Wexboy Portfolio – H1-2014 Performance

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alternative assets, benchmarking, Bloomberg Euro 500, correlation, diversification, FTSE 100, FTSE AIM All-Share, Irish shares, ISEQ, portfolio allocation, portfolio performance, quantitative easing, S&P 500, stock ideas

OK, that’s enough TGISVP (though rubbing resource muppets’ noses in it is lots of fun) – time for the rubber to hit the road: So how did the Wexboy Portfolio make out in H1-2014?! Well, first you may want to reference my FY-2013 performance – now, let’s turn our attention to my benchmark indices:

[NB: I’ve dropped the FTSE Eurotop 100 – I can find it elsewhere, but I’m used to seeing it on Bloomberg.com & I can’t find it as a ticker any longer. I could use the EURO STOXX 50 (SX5E:IND), but that’s a ridiculously small universe of stocks, so I’ll opt for the Bloomberg Euro 500 (BE500:IND) instead – not as well known, but functionally it gets the job done.] [btw Bloomberg’s fantastic, but they have some annoying habits – on the one hand, they abruptly discard useful features, while they also add awesome new features which they barely ever highlight!? Check this out:  Bloomberg Industry Leaderboard].

A +3.4% benchmark gain isn’t too inspiring – quelle surprise, the S&P’s the only index which really makes the grade! And the individual indices don’t bode well for my own portfolio, since it’s particularly focused on the UK. In my case, that’s more about UK-listed stocks (& funds), rather than UK-exposed stocks – but in my experience, a poor FTSE performance usually weighs on both. As for the US, I suffer from the inverse – I have a decent allocation to US-exposed assets, but little exposure to US-listed assets! I also opted for the UK & Ireland as an attractive substitute for a European portfolio weighting – again, that focus may hurt me (though the ISEQ’s performance was only marginally worse). This is a fairly typical stock-picker problem:

Why make it so bloody complicated…when the simple & most obvious strategy is so often the winner?!

Just to wallow a little more, it gets even worse if you look under the hood… While international interest has surged in Irish property assets/debt, the ISEQ (ISEQ:IND) itself & the FTSE AIM All-Share (AXX:IND) are good examples of markets that (still) attract risk-seekers & stock-pickers. And they display a very different story when compared with the S&P (for example), which mapped out a classic up & to the right chart during H1:

[The Bloomberg Euro 500 & the FTSE 100 (UKX:IND) indices exhibit similar (steady) trajectories, albeit they’ve made little/no progress]. On the other hand, here’s the ISEQ:

Despite its +3.5% H1 gain, the ISEQ’s actually lost 9.5% since its Feb high! [And continues to flirt dangerously with 4,640-55 support, a break of which could see a rapid decline to 4,325 (or even 4,115)]. Now here’s the AIM All-Share:

Lord love a duck, what a bleedin’ tragedy!? The AIM market actually lost 7.7% in H1, and ended the half-year a whopping 12.7% off its March high.

These charts explain why so many UK & Irish investors (& bloggers) are experiencing their fair share of pain right now. Exacerbated by our usual bad habit – checking share prices & the financial media so incessantly, we lose track of the details & end up relying on the headlines. And in the past 6 months, that’s inflicted a curiously painful form of cognitive dissonance on a lot of investors – seems like every week the leading indices are hitting new highs, yet one’s portfolio keeps moving mysteriously & relentlessly sideways, or down…

Personally, I feel like I’ve been running to stand still. I even lost the run of myself one evening & caught myself griping: ‘I could work all the hours in the day – seems like it would make no bloody difference to my returns!?’ Fortunately, I copped on about 5 minutes later, administering a short sharp genital cuff – yes, my complaint seemed like fair comment, but in reality it’s a dangerously indulgent line of reasoning. I mean, what’s the alternative: Work less?! Sure, that’s gonna work out… [You may as well start saving for that $5,000 course which promises you’ll earn millions trading 30 minutes a day]. My advice: Scotch the pity party, you can never forget investing’s just like poker – chance in the short-term, skill (& hard work) in the long-term. And even that gives chance a bad name, because in the end ‘Chance favours the prepared mind’. So it’s back to work for me…

Of course, choosing only two indices is really just cherry-picking. I haven’t bothered to systematically check other smaller/riskier markets & asset classes, but I still wonder how prevalent is this type of divergence, and/or warning sign(s), below the surface? It’s not an unfamiliar problem, more eclectic & value-minded investors often trail rising markets – usually they’ve made the decision to live with it, for their own peace of mind. But getting actively punished for taking such a stance is a different matter, an investor’s resolution can easily crumble – taking the easy way out becomes increasingly attractive…

Because the easy money (literally!) is in defensive & large-cap stocks, no matter how highly valued they are/become – due to a tsunami of central bank liquidity which has scarcely dented the real economy, it’s mostly been redirected into asset inflation. And large institutional investors, with the bulk of the firepower, have no real choice but to keep ploughing their money into large-caps…price be damned! Which leaves a lot of investors facing a real dilemma:

Do I still want to be a stock-picker, or do I just want to be a liquidity surfer?

Whew, let’s take a breather… Here’s the H1-2014 performance of the Wexboy Portfolio  – by Winners & Losers:

[Holdings marked thus* were completely sold off in H1. Average stake size reflects year-end 2013 portfolio allocation – except for Zamano (ZMNO:ID) – adjusted for incremental buys & sells (documented in a timely manner via Twitter & in blog comments). Gains/losses are based on yr-end 2013 prices (again, except ZMNO) vs. end-H1 2014/final sale prices. I’ve also calculated a weighted average gain for my entire (disclosed) portfolio (ignoring dividends & FX).]

And here it is, sorted by Holding Size:

And finally, by Portfolio Return:

Take your pick, but it’s a +2.8% gain any way you look at it – in a 6 month period, that’s a mere rounding error vs. my benchmark return. For me, in the end, the half-year’s bark actually proved much worse than its bite…

Portfolio winners & losers are pretty evenly distributed – but my Irish stock picks are clear winners (despite the ISEQ’s return), with Total Produce (TOT:ID), Zamano (ZMNO:ID) & Donegal Investment Group (DCP:ID) making up 3 of my top 4 portfolio return contributors. My position weightings also made a substantial contribution – which seems to happen all too rarely & unpredictably (?!) – I won’t bother with a table, but an equally weighted portfolio would only have clocked up a +0.6% gain. But we can afford to forget the winners – we should always focus more on the losers…

[btw I’d just like to highlight: If I don’t revisit a holding for a year or more, it actually isn’t a case of neglect – as I’ve always said, intrinsic valuation(s) & a good investment thesis change quite slowly, most of the time. But with many holdings now maturing (nicely?), ideally I’ll try to revisit them properly over the next 6 months].

Livermore Investments (LIV:LN) hasn’t been a core holding for a long time now – I kept a rump position as a substitute (CLO residual equity tranche) investment in light of my continued under-weight of Tetragon Financial Group (TFG:NA). In isolation, that was correct – but noting other issues, the money would have been/is better allocated elsewhere. Richland Resources (RLD:LN) – ugh, just goes to show, you can always lose more… The usual muppet response is tempting: No point selling it now..!? Funnily enough, RLD recovered its H1 losses last week – investors suddenly seem excited by its graphite venture. [Which may be misguided, there’s much debate whether large-scale high quality graphene production will be derived from chemical processes, rather than graphite itself]. They’re probably also excited by the magic Bernard Olivier appears to have wrought at LP Hill (LPH:LN)…

I’ve sold FBD Holdings (FBD:ID) – actually, my return calculation was a little unfair, I used the (lower) market price from my last sale announcement. I think the underlying investment thesis is still valid, but recent news, market developments & share price technicals will probably continue to pose near-term difficulties. From my perspective, the recent Argo Group (ARGO:LN) results were nothing new – but most investors were disappointed, and also surprised by the (unwarranted) dividend omission. I’ll have more to say about Argo in due course… [OK, hands up, who can name the new & respected investor on ARGO’s share register? Don’t spoil the surprise for others, just email me! If you know the answer, you’re probably a shareholder – I’d love to have your support].

JPMorgan Russian Securities (JRS:LN) & Avangardco (AVGR:LI) are now tarred with the same (Putin) brush… I’ve mostly tried to avoid country write-ups here – recommend a dirt-cheap market, esp. an emerging/frontier market, and almost inevitably you’ll look like an idiot shortly thereafter. I could easily envisage Putin flexing his muscle inside Russia’s borders, but not the Ukrainian situation – or Thursday’s tragic news. But both markets were priced accordingly – by investing, you were essentially signing a contract, i.e. you believed market prices & long-term upside potential would compensate for the inevitable setbacks. And if you’re going to bail out on the first major bad news, you’re breaking a contract you probably should never have made in the first place.

To be cynical about it, we all know commodity-rich nations almost never become true pariahs – and in this instance, much of the world (like China) couldn’t care less what Russia does in the Ukraine. In the end, I suspect American support and/or intervention will prove fairly symbolic – the onus is clearly on the EU here, to step up & draw (a pretty willing) Ukraine decisively into its economic sphere (via free trade & financial assistance). Avangardco’s domestic business is now worth significantly less in dollar terms (more so due to devaluation, than anything else), but global terms of trade have become even more compelling for its export business (which is what originally attracted me). I don’t doubt the company can still emerge as the world’s largest & lowest cost egg producer.

Alternative Asset Opportunities (TLI:LN) – happy accidents deaths are now accelerating, it trades on a nice NAV discount, net cash is now over 10% of its market cap, the directors have proposed a (first) return of capital, and it’s still a marvelous non-correlated investment. What’s not to like..?! Well, except I’m not at all happy to see the board opting for a B Share return of capital, rather than a share buyback/tender – supposedly favoured by major shareholders, though I struggle to understand who would turn down an opportunity to enhance NAV?! But I’m confident the share price will pick up in due course… As for Fortress Investment Group (FIG:US), I’m just stumped – intrinsic value is steadily increasing, but the stock continues to suffer the jitters on a regular basis. [I’ve noticed some peers also taking a hit (see Oaktree Capital Group (OAK:US) & Apollo Global Management (APO:US), for example) – but on the other hand, Blackstone Group (BX:US) & KKR (KKR:US) continue to trade near their highs, so it’s not a sector-wide phenomenon]. However, FIG & its peers are obviously quite vulnerable to market sentiment, so I remain open to trading ’round my position.

This year, UNG mostly appears to be suffering from profit-taking, after a huge 18 month rally – I recently published a fresh Universe Group (UNG:LN) write-up & added to my position. And finally, we come to Saga Furs (SAGCV:FH) – I remember being a little wary of the share price rally at the time, as I was piecing together my write-up. It did prompt me to add a health warning for readers (and provide what I think was a pretty rigorous review of the company’s longer-term financial history & stability), but I saw no warning signs 2014 would turn into a total bust… Unfortunately, Saga Furs deals with buyers – a far more unpredictable & hair-trigger bunch – rather than consumers. But buyers will obviously need to replenish their inventory & supply chains, so sooner or later they’ll (surely) have to return in force.

I continue to have faith in the investment thesis here: Saga’s one of the very few stocks I’d label as hidden luxury – a cheap alternative exposure to global wealth & the luxury goods market (vs. the half-dozen perpetually over-priced luxury stocks the analysts usually cite). And I suspect there’s been no great change in underlying wealthy consumer demand – in fact, I still believe we’ll see secular growth in emerging market demand. Plus we’ve had a few rays of sunshine recently – their June auction was much better in terms of volume & prices, and technically the share price appears to be bottoming out. I’d like to add to my position, but prefer to await further/sustained confirmation of improving sales & financials (even if it means buying at higher prices).

OK, moving on:  You can pretty much figure it out from the tables above, but here’s an end-H1 ranking of my current holdings – let’s restrict it to my Top 10, for a bit more focus:

This Top 10 represents about two thirds of my total portfolio – similar to what you might see in most high conviction fund portfolios. Over my investing career, I’ve evolved from having too few holdings…to having far too many holdings. Now I believe there’s a happy medium of about 20-25 holdings, and your Top 10-12 holdings should probably amount to somewhere between 50-75% of your portfolio. For me, this translates into an overall portfolio allocation (including undisclosed holdings) which looks like this:

Obviously, this is organized just as much by investment theme, as by country/region. [For example, Donegal Investment Group is far more of an Agri exposure, than an Irish exposure. And these days, Saga Furs offers Emg/Frontier Markets exposure, in terms of global fur buyer/consumer demand & growth. Plus my Fixed Income exposure’s pretty alternative – it’s actually life settlements, via Alternative Asset Opportunities. And so on…] But let’s not reinvent the wheel here, it’s a perfect time to recommend you read/revisit my 15-part series on portfolio allocation, starting here & ending here – well, presuming you’re a glutton for punishment! My allocations haven’t really changed dramatically since – except for a near-tripling of my Agri exposure (to which I’d happily add more, giving the right stocks & pricing).

You’ll obviously notice an approximate 50:50 split between equities and real & alternative assets. It’s also worth highlighting Emg/Frontier Markets are a little over half my total equity allocation. With these markets now reaching 50% of world GDP, this makes perfect sense – unfortunately, it’s also a reminder the vast majority of investors are dramatically under-weight these markets. All of this reflects a very deliberate & fairly permanent allocation strategy – all in support of my quest for greater diversification & less correlation in my portfolio. [Unfortunately, I shouldn’t over-state this – my real/alternative asset exposure is still via equities, which tend to decline in a market panic even if underlying intrinsic values remain unaffected/uncorrelated]. Frankly, I’m equally focused on preserving my wealth, as I am on increasing my wealth…

But I fear too many investors gravitate to one extreme, or the other. Those focused solely on increasing their wealth trip themselves up with their greed, or turn into gullible fools – they always forget, and must always re-learn, how difficult it is to recover from losses. [Let’s state the blindingly obvious – it takes a 100% gain just to break-even after a 50% loss]. And those focused solely on wealth preservation also struggle: i) they never take a risk, and end up permanently besieged by inflation & taxes, or ii) they duck for cover in defensive (food, health, etc.) & dividend stocks – not a bad strategy, but inevitably it becomes one-dimensional & ends in a price bubble (future growth can’t hope to support defensive stock multiples), or an income bubble (dividends are never-ending & will always increase…).

There’s other benefits:  I’m squeezing more investment themes/asset classes into my portfolio – so I end up with far less room for individual holdings, vs. investors who focus exclusively on (regular) equities (& possibly suffer from home bias). Which forces me to be far more discriminatory in my stock selection, and probably explains my obsession with sector/peer analysis & comparisons. For most investment themes/asset classes, I’ve only got room for a single shot or two…so I’ve gotta make it count! [The last thing I want to discover, a month later, is a safer & cheaper stock I could have bought instead]. Plus it encourages me to ration risk – I’m not afraid to make aggressive investments, but I will use other defensive safe holdings in my portfolio to pay for them…

It also imposes a much needed dose of humility:  If I don’t know enough about a country, an investment theme, a sector, or an asset class, how on earth can I ever bloody hope to select an appropriate & winning stock (or two) – it’s a sign I should move on (to something else), maybe opt for an ETF, or else defer to a far more experienced fund manager. And after all that stock research & selection, the last thing I want to face is starting over…again, every idea/stock should count! Far better to end up choosing high-quality long-term holdings – by now, I’m sure you’ve noticed how low my turnover is – you’d be surprised at the impact on your net returns, in terms of saving on commissions, spreads & especially taxes. [And if creating & managing a portfolio like this makes the most sense to you too, just give me a shout – we should talk…]

Now, taking another look at my portfolio, the US & Europe are the obvious missing allocations – clearly, I don’t worry too much about departing from my benchmarks! Which goes back to my previous question: Do you want to be a stock-picker, or a liquidity surfer? Perhaps I’m just stubborn, but when I look at today’s headline pricing – for both markets – I can’t bring myself to buy the indices blindly, even though that’s clearly where the money’s flowing. But I do think there’s plenty of underlying value in European small caps & certain markets – ideally, I’ll have the opportunity to re-deploy some cash. As for the US, I’m sure there’s plenty of smaller value stocks & pockets of sector value still available, but I have little interest in searching for them right now.

That’s clearly a contrarian call right now:  But if the US economy’s heading towards higher & more robust growth, it already looks pretty well priced in to me, and if it’s not…well, you have to think the Fed & the US government have shot their loads already, so God knows what happens next!? [US labour force participation’s at near-40 year lows, U6 unemployment’s still up around the worst we saw in the 1990s/2000s, new jobs pay crap service sector wages, real incomes (for males) haven’t improved since the 1970s, corporate revenue/earnings growth remains pretty anemic, but at least corporate cash is at all-time highs – this has been debated as a question of confidence, but right now corporates actually have zero need for additional capacity]. Now, I’m obviously not going to argue Europe’s in better shape – but I will argue it has more scope for restructuring (plus M&A, and maybe even some healthy creative destruction). And Europe now has a handy US template for reference, it’s probably 2 years behind the US in its economic cycle, and (most importantly) its central bank still has immense liquidity & fire-power at its disposal (vs. the Fed, which is now flirting – probably fairly pointlessly – with the prospect of rising rates). A single chart’s worth a thousand words – compare the Fed & ECB trajectories:

In fact, counter-intuitively, this may be a hugely persuasive signal to buy European equities – as any trader will tell you, if they can rally in the face of a declining ECB balance sheet, nothing can bloody well break ’em..!

I could also lay out the various market multiples, but you can find them elsewhere – anybody can justify a high (or low) multiple, anyway. And they really don’t tell you what investors might do next… [For example: If a market had an 18 P/E ratio five years ago, and (coincidentally) the same ratio today – not that unusual – what does that tell you? Not much, I reckon]. Knowing how investors think, if you simply focus on where a market’s come from, I’ll bet you can derive a much better idea of where it’s going... The following table’s pretty simple, but also pretty compelling:

Everybody focuses on the post Mar-2009 rally, but at this point I think the rallies from the Feb-2011 and Sep/Oct-2011 highs & lows are more instructive: On either time-scale, the S&P’s clearly ahead by leaps & bounds. This is not undeserved, by any means – but it’s a great reminder investors may find it increasingly tempting to take profits in the US (of course, markets also tend towards mean reversion). This is particularly true of large institutional investors, who need to regularly re-balance & re-allocate their portfolios – and they move very slowly & gradually, so once this process starts it tends to continue for years to come…

This is not to say I think the US market’s heading for a crash. The Fed’s already come this far, the US government’s hooked on growth & stimulus, and investors have complete faith in the Greenspan/Bernanke/Yellen put – there’s really no turning back now, and at this point I’m sure even a 10% decline would start setting off the alarm bells & calls for action. [God knows what that implies for US public finances, inflation & the dollar]. But can I see the US market oscillate between such hope & despair, possibly for years to come? Sure I can… Don’t forget, we still have no real idea if the US is possibly evolving into another Japan – I’m not actually suggesting that, but I do know a de-leveraging is the longest, deepest & most intractable type of recession to recover from. [Read your Reinhart & Rogoff – despite the glitches, the core message is still true (& still depressing)].

But on a less depressing note – and this is purely a gut feeling – I’m really not that bearish about the markets at this point… [Damn, I really should be more oriented towards (regular) equities in my portfolio!?]. It’s become fashionable again to ponder market top signals & the VIX – unfortunately, the VIX charts we see are only 5 years old, or (even worse) they start back in 2007. Which is totally misleading, none of them give any real sense of VIX history – for example, the latest VIX reading is 14.5 (admittedly, after spiking sharply), not so far out of line with its long-term average (somewhere between 19.0 & 20.0). Look at a genuine long-term chart & you quickly realize the VIX can comfortably reside at sub-12.0/15.0 levels for a couple of years before things might go haywire:

I suspect there’s still plenty more scarred and/or neophyte investors out there, and they’re near breaking point. They can hardly bear the fact they’re missing out on all these market gains, while they basically earn zip on their bonds & deposits. I think the odds are far better we see a bit of melt-up – as these people join the party (now where’s that damn punch-bowl?!) – before we see a (possible) melt-down… It also helps the brokers love to whisper about this possibility.

In fact, if you forced me to bet on a market, I’d surprise myself & say…the UK! But take another look at my last table – I’m perplexed why the UK market’s lagged so much in the last few years. And look at the UK property market, price rises already have the authorities debating whether it’s a threat – is it so far fetched to think the equity market might also accelerate? Most persuasive of all is the FTSE 100 chart itself:

I must say, an intriguing chart… [Whereas I think the S&P chart suggests 2,000 could present a huge (psychological) barrier]. The FTSE’s 6,840-95 resistance zone’s been forming for the past 14 months – even, arguably, for the past 3 years. I don’t know how/if/when, but if that level breaks, I’m pretty sure the FTSE will explode higher (dragging the rest of the market with it). Here’s hoping…

Best of luck for the rest of 2014!

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