agri-business, averaging, cash, correlation, distressed, diversification, emerging markets, Event Driven, frontier markets, Ireland, luxury goods, mobile, portfolio allocation, property, UK, US, volatility
OK, the Olympics are over – time to focus, focus!
And these pleasant late summer markets might soon grow stormy…
So it’s as good a time as any to offer up a current snapshot of my top holdings & portfolio allocation. Let’s begin with my Top Nine holdings, which follows on from my recent H1-2016 Performance post. [In this post/tables, since I made no incremental H1 buys/sells, the average stake for each holding actually equated to my year-end 2015 holdings…so eight months later, an update’s clearly overdue!]:
[Current: As of CoB 24-Aug-2016]
For your reference, in my last post, I included a paragraph (or two) of updated commentary for each individual holding. I also completed a similar exercise in my Top Tips post back in January. And just for completeness here, I’ll again provide corporate website & Bloomberg links, links to relevant posts/write-ups (remember, good investment theses tend to evolve slowly), plus the closing share price & market cap for each stock:
‘Zamano…So, What Now?!’ (NB: First link = most recent post/write-up)
Share Price: EUR 0.113
Market Cap: EUR 11.2 Million
Share Price: GBP 41p
Market Cap: GBP 30 Million (USD 39 Million)
Share Price: GBP 226.75p
Market Cap: GBP 473 Million (USD 626 Million)
Share Price: EUR 5.60
Market Cap: EUR 55 Million
Share Price: USD 10.74
Market Cap: USD 1,026 Million
Share Price: EUR 14.30
Market Cap: EUR 51 Million
Share Price: GBP 2.05p
Market Cap: GBP 9.6 Million
Share Price: USD 4.99
Market Cap: USD 1,968 Million
Share Price: GBP 98.5p
Market Cap: GBP 30 Million
And yes, now the question that’s been bugging you: What’s with the Top Nine? I mean, who does a Top Nine?! Well, I have a confession…and I’m sure regular readers already know what it is:
This Top Nine isn’t such a representative snapshot anymore – in fact, it now comprises just 46% of my current portfolio – but it’s all I’ve got here, in terms of actual disclosed holdings. And Rasmala isn’t even in the Top Nine…there’s now seven undisclosed holdings ahead of it, so in reality it’s a Top Sixteen holding!
But as you may know, I can be sloowww to buy new holdings, I’m (usually) slow to sell holdings, and these days I’m much better about practicing what I preach: To Average In, Average Out of positions is an excellent way of fighting the Fear & Greed we all tend to experience. So yes, I’ve plenty of new holdings in my portfolio – each of which I’d love to write-up here asap – but at this point, they’ve yet to evolve into full positions. Well, OK, with one exception…which has totally blown past my target allocation, on the back of a monster rally. But I’m not for selling here, so when the dust settles a little, I hope & suspect it’s still a great candidate for an investment write-up. All in all, not a bad complaint to have…
Now, I’ll admit to some occasional impatience with this approach…after all, most of us believe we have a God-given gift which allows us to single out the potentially exceptional performer in our portfolio/buy list. In reality, when it comes to guessing (for example) our best performing stock for the year, we’re usually so wrong it’s laughable – that’s what comes from attempting to predict market noise. And so over time, I’ve learned to ignore the ever-nagging temptation to pile all my cash & proceeds into a single stock…my hottest stock. That’s chasing bloody rainbows. Far better to average into an ongoing selection of high quality/high potential stocks. Which is not to say, time the market – I’m no believer in holding (long-term) surplus cash in my portfolio, so most of my purchases are funded in exactly the same fashion, i.e. from averaging out of stocks!
OK, but where does that leave us now?
Well, I beg your patience, investment write-ups to come…like I’ve always said, in reality an investing blog which tracks a real-world portfolio is bound to be a bit boring at times! But meanwhile, this is also a good opportunity to pause & consider my current portfolio allocation:
Early this year, I included a bit of an update/taster here – but here’s the last portfolio allocation pie chart I published, from about a year ago, which I’ll actually reference here for comparison purposes:
Emerging & Frontier Markets (down from 17% to 10%):
I continue to pare my emerging & frontier markets allocation – most recently eliminating my Russia* exposure – though I should highlight the primary driver is a re-allocation of my Saga Furs holding (see below). [Leaving VinaCapital Vietnam Opportunity Fund & Rasmala as my only disclosed holdings here]. While these markets still offer the best growth opportunities & ever-cheaper valuations (I’m tempted on a regular basis)…as I detailed last year, fund flows & sentiment suggest developed markets will keep leading the way, while any kind of serious market reversal seems likely to impact emerging & frontier markets just as severely. Which isn’t the most compelling of scenarios… On the other hand, my new investment themes (again, see below) are also a play on such higher growth markets, albeit via Western companies.
[*Take a look at the comments. I cited a new oil bear market as another reason for my recent sale of JPMorgan Russian Securities (JRS:LN)…of course, oil immediately rallied & JRS set new two year highs, a timely reminder short-term macro predictions can quickly make you look like an ass.]
Luxury Goods (zero to 15%):
When it comes to portfolio allocation, I see nothing wrong with mixing it up – I’m happy to (re-)allocate based on secular investment themes, national & regional location, and/or (alternative) asset categories. I’ve regularly touched upon luxury goods companies as a potential investment theme (e.g. see the first section of my original Saga Furs post), but only in the last year do they finally deserve a separate allocation (in January, I mentioned this in passing). However, Saga Furs remains my only (re-allocated) disclosed holding in this category.
And yeah, when you survey the current economic & consumer landscape in the West, and consider the regulatory backlash in China, not to mention increasing anxiety about emerging & frontier market growth…luxury goods may seem like a rather counter-intuitive bet!? But this isn’t anything new – the industry’s always suffered growth hiccups along the way, and corruption-related Chinese revenue/profits was a windfall that was inevitably going to be ‘re-based’. From my perspective, I see little sign of a new & meaningful risk/interruption to the sector’s long-term growth trajectory…after all, what’s more reliable than betting on human vanity & insecurity?! And in general, if you’re a value-biased investor, the only reasonable opportunity to invest in the sector comes when the outlook’s looking a bit grim. In due course, I hope to return to this investment theme with a separate & more detailed post.
United Kingdom (down from 9% to 4%):
I’ve done a bit of a Brexit here…primarily due to my (highly profitable) exit from Universe Group (UNG:LN), though the recent price reversal in my disclosed Newmark Security holding also contributed. Coincidentally, this leaves me smack-dab at a benchmark weighting, with the UK now representing just 3-4% of world GDP – worth remembering each time you think you’re underweight (or realise you’re actually massively overweight). Not sure this will change soon: On the one hand, the AIM market has gone nowhere for two decades now (with little sign of change), and deep value stocks appear to be in a permanent & unprecedented bear market (maybe that’s a buy signal…but it sure doesn’t feel like it!?) – yes, there’s still small/micro-cap stocks which tempt me, but a consistent underlying growth trajectory’s required if they’re to have any chance of breaking higher. And at the other extreme, the old economy (and/or defensive) bias of the FTSE doesn’t seem to offer much in the way of value or opportunity either.
United States (unchanged at 4%):
Regular readers will realise my holding(s) have changed here…from King Digital (KING:US), which I never had a chance to write-up (but which also inspired a new investment theme, see below), only mentioning it subsequent to a profitable but still frustrating take-out by Activision Blizzard (ATVI:US). I’ve just one undisclosed holding here now, but I do see more opportunity…albeit in terms of stock-picking, which may show up in other portfolio allocation(s). The market itself I find far problematic – it’s obviously the most expensive of the (major) developed markets, which is increasingly hard to justify considering its disappointing GDP growth (worse than Europe YTD…how many investors actually realise that?!) & ongoing negative earnings growth. Worst of all, it suffers from the Yellen collar (which I wrote about here) – the Fed put’s still there under the market (but with a much tighter strike than the Greenspan era), while any significant market advance will prompt the Fed to raise rates. However, actively avoiding the US may be a rather pointless strategy, as its (positive/negative) performance will likely prove an anchor for other global markets.
Europe (no allocation):
It’s worth highlighting I actually have no separate portfolio allocation for Europe. This doesn’t mean I’m actively avoiding the region (with plenty of value still on offer, in terms of individual markets/stocks), it just means: i) my European stock picks are allocated elsewhere in my portfolio – Luxury Goods being an obvious candidate, with the industry predominantly headquartered in Europe (whereas in the US, one could argue Tiffany (TIF:US) may be the only genuine luxury goods company, in the more traditional sense), and ii) despite the Brexit vote, I still think Ireland (& maybe even the UK) remains the best proxy bet in & for Europe (as I argued in my last post).
Ireland (down from 22% to 12%):
But if so, why has my Ireland allocation been slashed?! Well actually, it isn’t…
Firstly, a timely sale of One Fifty One plc & a re-allocation of my Zamano holding (see below) eliminated most of my previous allocation – my holdings today consist of new (& existing) undisclosed holdings, with the Brexit vote throwing up some unexpected & compelling buying opportunities (the ISEQ plunged 17%, but has subsequently recovered to within 4% of its pre-Brexit close). And second, if you include holdings which have been (re-)allocated elsewhere in my portfolio, my overall Ireland allocation is still a substantial % of my entire portfolio & obviously remains a massively overweight bet when you consider the Irish economy’s a merely fractional share of world GDP.
Mobile (zero to 21%):
OK, maybe it’s odd Zamano inspired a separate portfolio allocation (and is the first/only disclosed holding re-allocated to this investment theme). After all, isn’t it just a marketing/messaging company which acquires/monetises content & customers (ah but…isn’t that exactly what a lot of other tech companies do?!), and don’t I consider it more an event-driven stock anyway? True…but take a look at the beginning of my original ZMNO post, where I briefly touch on smartphones (which, believe it or not, I radically pruned!). As humble as Zamano’s business is, it actually sparked a step-change in my awareness of the smartphone revolution. Which I’ll try not to get started on here, because I may never stop…
Let’s spell it out: Mobile is surely the investment theme of a lifetime…and disagreeing with such a grand assertion is verboten, instead investors need to focus on tactics (i.e. what stocks to buy & what prices to pay). And Andreessen Horowitz (with whom I had a recent conference call, I kid you not, to discuss a related theme) map it out far better than I ever could: See ‘Mobile is Eating the World’ & ’16 Mobile Theses’, not to mention the original sacred writing of @pmarca himself…‘Why Software is Eating the World’.
While the internet revolution was a necessary precursor, smartphones herald the true revolution – we’re now reaching a unique point where, for the first time ever, virtually all of humanity will be connected in real time & space (i.e. whenever & wherever you are). For example, it creates a long tail which never existed before: I must read it again, but Chris Anderson’s book got it wrong…it’s not especially about business/retail, the real opportunity lies with individuals who can now connect with & change the entire world, no matter how small & isolated their voice may seem to be. It might seem like nothing – a mere fad – but a teenager sitting in her bedroom in Australia can now have an audience of millions around the globe. [In contrast, many of the great artists in history died relatively poor & unknown – simply because they had a near-zero possibility/opportunity of ever connecting with 99.9% of the planet!] And with smartphone usage basically a decade old now, we haven’t even scratched the surface of what it ultimately means in terms of their utility & exploitation…
Of course, smartphones are ultimately just a conduit – which is why I labelled this investment theme as Mobile. Connecting to the Cloud & the Internet of Things heralds the real revolution, particularly as we now appear to be reaching what looks like simultaneous/game-changing inflection points for payments, virtual reality & machine learning – all of which will be necessarily cloud/mobile-based services from day one, because of their algorithmic/computational/storage intensive requirements & their obvious utility. Again, a16z pretty much covers the gamut of these opportunities in their Tech Topics.
Property (down from 4% to 1%):
With the recent sale of my remaining KWG Kommunale Wohnen (BIW:GR) stake (see commentary here – the rest of the German residential property sector’s now priced at a significant premium), Property now seems a bit of a lost cause. As I detailed here, I don’t see much obvious value/opportunity in most Western property markets – although the Brexit vote may have thrown up some new UK & Irish opportunities, but probably more in terms of individual companies & share prices (which ideally, you were tracking already as potential buys), rather than any great step-change lower in terms of underlying property values & dynamics. [I suspect the re-pricing/redemptions of open-ended UK property funds is a bit of a red herring]. Japanese (residential) property’s more compelling, but not an opportunity I feel I have to reach for vs. other potential buys I have in mind, while emerging & frontier market luxury residential property is a longer-term opportunity to consider (though decent company exposure mightn’t be so easy to access).
Natural Resources (zero allocation):
You know what – no links, no how, nowhere, not yet…
Why can’t investors grasp natural resource/commodity cycles can easily last 10-20 years – every six months or so, it seems like they discern (yet again) a new dawn for commodities. In reality, you don’t buy on a perceived turn-around…you finally buy when nobody perceives a goddamn turn-around ever!
Agri-Business (unchanged at 8%):
Likewise, with the vast majority of agricultural commodities also enduring a pretty severe bear market, this portfolio allocation’s also on hold – Donegal Investment Group is my primary & only disclosed holding here, and it’s really another event-driven investment with two major disposals & a return of capital on the horizon. While a century-long bear market is apparent for many agri-commodities, this is obviously due to (& offset by) long-term/ongoing yield & (mechanical) productivity gains. And fortunately, in the short-term, agricultural cycles tend to be much briefer in terms of weather cycles/reversion & the necessary re-adjustment of supply-demand imbalances, so this could soon become a more fruitful area again for research & stock-picking. [On the other hand, it’s worth highlighting aquaculture is generally booming right now…but I can’t help but wonder if it’s heading for another of its periodic & abrupt retrenchments].
Distressed (down from 11% to 8%):
This portfolio allocation’s evolved into more of a grab-bag of financials & credit exposure – my recent sale of Argo Group (ARGO:LN) was frustrating, but likely correct*, leaving me with disclosed holdings in both Fortress Investment Group & Tetragon Financial Group. [*See commentary here. Since then, another buyback proposal has been announced…sounds good, but probably heralds an increasingly inevitable end-game for minority investors]. Distressed is somewhat of a mischaracterisation here, but certainly reflects the market’s misperception of these stocks: FIG actually trades at a discount to current net cash/investments & fund-related incentive income per share, while TFG’s portfolio is generally presumed to be choc-a-bloc with toxic CLOs (actually, they’re not…and they amount to just 27% of its portfolio anyway). And the same is generally true of all financials**, plus many of the more exotic investment holding companies & credit-related investments out there, which means I see plenty of other potential buys jostling for attention.
[**If I haven’t highlighted it before, I believe Technology & Financials are probably (by far) the best sectors in the West (& quite possibly, globally) to focus/bet on now: The unprecedented compression in financial valuations affords a marvelous opportunity to pay up for quality/best of breed, whereas tech stocks obviously require a far more rigorous evaluation of price paid vs. the potential risk/reward on offer (which, of course, means avoiding both value trap & blue sky pricing..!?)]
Volatility (up from 2% to 5%):
And with the VIX trading sub-12.00 for much of August, it’s a perfect time to unveil what was previously an undisclosed portfolio allocation. [Though, alas, not my actual holding(s)!] Investors tend to forget yet another inevitable consequence of coordinated central bank monetary easing is a consistent & sustained suppression of market price volatility…which occurs right across the board in the equity, fixed income, foreign exchange markets etc. Look back at the longer-term VIX chart & you’ll see the same post-recession/market crash pattern re-occurring historically (as a direct result of Fed/central bank action). And bearing in mind unprecedented stimulus this time ’round, the fact that post-credit crisis volatility has proved to be far less responsive & far more jagged – not to mention central banks have failed to generate any appreciable price inflation, despite all forecasts to the contrary – is rather terrifying confirmation of how bad the underlying collapse & deleveraging really was (& still is), absent currency debasement…
But all good (bad?) things must come to an end…markets will go haywire & volatility explode higher again. And in that scenario, volatility as an asset class can be a negatively correlated & highly lucrative investment – black swan investing is the extreme example. Of course, in the regular world most investors inhabit, things aren’t so simple… Another look at the long-term chart shows volatility can trade at historically low levels for years at a time…only to spike, by definition, when you least expect it. But what really kills you – if you actually dabble in VIX futures/ETPs – is the contango embedded in the normal VIX futures curve. The implied negative roll yield is totally devastating…as the 99.9% decline in VXX will attest! Clearly, any kind of VIX derivative is toxic for buy & hold (or wrong) investors.
The solution may be to seek out companies which exhibit long-term underlying growth, but which can (potentially) thrive & benefit from a market/volatility crisis – antifragile companies, if you like, to use another Taleb phrase. Assuming this more flexible approach to Volatility, such exposure’s arguably one of (if not the) most important portfolio allocation – though obviously the potential for a large & negatively correlated price reaction may be reduced or delayed, albeit this should (ideally) be mitigated by the underlying business growth trajectory.
The obvious candidates are brokers…which present a bit of a double-edged sword. Yes, they have the potential to: i) benefit massively, at least in the short-term, from a spike/step-change in volatility, and/or a large market decline, and ii) possibly benefit longer-term from an accompanying spike or sustained increase in interest rates (and/or credit spreads) – historically, a primary driver of broker profitability was interest earned on client balances, which has now been almost eliminated. But most brokers also appear: a) to be fairly/over-priced relative to their current profitability/return on equity, and b) to be in a race to the bottom*, both in terms of market-making and offering the lowest cost & best technology, so the underlying business dynamics aren’t necessarily all that compelling.
[*Perhaps I should call it a race to the top & bottom: If the more recent trend towards passive investing (plus robo-advisers, etc.) continues, or even accelerates (though I’m not yet convinced…if investors grow more confident, many will enthusiastically (re-)embrace active investing), brokers will have no choice but to choose a low(est)-cost online model, or simply drop out of the arms race & opt for a high(est)-cost hand-holding model instead (i.e. old-fashioned mahogany office wealth management). Of course, in that scenario, your average run-of-the-mill broker may simply be left blinking & befuddled in the middle
ground wasteland, as he slowly & then quickly bleeds to death…]
Fortunately, I continue to identify other companies/sub-sectors to explore & potentially increase my exposure to this
asset class – investment theme may be the better description – I suspect it may ultimately evolve into a significant portfolio allocation, and a fruitful source for some interesting future write-ups.
Event-Driven, Fixed Income & Cash (down from 23% to 12%):
The decline here is a result of my well-timed & lucrative exit from NTR plc, and a fortunate reduction (in light of the subsequent & highly disappointing cost of insurance update) in my Alternative Asset Opportunities holding. This is actually my only disclosed holding, except for my current Altas Investments plc holding (which post-NTR demerger, I confirmed I would no longer be disclosing). Which means I’ve also been raising cash from small/legacy holdings, which I expect to reinvest in higher quality/growth positions in the next couple of months – I must confess, a low volume low-VIX market which keeps setting new highs in August (of all months) makes me feel a tad nervous. I suspect we’ll have a market wobble or two in Sep/October, but ultimately this is something you should be ready, willing & able to take advantage of…
Meanwhile, I have a few different/upcoming posts in mind…ideally, my next post will be a closer look at the High-Low Strategy which has been a primary driver of my more recent stock selection.
So now, welcome back…it’s almost September!