street & Wall Street so often end up at odds. Mainlining on monetary stimulus, near-term fiscal & growth prospects are obviously picking up for developed markets, while many emerging markets are heading in the opposite direction. This relative convergence is a perfect explanation for the huge performance gap between developed & emerging markets. But eventually the market will wake up & focuses on absolute fundamentals – at that point, investors will re-discover the over-whelming superiority of the fiscal & growth (among other) advantages emerging & frontier markets still enjoy vs. developed markets. But maybe I’m just over-thinking this – if it’s sustained, US liquidity & bullishness seem to always spill over into emerging/frontier markets in the end, where it tends to have a disproportionate impact.
So my belief remains undimmed that emerging/frontier markets present a secular & far superior growth opportunity. And they’re priced at an incredible 25-35% P/E discount to developed markets. So I’m actually still looking for opportunities to buy, not sell! Because in reality my current allocation isn’t that major… OK, versus most portfolios, perhaps it is – but emerging/frontier markets share of world GDP now equals that of developed markets! Clearly, this offers huge scope to continue increasing my allocation over time – on an opportunistic basis, of course. Obviously I’d like to cherry-pick the good (& cheap) apples along the way. Frankly, I remain bloody but unbowed… 😉
My diversified approach to portfolio allocation & stock selection clearly doesn’t help either. In fact, it usually prompts some annual soul-searching… Because I’m almost inevitably doomed to under-perform a couple of major benchmark markets each year. And to under-perform investors who made the no-brainer decision to just (passively) buy those indices. And maybe most galling, I’m often going to end up whipped by chumps who chased after the hottest & most ridiculously expensive stocks – then they’ll ask, who’s the chump now?! Most years, c’est la vie…
On the other hand, I draw great comfort from the fact I’ll never end up bottom of the heap either. Pity the poor Brazilian investors & investments bloggers who ended last year down 15.5%. [OK, I don’t know any Brazilian bloggers..!] And when markets suffer ‘cross the board, I obviously hope to out-perform. But most of all, I escape the biggest (& often most over-looked) risk for many investors – home bias. A risk that’s potentially devastating – if your portfolio’s concentrated in a single country/region, no amount of out-performance will compensate for a collapsing currency or market. Sounds unlikely? Hmm, famous last words – and history’s full of ’em. In fact, forget the history books, just cast your mind back a few years. Ireland’s an horrific example – it was the best performing EU market in 2013, but that means shit to an Irish investor who lost 80%+ by Mar-2009 & who’s still down well over 50%.
I obviously want to earn decent returns, and I approach risk accordingly – but for me, the risks posed by a concentrated and/or correlated portfolio are simply unacceptable. Which demands I construct an alternative portfolio – a portfolio that’s diversified across both asset classes & geographies, that’s both defensive & offensive, and that’s ideally as uncorrelated (both internally & externally) as possible. It’s also forced me to realize I can forget about my gains, they’ll take care of themselves – I just need to worry about my losses… Label this approach as you will – some might call it a private wealth management, a family office, or simply a hedge fund strategy. By traditional definition, I’d consider all of these overlapping strategies anyway.
So let’s get down to the nitty-gritty…
Well, in H1-2013 I easily out-performed the average 9.0% benchmark gain by an additional +5.5%. I guess my whole suspicion of US QE-infinity & tapering was an appropriate stance. But looking now at FY-2013, I find I’ve only added an additional 4.0% of portfolio performance in the second half:
[*Holdings thus marked were completely sold off in 2013. For each holding, I’ve calculated/ranked them by average stake size, based on my original stake (as of yr-end 2012, or my first write-up) plus incremental buys & sells. Note subsequent buys & sells were documented in a timely manner in my Twitter feed (& in appropriate blog post comments). Individual gains/losses are based on yr-end 2012/write-up prices vs. yr-end 2013/final sale prices, and I calculate a weighted average gain for the entire portfolio. For simplicity, I ignore dividends & FX. For reference, here’s my file – plus it includes links to each company’s website:
This is quite the reversal of fortune! For FY-2013, I’m up +18.4% in absolute terms, but I’ve under-performed my average benchmark market gain by 4.7%. But noting my macro & portfolio commentary above, and considering the year we’ve had, that comes as no great surprise to me really. But we should also consider micro – as I’ve said, I really just need to worry about my losses…
Alternative Asset Opportunities (TLI:LN) has now come full circle since I first wrote about it just over a year ago. I sometimes think TLI’s damned either way… In a bullish market, investors get bored with it – while in a bearish market, it becomes too exotic & opaque! Investors also have widely differing opinions about potential IRRs to be achieved on policy maturities. But frankly, I find it pretty damn refreshing to debate the range of potential gains here, rather than having to actually worry much (if at all) about a potential loss! TLI is un-leveraged, it trades on a 17% NAV discount, management should begin to buy-back shares in due course, and it continues to offer attractive, uncorrelated & low-risk upside – it remains a core holding for me.
Saga Furs (SAGCV:FH) has recently suffered a rather violent setback in its share price. This appears to be fur market related, rather than specific to Saga – rumoured visa/business issues for Chinese buyers, mild Chinese/Russian winter weather to date, plus buyer hesitancy over the continued escalation in fur prices, all conspired to remove many buyers from the December auctions. This absence of buyers means any read-through on fur prices from those auctions is pretty irrelevant – we shall have to await the March & June auctions. I wouldn’t be surprised if teaming up with American Legend & Fur Harvesters Auction proves to be an ace in the hole for Saga. But even if Saga experiences a poor 2014, I believe it’s already priced cheaply enough to reflect that (it traded on a 5.5 P/E as of yr-end!). Plus I see nothing in the recent news/rumours that suggests any permanent impairment to Saga’s long-term potential & intrinsic value. [And it’s enjoyed an impressive +15.5% bounce since yr-end].
KWG Kommunale Wohnen (BIW:GR) continues to suffer from the Conwert Immobilien Invest (CWI:AV) effect… But as I’ve argued a number of times, it’s far more valuable for Conwert to engineer a re-valuation of KWG, rather than extract a once-off gain by exploiting/oppressing minority shareholders. And KWG’s one of the cheapest German residential property companies out there (trading on a 0.58 P/B), despite the fact it sports lower leverage than its peer group, and has one of the best value-creation records in the industry over the past 6 years. Asta Funding (ASFI:US) – it’s safe & cheap, but you’d need the patience of a saint with this one… Just goes to show, if you don’t have a catalyst & suffer a management who seems to care little about shareholder value, you may end up waiting ’round forever before seeing intrinsic value realized.
Tetragon Financial Group (TFG:NA) – I look at this stock & still get pretty excited… Out of all my existing holdings, this is the only one where I could potentially double or triple my stake. But I need to see the share price perform better technically first. I also want to see a lot more news-flow about (ultimately) diversifying their portfolio & growing their asset management business & AUM – and I don’t mind paying up for that kind of confirmation. Meanwhile, I remain very comfortable with their CLO portfolio at this point in the US cycle – particularly the fact that it’s still priced at 39% NAV discount! Richland Resources (RLD:LN) & Petroneft Resources (PTR:LN) – er, more fool me! Both prove you can always lose more money on a bad stock. At least Petroneft’s got huge upside potential (in theory), and it’s a pretty negligible holding. As for Richland, at this point, there’s no bloody excuse…
So, ’nuff said – I mean really, any complaints from me at this point would simply be #whiteboyproblems. Because:
– I racked up +20.2% in 2012, and now I’ve clocked another +18.4% in 2013. What’s not to like?! And I’m somewhat stunned to see my 4 largest holdings lost an average (8)% last year. Considering they represent over 40% of my disclosed portfolio, that’s a pretty astonishing performance from the rest of my holdings. But in my opinion, each of these Top 4 holdings still offers a compelling investment opportunity/theme, and I certainly don’t believe there’s been any permanent diminution in their long-term intrinsic values (on average) in the past year. I know I’ve probably said it before, but this embeds an additional & very attractive kicker in my portfolio in terms of upside potential for 2014.
– I need to highlight the rest of the iceberg this year… I think I provide a very auditable performance record for my disclosed holdings. But obviously my actual entry/exit prices aren’t necessarily the prices reported on the blog – for example, it’s only fair to readers to reference the latest/current share price when I publish a new investment write-up. Last year, I actually enjoyed some extra juice on those holdings in my personal portfolio. For example, Saga Furs was a stand-out – I actually ended the year (marginally) in profit vs. my actual entry price (believe me, its yr-end decline hurt just the same).
Undisclosed portfolio holdings also assisted across the board. These included a couple of frontier market funds, some UK/Irish micro-caps, plus a number of unlisted/Reg S holdings. [For reference, I did publish a post on one of these, Titanium Asset Management (TAM:LN) – essentially after the event (i.e. as a management tender offer was closing)]. On average, the gain on these holdings was triple the reported return on my disclosed holdings. I also target & track specific FX allocations in my portfolio – fortunately, this provided a decent contribution in 2013. Finally, dividends were also a welcome treat, though many of my holdings tend to pay no dividend – offset by my dealing expenses etc., which also tend to be quite low in my portfolio.
This all delivered substantial additional performance in my personal portfolio for 2013. Unfortunately, dear reader, this isn’t something you can audit – my apologies. So please feel free to ignore these paragraphs, or judge according to the rest of the blog – as you prefer.
– OK, it would be far too precious to adopt a hedge fund benchmark for the blog, but mentally that’s what I’ve always referenced when evaluating my personal portfolio & performance. Considering my overall approach to portfolio construction & allocation (and to a lesser degree, stock selection), I think that’s a pretty fair comparison. At the end of the day, I care far more about my absolute return, rather than my relative return – just like any decent hedge fund should. Of course, this also happens to be an immensely pleasing comparison – again! There’s a wide variety of hedge fund indices out there, but I see Bloomberg’s one of the first to report a FY-2013 performance of +7.4%. To out-perform the 2 and 20 boys by +11.0% (and by an even wider margin in 2012) feels almost as bloody good as…the cash itself!
So now you know what I’ve been getting up to for the past month – yeah, celebrating! 😉 But that’s enough of the champers for now… Yes, we all did pretty damn well in 2013, but like I said – time to forget about calendar year 2013, or even 2014. Just start each day fresh, and be ready to bite the ass off a bear – remember, it’s a battle for investment survival out there!
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Well done! Another year of impressive performance, I’m in your debt for some excellent returns, particularly from TOT, AERL, PCI, DQ7 and BOI. I have a dilemma with VOD as I’ve fallen for the deal offered to holders on 20-Feb, which I rate as a spectacular opportunity.
All the best
Good to hear, Paul! At least I own some of those also…
Don’t really track the telecoms – post transaction, it’s mostly a European telecom with some nice emerging market exposure. I prefer the emerging market exposure – I’m not sure if there’s another European telecom or two out there who might offer higher exposure?
How do you feel about Petroneft for year ahead?
About the same..!?!
Intrinsic value’s a multiple of current share price, but that’s pretty irrelevant as long as they remain short of cash. And short of production increases…at this point, the risk of a reserve downgrade is a valid concern, though I believe there would still be plenty of intrinsic value upside after any such downgrade.
They do appear to be near a farm-in deal – but that doesn’t necessarily imply a large up-front payment to Petroneft, so I think it’s safer to wait for definitive news (even if it means the share price jumps).
Also, management need to pull their socks up & confirm who Natlata is…before some shareholders have a bloody coronary!
This is the closest thing to an identity I’ve seen. From Times in November:
‘Natlata is believed to be an investment vehicle of Maxim Korobov, a Tomsk businessman and former member of the Russian State Duma.’
Well, that’s as good as any to believe..!
great to see you alive and kicking, mallet’s cospiracy is missing you, im about to come back under new guise and in new format, but for now heads up – you rock. i sent the year being 400% short JPY plus chanced on a couple good bond trades, so returns have been – ahem – good, i have been thinking about not tempting the devil and shuttering up for 3 years, but then where will i get my adrenaline? currently i am very long Ukrainian debt and yahoo, and short JPY and JCP. i have spent most of 2013 learnign and practicing options, so my new blog will cover that a lot.
ps speaking of asset managers… what do you think re PDV (provida) trades NYSE. it’s a chilean fund manager, owns 37% of the country, so to speak, is 90% owned by Metlife who paid $92 for it last october. its cheap on p/e and CY basis and one would guess Metlife might try to buy the rump it does not yet own. but p/aum is 4.1%!?
Ah, so you’ve been keeping a low profile…rolling around in a pile of cash?!
Hmm, there might be a joke in there somewhere: ‘I was long Ukrainian debt & Yahoo – but I couldn’t sleep at night…so I sold my Yahoo!’ I’m not convinced by Marissa Mayer’s reign yet. Send over the new blog link when ready & I’ll swap it out with Mallet’s.
Maybe I’m not looking hard enough – I see some MetLife branding, but I don’t see an English website for PDV? I’m puzzled by the low P/E vs. the high P/S & P/AUM – did they enjoy any one-time gains? The P/AUM ratio doesn’t surprise me though – it’s rare I’ve found a decent price for asset managers in many of these markets. I guess market enthusiasts pile into them as a demographics plus leveraged play on the market. Curious MetLife only bought 90% – do you know the specific reason(s) they stopped short of 100%? That’s probably a good pointer whether they’re even able to buy out the remainder.
Happy New Year,
I think home bias is not that bad. For example I have invested in a German Real Estate company IMW, whose reports are in German only. I think this is a reason for the cheap price.
For emerging markets exposure I look at look through revenue and not the home country of the company. China is the biggest car market etc.
Yes, like I said in my other comment, the real danger is investors who are unconsciously home biased. On the other hand, if you are v conscious of the risks & biases involved, then yes an occasional silver lining may be presented – in the form of (for example, as you highlight) mis-priced companies due to language barriers, misconceptions about geographic exposure(s), etc.
Francis Doogan said:
Bar Petroneft, your HOME BIAS seems to have worked?
Well, yeah… 😉
I’m not at all opposed to a conscious under/over-weighting off a specific market – but if it’s your home market, you should definitely re-examine your logic/investment thesis for signs of bias. The real problem with home bias is investors who might have say 75%+ invested in their home market, and aren’t even conscious of the colossal bet/risk they’re actually taking…