Wexboy Portfolio – FY-2014 Performance

Tags

Alternative Asset Opportunities, Argo Group, Bloomberg Euro 500, emerging markets, FTSE 100, FTSE AIM All-Share, ISEQ, NTR plc, portfolio allocation, portfolio performance, S&P 500, Saga Furs, value investing, VinaCapital Vietnam Opportunity Fund, Zamano

Crikey, the days are flying by already, eh?! Here we are, January’s nearly over & a FY-2014 performance review would look a bit silly in February… So let’s bang this one out: So, how did the Wexboy Portfolio perform for FY-2014? [For reference, here’s my mid-year review]. First, let’s take a peek at my usual benchmark:

Maybe this is hindsight talking, but looking at these index returns, they (nearly all) make perfect sense to me now! But duh, isn’t that true most of the time!? That is, assuming you accept momentum generally trumps value in the market…

The Irish market enjoyed the highest return, as it continues to accelerate slowly but surely out of an unprecedented recession. Of course, the recession was inevitable, but was unfortunately compounded by the foolishness of the banks & then the government itself. However, the scale & trajectory of the burgeoning recovery (now & to come) is well-deserved. Ireland may have waved goodbye to currency flexibility, but it’s one of the very few countries that still proved willing & able to take the public & private pain of radical fiscal & competitiveness adjustment, and now it’s starting to pay off in spades… [Right now, Beardy Krugman must be wishing Ireland was wiped off the map!]

The US market wasn’t far behind, though for entirely different reasons. Being the epicentre of a global financial crisis proved an excellent strategy…ideally, you end up being rewarded as the first country to subsequently escape recession! But it seems blindingly obvious the US recovery (& accompanying market rally) wouldn’t exist without the GUBU fiscal & monetary debasement we’ve witnessed. Which presents a dilemma for investors: Do you abstain, on the basis it promises an even more catastrophic disaster to come (as we’ve regularly seen since the late ’90s, as a direct consequence of the Fed’s actions & inaction)? Or do you believe the Krugmanesque fairy tale of a free lunch – government stimulus & QE really can deliver sustainable economic recovery at no perceived cost? [Hmmm, maybe a dine & dash strategy does offer a free lunch…well, ’til you’re caught!] The answer, I suppose, is the usual one:

Don’t fight the Fed!

Of course, we’re seeing the same thing in the currency market now. After years of wrong talking head calls (which they’ve conveniently forgotten), the dollar’s finally being rewarded for its…debauchery!? But this shouldn’t be a huge surprise – we’ve seen regular occurrences of growth-led dollar strength over the past 3-4 decades, since the US has more aggressively adopted its global growth engine role. However, the ultimate consequences of this profligacy are unequivocal – there is actually no free lunch: Over the decades, the dollar has severely devalued against most major currencies. [Always amusing when somebody refuses to believe, for example, $/JPY was trading 240-300+ in the ’70s/early ’80s!]

The US market & dollar are clearly a challenge for the contrarian beast lurking in so many value investors. But the pain of contrarianism shouldn’t be under-estimated – sometimes it’s not even about losses, it’s simply the pain of being left in the dust! And people often forget the unrelenting psychic cost – everybody hates a Cassandra when the markets are booming, then hates them even more for being right when the markets actually crash! Frankly, at this point, it seems more than sensible to assume we’ll see continued US market momentum this year. Well, until we don’t…the near-universal belief in US large-caps & the dollar certainly sows the seeds of its eventual destruction!

As for Europe, any kind of positive 2014 return (however small) was a pleasant & surprising blessing in the face of continued German intransigence & ECB inaction. But surely now we’ve reached an inflection point, with at least $1.3 trillion of fresh liquidity being unleashed over the next 20 months. Go on, check the indices, you’ll see a highly visible impact & response: Europe has actually out-performed the US by over 9% year-to-date! [In fact, the S&P’s down 1.7% YTD]. Wow, doesn’t really feel like that to me…how about you?

But we’re not seeing this relative out-performance in currency terms – quite the opposite, in fact! Which is a little strange: Many of the same people who argued QE was good for the US economy, and in turn good for the US dollar, are now arguing the ECB announcement is obviously bad for the euro!? There’s gotta be a fair bit of cognitive dissonance there, though maybe it’s all a matter of timing in the end. Meanwhile, a weaker currency fortunately provides Europe with another glorious stimulus…

But I have to admit, the UK market perplexes me. The BoE’s been very aggressive with its monetary stimulus over the past few years, and the UK obviously enjoys & exercises huge latitude with its currency flexibility – surely the market would have responded more positively?! Look closer though & there’s a couple of mitigants: i) The government’s rather silly prudence has probably been a negative, when most investors would prefer a focus on growth at all costs, and ii) the advantage of the pound’s significant decline vs. the US dollar (& other global currencies) is offset by an equally significant appreciation vs. the euro.  All in all, I would still have expected the UK to keep pace with (if not surpass) Europe…

At this point, the UK’s too hard to call…which suggests it’s a good time for some technicals! As I’ve highlighted before (see the end of my H1 review), the FTSE is once again knocking on a hugely important 6,840-95 (& also 6,930) resistance zone – I suspect a break here might herald a decisive change/improvement in investor sentiment, and a potentially massive surge in the UK market.

We shall see…

OK, on to the Wexboy Portfolio – here’s my FY-2014 performance, in terms of individual winners & losers:

[Holdings marked thus* were exited completely: Gains are now based on my average sales price, and I’ve also corrected my previous mid-year file so average stake % reflects my average stake size during the year (now excluding my last/final sale). All other holdings: Gains are based on average stake size (year-end 2013 allocation, adjusted for incremental buys/sells), and yr-end 2014 prices (vs. yr-end 2013 prices, or original investment write-up prices). NB: I’ve ignored dividends & FX when calculating individual portfolio gains & the weighted average gain for my entire (disclosed) portfolio.]

And again, by size of individual portfolio holdings:

And finally, in terms of individual portfolio return:

So, a 2014 weighted average loss of (1.3)%  for the Wexboy Portfolio? Surely any fool in my situation should have been laser-focused on buying the Irish & US markets? Instead, I pretty much chose to do the exact opposite! [OK, not quite: i) I actually did buy/hold significant US stocks/assets, but it was mostly indirectly (rather than via US-listed stocks), and ii) while I limited my overall exposure to the Irish market, I still maintained a massively over-weight position when you realise Ireland amounts to a mere 0.3% of global GDP]. Ironically, this is actually a fairly typical example of how painful & frustrating observing traditional investing dictums (avoid over-valued markets & home bias) can often prove to be…something you get to enjoy learning from real life, not from books.

Um, time for a couple of excuses, fast… 😉

Somewhat surprisingly, I can let out a wee sigh of relief here – in absolute terms, my portfolio loss is pretty minor, while in relative terms I’m always braced for a divergent year like 2014. While the hit ratio for my winners looks pretty woeful (just under 40%), the weighting of my holdings fortunately offset most of the damage. [Average holding for my top 5 winners was 6.3%, almost double the average 3.4% holding for my top 5 losers]. Recalculating for an equally-weighted portfolio, my 2014 loss would have ended up at (6.3)% instead.

And things could have been much worse… I have a major portfolio exposure to UK LSE & AIM-listed stocks (no, not the skeevy junior resource/blue sky end of AIM…well, mostly!), and to emerging markets/stocks (albeit, indirectly). Emerging markets delivered a (1.8)% loss in 2014, the FTSE 100 ended the year with a (2.7)% loss, while the AIM All-Share index suffered a disastrous (17.5)% loss. [And for investors primarily focused on AIM, it probably feels even more painful – at this point, it’s officially in a bear market, having declined a cumulative (23.7)% vs.  its Mar-2014 high].

Of course, I could justify including the AIM & MSCI Emerging Markets indices in my benchmark, but let’s try resist that brand new temptation… After all, for most readers/investors, a normal frame of reference is obviously one or more large-cap developed market indices – for them, departing from that universe into what most would perceive as riskier small/micro-caps & emerging markets implies/demands a strong expectation of superior returns…which clearly didn’t happen last year! Therefore (in the absence of some highly-specific mandate), I’d concede my current index choices continue to serve nicely as both a benchmark, and as an appropriate hurdle for my investment/diversification alternatives.

But looking back to 2013, 2012 & the tail-end of 2011, I’m very comfortable with my medium-term relative & absolute performance. [Why yes, I now have a 3 year performance record…care to discuss?!] And looking ahead, I believe the majority of my holdings have increased their intrinsic values in 2014, and/or they’ve moved closer to a potential (activist) unlocking of shareholder value…hopefully, we’ll see this reflected more specifically in their 2015 share price performance. Yes, I know, isn’t that what we all say..?! But arguably, my dependence on event-driven/deep value investments is (much) less risky than a portfolio reliant on over-priced/potential high-growth stories which may never materialise. [Assuming I’m not sitting on a bunch of value traps, of course…]

And as I’ve highlighted many times, I really look to the average hedge fund performance for the year as my personal benchmark. I’m not suggesting my portfolio’s some absolute return tail-risk hedged uber-vehicle (though I’m not averse to all that, resources permitting), I really mean it in the old-fashioned sense (& purpose) of a hedge fund – I worry as much about preserving my wealth, as I do about increasing my wealth. And that’s no easy task. Most people tend to obsess over one, to the detriment of the other (whether they realise it, or not) – so in reality, maintaining a healthy balance is a fraught & never-ending exercise. But then I note the HFRI Composite Index returned 3.3% in 2014, and only 6.3% pa over the past 3 years…and I feel a little better! 😉

OK, now let’s recap some of my major winners & losers. Somewhat arbitrarily, in the interests of brevity (& sanity), I’m just going to focus here on stocks that delivered gains/losses in excess of 10%:

Winners:

NTR plc (Grey Market):   Since my write-up, NTR announced it was exploring a sale of its US wind farms, appointed Marathon Capital to formally launch a sale process, and confirmed its intention to provide significant liquidity to shareholders (presuming a satisfactory sale outcome). Despite all this progress, which should ultimately lead to a full unlocking of NTR’s underlying intrinsic value, the shares have languished somewhat since their Sep-2014 high of EUR 2.60. [I’d also highlight the dollar’s recent strength, which should significantly increase my target price range & fair value (all else being equal)]. It shouldn’t be too long now before we can expect to see a progress report, or an actual sale announcement.

Total Produce (TOT:ID):   Sold. [btw Here’s my very first TOT write-up, just over 3 years ago now…when it was trading at just EUR 0.39!] The huge value gap that existed here has now been closed – some upside potential remains, but not enough to keep me invested. And I don’t see that changing any time soon, noting management’s poor record in terms of earnings growth & capital allocation. However, a potential re-merger with Fyffes (FFY:ID) is a potential wild card here…although this has been talked about for years, and I suspect it would actually require the threat of an activist/acquirer to make it happen.

Zamano (ZMNO:ID):   Tsk tsk, I should be bloody delirious about my 2014 gain here…  But it basically occurred in a single post-investment write-up surge last May, so it feels like old news, with the share price treading water since (well short of my fair value target)! [How complacent & entitled we often feel with our winners, eh..?!] Despite an encouraging IMS, Zamano continues to feel like a permanently neglected stock…but there’s a number of obvious paths to value here, as I detailed in my original write-up. Meanwhile, if you take ZMNO’s current EUR 10.9 million market cap & annualise its most recent results, shareholders are being rewarded with a 16.0% return on investment (almost 22% on an ex-cash basis).

Alternative Asset Opportunities (TLI:LN):   Despite the continued life expectancy adjustments in the portfolio (what are these people, bloody vampires?!), I think it’s now safe to say we’ve reached a veritable sweet spot with this non-correlated investment. There’s no longer any financial risk to the portfolio, the share price continues to trade at an NAV discount, our petites morts are beginning to accelerate, management’s begun to return capital (unfortunately, they’re neglecting to repurchase shares), the dollar rally adds a nice tail-wind, and a renewed decline in yields (10 yr UST’s now at 1.74%!) should finally attract yield whores investors into the US traded life market (and/or compress valuation discount rates).

VinaCapital Vietnam Opportunity Fund (VOF:LN):   Vietnam now appears to have a decent handle on its inflation & banking sector NPL/capitalisation issues. The market’s priced on a reasonable multiple, and there’s a compelling growth path ahead of Vietnam, both in terms of its domestic economy & its export potential. If you’re afraid to make a China bet today, or you missed making a big China bet over the past decade or two, Vietnam is perhaps the easy alternative! Like most frontier markets, a multi-asset fund (listed/OTC equities, private equity & property) like VOF is probably the best investment vehicle – it trades on a 23.5% NAV discount, has a good performance record, and management continues to actively repurchase shares (spending a cumulative USD 198 million & retiring 30% of its outstanding share count!).

Losers:

Livermore Investments Group (LIV:LN):   Sold. This was a hugely rewarding position, but with my increasing stake in Tetragon Financial Group (TFG:NA) (which also invests in CLO residual equity tranches), Livermore became a less compelling/non-core investment. It continues to trade on a huge 37% NAV discount, but the specialised nature of the portfolio & management’s dominant stake in the company are a deterrent for most investors. This management stake wasn’t actually much of an issue, historically, but egregious 2013 compensation & losses on Babylon (BBYL:IT) (a related-party company) now leave a bad taste in the mouth.

Argo Group (ARGO:LN):   Argo’s share price is now revisiting 5-year lows… Obviously, frustrated shareholders have (understandably) concluded ARGO’s a permanent value trap, and its illiquidity has exacerbated the share price decline as they’ve exited. But I’d have to disagree ARGO is a value trap…at least in financial terms. In the past 2 years, investments increased by 10% to 19.3 million, cash remains stable at 4.7 million (inc. a subsequent 2.4 million receipt of TAF/ASSF management fees), while the asset management business also remains profitable on an underlying basis.

But in terms of management’s neglect of shareholders and shareholder value, ARGO certainly feels like the quintessential value trap. Who can blame the average investor (severely) discounting the value of Argo’s TAF investment? [A substantial fund realisation has long been promised…]. Or his frustration that a majority of shareholders’ capital remains tied up in TAF, when it would be far more profitably (re-)deployed into funding a substantial tender offer? Or if he assumes the asset management business is unprofitable, as per the latest results? [Backing out the (unnecessary) USD 1 million TAF/ASSF bad debt charge from the LTM P&L (since it was subsequently collected), Argo’s underlying operating margin is actually 9.5%]. Or if he discounts the potential impact of the H1-2014 employee redundancies? [Potentially, by my calculation, this could (almost) double Argo’s operating margin…all else being equal, of course]. But we can obviously lay blame on management’s poor investor relations effort here…

The continued evolution of AUM is a wild card, but otherwise the best hope for shareholder value/gains is now clearly dependent on a value-realising event. All I can do, at this point, is refer you again to my last letter to management: There are potential buyers out there for Argo – either the company, or its business/assets…

Saga Furs (SAGCV:FH):   In my 2013 investment write-up, I presented Saga Furs as a totally unique investment opportunity – a stock that encompassed three of my favourite things: Luxury goods, auction houses & emerging/frontier markets. I also highlighted the multiples for both luxury goods & auction houses, which nicely illustrated the potential upside for Saga. While I believe both sectors are secular growth stories, I’m well aware they’re also pretty savage cyclicals along the way – I tried to incorporate this into my Saga valuation (looking back at average margins), and I also included a health warning.

But I certainly wasn’t expecting their trade buyers to suddenly disappear, fur prices to reverse sharply, China to clamp down on luxury gifts/advertising, and Russia to become a sanctioned pariah state. [Of course, the luxury goods companies are also dealing with some of the same issues]. Fortunately, I did consider some stress-testing in my analysis – noting Saga was a financially strong company, it had produced an average adjusted operating margin (inc. financial income) of 24.2% over a 7 year cycle, its adjusted operating margin barely turned negative (1.4%) in 2009 (despite a 39% drop in sales), and the company’s actually been around for 75 years plus!

In reality, luxury goods companies & auction houses – like most cyclicals – present the greatest upside when the numbers look horrible & valuations look ridiculously expensive…which can make them incredibly difficult to buy. Effectively, with Saga, I only discovered this after buying it..! A mixed blessing, indeed – I’m now sitting on a significant loss, but at least I own a stock (which I very much want to hold for the long-term) that might otherwise have proved very bloody difficult to buy ever since. [A self-serving argument, maybe – but if you’ve ever agonised over the right time & price to buy Sotheby’s (BID:US), for example, you’ll know exactly what I mean].

Now the shares are trading on a 1.7 P/S & a 0.9 P/B multiple – not so cheap, as things stand, but far more reasonable in a longer-term/more normalised context. [And the recent dollar rally now provides a v attractive tail-wind for the company, which operates with dollar revenues & euro expenses]. Based on Saga’s operating & share price history, I’m confident we’ll see another/higher cyclical peak in sales & earnings in due course, and a share price trajectory to match…

Avangardco (AVGR:LI):   Sold. Sentiment/momentum can trump value for a v long time, especially when it involves a Russian military intervention/stealth invasion/annexation/call it what you will… I’d like to claim I exited AVGR on the Russian news, but no…I didn’t. Which is pretty dumb, since there’s a simple rule for any kind of unexpected military/government action: Sell first, ask questions later! Because at that point, you really haven’t a bull’s notion what impact such an event may have, or how long it may last (days, or years?!). And even if it ultimately proves inconsequential, you have no idea how aggressively the market will discount all sorts of potential & related risks in the interim. What finally put the scare up me was AVGR’s failure to rally on its dividend declaration* – apparently a small event, but I’d expected it to be disproportionately significant in terms of investors’ sentiment & ongoing doubts about the company). The subsequent technicals/price action then prompted me to pull the trigger & sell.

[*With hindsight, the market was correct: AVGR hasn’t paid its dividend! But Thursday’s announcement is fascinating – the controlling shareholder, Oleg Bakhmatyuk, apparently isn’t waiving his dividend, but he’s postponing payment to facilitate payment of minority dividends. So, if you’re a shareholder, this may end up a great pub story…you can boast you’re one of the few people who owes a Ukrainian billionaire USD 23 million & is still alive! 😉 ]

Richland Resources (RLD:LN):   This was perhaps my first serious effort at demonstrating to readers how useful a value perspective can be when it comes to selecting a junior resource stock with both a reassuring margin of safety & attractive upside potential. Of course, what I was really trying to do was prove any notion of value is utter twaddle when it comes to junior resource stocks… Because buying a junior in a resource bear market is much like taking a shower in a sand storm, a pointless & unpleasant experience – I recently expanded on this here. Incidentally, I realised a very rapid & chunky profit on part of my position originally – of course, that’s been more than lost since. Again, when you encounter unexpected government action (& inaction), just sell… Why I still own this tiny carbuncle, I can’t explain – other than to helpfully illustrate you can always lose more money on a busted position!

JPMorgan Russian Securities (JRS:LN):   I’ve mostly tried to avoid writing about country/regional funds on this blog. After all, what exactly do you write? Fund analysis is a simple affair, but no matter how many words/graphs you pile on, what are you hoping to achieve with your macro analysis…I can’t help assuming readers either agree with me already & know all the basic facts & figures, or else it’s a country/region they wouldn’t dream of touching with a barge-pole. I played it smart with VOF:LN (see above) – I kept my write-up short & sweet, focusing mainly on the market’s technicals & a few fund facts. But then it all went to my head, and a few months later I launched into a two-part From Russia With Love post (here & here), culminating in a JRS position/recommendation.

Such presumption was duly rewarded…the market’s been going down ever since. [And yet again, I ignored the military/government rule here!?]. Funnily enough, in my defence, I wasn’t entirely wrong: Check out this second chart. That’s the MICEX (RUB denominated), which confirms (astonishingly) that I’m marginally profitable on my market bet – it’s actually the bloody $/RUB that totally screwed me! Even more oddly, I wrote another two-part post just months earlier which was actually bearish on Russian (& Ukrainian) farmland stocks (here & here). And those stocks have gotten absolutely destroyed since then, so maybe my Russian record isn’t totally appalling…

However, there’s one more simple rule to contemplate here: Always buy last year’s worst-performing market. Sounds easy & makes perfect sense on paper, eh? Yeah well, now that market is Russia…so what you gonna do?!

Advertisement