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Benchmark Performance:

Let’s jump right in, here’s the H1-2017 performance for my usual benchmark indices:

Move along, nothing to report here…but that’s exactly what we should focus on! Of course, the financial media’s become more & more hysterical about the markets – de rigueur in an ADHD world – but cooler & more logical heads have also been sounding the alarm bells so often, I’m sure I’ve gone deaf. But sacrilegious as it may sound, a +8.2% YTD gain for the S&P 500 isn’t all that extraordinary… Sure, it’s within spitting distance of the market’s average annual return, but that doesn’t mean much – history confirms annual returns tend to rack up in just a few months, with the market faffing around for the rest of year.

And looking back, I’m hard-pressed to find this outrageous bull market everybody’s yammering about. In reality, the S&P soared a massive 6.6% pa over the last three calendar years (2014-2016). Seriously…that’s it!? [How many readers are reacting with disbelief right now?] Even my blind maiden aunt couldn’t get her knickers in a twist over that kind of return…

Of course, the nay-sayers will argue the S&P’s trajectory is irrelevant – we should really focus on how expensive it is today, in absolute terms. Hmmm…maybe if you cherry-pick the most damning P/E multiple comparison!? But taking a longer-term perspective, the Nifty Fifty actually peaked at 42x in 1972, while TMT stocks peaked at 60x in 2000 (with the S&P hitting 29x). Except isn’t that just a greater fool approach…shouldn’t we be evaluating the market vs. normal P/E multiples? Well, again I fail to understand the alarm: The S&P today actually sports an 18.8 forward P/E, a mere 9% premium to the average 17.2 forward P/E over the last 20 years (which included the dot-com bubble, but also the financial crisis).

And absurdly, the doubters choose to ignore gravity (i.e. interest rates)! Whereas I’m perfectly happy to defer to Buffett here – aside from secular earnings growth itself, interest rates are arguably the equity market’s greatest single driver (& valuation benchmark). This one 10 Year UST chart effectively tells you more than a dozen books could about the US equity market’s trajectory over the last 50+ years:

Ever since the crisis – even more so, in the last six years – we’ve enjoyed (?) a radically different interest rate paradigm vs. prior decades. The S&P peaked at 29x in 2000, when bond yields were actually 6-7%, vs. sub-2.30% today – so in reality, its current P/E is a mere fraction of that peak multiple, when properly adjusted for the collapse in the risk-free rate that’s embedded in your valuation framework/model. But once a skeptic, always a skeptic…many people feel compelled to refute the logic of this argument!? Shame we can’t go back in time, say 20 years ago, and ask them to try imagine a sub-2/3% bond world – for God’s sake, don’t even mention negative rates, it would surely rip a hole in the space-time continuum – to a man, I guarantee you they’d laugh & agree market multiples would expand hugely in such an unprecedented environment!

Aha…but now rates are finally rising again!?

And yes, this is how the bricks are added to the wall of worry we’ve continued to climb here. You have to remember where we’re starting out from, and where we are today…do 1%, 2%, even 3% rates, for example, make any difference in the real world? [Yeah, I know: In due course, some asshole will blow himself sky-high on some exotic spread bet he’s managed to leverage out the wazoo…but he’ll be an exception]. Rates may continue to slowly move higher – short rates more so than long, I suspect – but I’m willing to bet this will be generally hailed as a welcome & essential normalisation of the economic environment. Not to mention the euphoria, and potential step-change in valuations, if Trump focuses less on Twitter & focuses more on actually delivering a substantial corporate tax cut/repatriation deal. [Who knows the odds of that, but it doesn’t exactly appear to be discounted in the market now].

As for shrinking central bank balance sheets, I don’t see that being any more likely than governments finally abandoning long-term currency debasement. And it may have taken three decades, but the central banks (led by the Fed) are now fully trained to focus on & rescue markets, rather than underlying economies. Which means the markets are now navigators of the party bus, not the central bankers…and they can yank the wheel whenever they want. Which is how a 10% correction has now mutated into the new benchmark for a potential crisis.

Ultimately, this new market paradigm may indeed prove to be unprecedentedly bullish, but it would be foolish not to expect another 5-10% pullback in due course, accompanied by the usual panic & gnashing of teeth. Who knows the timing, but I do know such a correction would be a small (& temporary) sacrifice for the markets to make, if they really need to scare the bejesus out of the central banks to keep us all afloat & partying up a storm on this ocean of money ($12 trillion plus!).

But hey, you lays your bets…

Moving on…yes, Europe disappoints again, with the Bloomberg European 500 delivering a +4.9% YTD gain. Which isn’t necessarily bad, except each year we’re greeted with the same intoxicating contrarian dawn: Surely this is the year, when Europe finally blows away the US?! Yeah but, how often does that happen for real? Let’s face it, the US market’s invariably the slutty blonde at the party, and it’s really not much fun without her. [Hey, she feels bad, you should feel bad too…and look, here’s a global financial crisis. You’re welcome!] So it’s not surprising to see Europe trailing in the last few years, clocking up a mere 2.6% pa in 2014-2016, little more than a third of the US market’s annual return. Again, I ask: Where’s the bull market..?! 

As for the UK, yep, it’s still all about Brexit…

Sterling’s collapse is the only bright spot here – last year, it helped the FTSE 100 to finally break out from that dreary triple-top pattern it’s endured since late-1999 & deliver a tasty 14.4% gain. However, sterling’s (limited) bounce this year has since proved a real head-wind (& commodities have gone into reverse again), with the FTSE’s half-time score a mere +2.4% YTD gain. And longer-term, it’s failed to capitalise on this major breakout…returning just 1.9% pa over the previous three years. But noting the FTSE’s international/sectoral bias, maybe we should also consider the more domestic-focused FTSE 250 – a +7.0% YTD gain may hearten Brexit bulls, but the index badly trailed the FTSE last year (with a mere 3.7% gain), so check your excitement. [And its 4.1% pa return in 2014-2016 isn’t worth boasting about either]. In fact, the real bull market may be the FTSE AIM All-Share, whose 14.4% YTD gain is virtually identical to last year’s 14.3% return, and reflects a near-50% rally since Feb-2016…unfortunately, this followed a two year bear market, so AIM’s 2014-2016 return is actually a negative (0.8)% pa. And so, again, I must ask:

Where’s the friggin’ bull market..?!

Which leaves Ireland, last but never least…perhaps my last chance to find a real bull market. Alas, the days of 15% & even 30% annual returns may be over, Ireland now appears to be diligently tracking Europe, with the ISEQ recording a +4.8% YTD gain (last year’s return was also similar to Europe). But it does boast a 12.8% pa return for the last three calendar years…at last, a bull market!? But to take a longer-term perspective, it’s a market that crashed over 80% during the crisis, and still remains a third below its 10,000+ peak from a decade ago. And as I’ve often reminded readers, buying the ISEQ itself is a strange endeavour…you’ll end up with a handful of companies & not all that much Irish exposure! Fortunately, I continue to find high-quality bargains – like Applegreen (APGN:ID), for example – so it remains a good stock-picker’s market!

And after all that, here’s that 5.1% H1-2017 benchmark performance again:

So, now…how did I do?

Portfolio Performance:

And here’s the Wexboy H1-2017 Portfolio Performance, in terms of individual winners & losers:

[**Exited holdings. Other holdings: Gains based on average stake size (in most instances, my year-end 2016 allocation), and end-H1 2017 share prices (also used as sale price for FIG:US, adjusted for $0.18 of incremental dividends inc. in the SoftBank offer). NB: I’ve otherwise excluded ALL regular dividends & FX gains/losses.]

And ranked by size of individual portfolio holdings:

And again, merging the two together – in terms of individual portfolio return:

And yes, I can & should be damn happy with that result…a +9.6% portfolio gain is almost double my +5.1% benchmark gain! Which goes a long way towards mitigating the shellacking I received last year, in relative terms, with an otherwise benchmark-busting performance crucified by a single sorry stock, the now infamous Zamano (ZMNO:ID).

But I’m not…

Happy, I mean.

Well, actually…I really am! 🙂

Once again, there’s a big disconnect in the performance of my disclosed portfolio vs. my all-in portfolio performance (i.e. including undisclosed holdings). A result of a major (but gradual) evolution in my portfolio – and since I try to average in (& out) of positions, and have added a large selection of new positions, this process stretches all the way back to 2015 now (& was pretty much a full-time ‘job’ during 2016). Looking back, I think I laid out a pretty consistent rationale for this gradual portfolio evolution over quite a number of posts:

‘It’s Time For A High-Low Game…’

‘Current Portfolio Snapshot & Allocation’

‘Wexboy – Top 14 Tips for 2016!’

‘So, Just Average Is Best…’

‘The Inherent Contradictions of My Portfolio (or Who’s The Greater Fool..?) (Part III)’

‘The Inherent Contradictions of My Portfolio (or Who’s The Greater Fool..?) (Part II)’

‘The Inherent Contradictions of My Portfolio (or Who’s The Greater Fool..?)’

‘Welcome to the Floating World…’

‘Stock Picking…Art, or Science (Part IV)?!’

And if you didn’t fancy wading through that lot…let me summarise here:

No, I haven’t lost my mind & turned into some delusional bull. But I am, in reality, a GARP investor…and always was, except you maybe never noticed (it comes & goes with me). [My portfolio was last stuffed to the gills with high-quality large-cap GARP stocks post-crisis, for a number of years]. Now, I’m laser-focused once again on high quality/growth stocks (esp. those boasting wide economic moats), for both defensive & offensive reasons. Defensive, because I’m still hugely concerned by the underlying fiscal & economic strength of the developed world…so I need companies that can boast a robust business and/or secular growth even in a fragile economic environment. And offensive, because (more cynically) I believe putting the QE genie back in the bottle may prove a near-impossible task…ultra-low (even negative) interest rates & unprecedented monetary stimulus could still unleash a completely unprecedented equity bubble.

Unfortunately, it wasn’t ’til late-2016/early-2017 I finished off building/averaging in to most of these new holdings, so only recently have I finally been able to express this overall portfolio thesis in terms of individual stock write-ups – my rash of posts re Applegreen (APGN:ID), Record (REC:LN) (which was actually the new Volatility allocation I mentioned in this Aug-2016 post), and Alphabet (GOOGL:US) (Company D in this Jan-2016 post) are good examples.

[And while we’re at it: Company A in that last post was actually Moleskine, which got acquired before I could get around to a write-up. Company B is a rare position now which I’m still slowly building…a major technical factor holding it back has now been eliminated. Whereas my position in Company C is complete – I expect it will be a blog write-up in the next few months, esp. as the share price has gone nowhere for over 4 years now despite EPS growing almost 50%!?]

But those new write-ups are just a few of my current undisclosed holdings, so hopefully you can anticipate a nice pipeline of write-ups still to come (unless they really out-pace themselves…which, of course, wouldn’t be such a terrible thing!). And for whatever reason(s) – presumably, luck as much as anything – my overall portfolio thesis really came together this year, in terms of individual holdings. In fact, my top five portfolio gainers (unfortunately, only two of which are disclosed to date) actually enjoyed an average 50%+ gain in H1 – while my overall (all-in) portfolio gain itself was over five times my benchmark return. A pity there weren’t more disclosed holdings, eh..? But anyway, in terms of performance, I have the same high hopes today for my new investment write-ups, and more new holdings to come on the blog.

Not to mention, my older disclosed holdings…I’m certainly not holding those for fun! Let’s wrap up here by focusing on some of those:

First, my single-digit winners & losers don’t warrant much in the way of fresh analysis here (but feel free to comment/email me with any questions). My three new write-ups this year clocked up an average +6% gain, but obviously haven’t had much chance to rally so far – however, both Applegreen & Alphabet enjoyed significant technical breakouts (since my posts) which they can now build on, while Record looks close to testing/breaking out of a trading range that’s held it back for the last six & a half years now. Tetragon Financial Group (TFG:NA) & VinaCapital Vietnam Opportunity Fund (VOF:LN) are both chugging along nicely (an average +6% gain, again) in terms of underlying asset appreciation, while their substantial NAV discounts remain undeserved in terms of their actual exposure & longer-term performance. And I can hardly complain about a +5% gain from Donegal Investment Group (DCP:ID)…since quarter-end, the stock’s enjoyed another +10% gain, after confirming the sale of An Grianan for EUR 17.4 million (almost 30% of its current market cap). The laggard is Saga Furs (SAGCV:FH), with a (5)% loss – a story of unrealised potential ever since I first wrote it up – which is actually reporting an impressive year, in terms of auction results, but with a steadily expanding expense base over the years, it remains to be seen how quickly & robustly profits can bounce back here.

We have the same old suspects for my two big losers – just goes to prove there’s always another leg down with small-cap losers, and it tends to hurt (again) far more than you might expect:

Newmark Security (NWT:LN):   A further (13)% loss, and we still remain in the dark here… While revenue held up last year, profits fell on investment in new market & product development, and since September we’ve had significantly lower revenues and actual P&L losses to look forward to as ‘the opportunity pipeline continues to grow but the conversion into sales has been slower than hoped’. At this point, I’m still willing to believe the CEO’s more guilty of over-promising & under-delivering, rather than believe Newmark’s suffering a permanent setback. If/when we see the company right-size itself & start enjoying a meaningful payoff from its more recent product & sales investment, the shares will look extraordinarily cheap once more – assuming a FY-2013/2015 average revenue run-rate of £20 million is (at least) re-established, the shares would offer a 0.26 P/S multiple (vs. an average 11.0% operating profit margin). And would be much cheaper again on an ex-cash basis. Which makes them an attractive hold, but not something I want to actively average down on here (though I’d happily pay up for confirmation my thesis is actually playing out). However, a full value transformation will only be realised here with a necessary disposal of the electronic division – and no, there’s still no sign of that yet – even if it’s restored to profitability, there’s scant hope of it ever delivering a comparable divisional return on capital. [Specifically, in terms of average adjusted pre-tax segment profit (over the last 3 FYs), the electronic division’s earned an average 19% pa on net assets employed…vs. 130% pa for the asset protection division!?]

Zamano (ZMNO:ID):   Lord Jesus, another (17)% loss… The problem with illiquid micro-caps: Even if the fundamentals don’t get any worse, there’s almost inevitably another leg down in the share price regardless, as less patient & more nervous investors bail out at any price. The only good news here is that Zamano’s story will end soon…the torture won’t endure for years to come, unlike so many failed micro-caps. And I’d dispute what seems like a prevalent investor fear…that the company’s now losing/haemorrhaging cash. Zamano’s H2-2016 revenue run-rate was €26.7 million, with a €3.6 million gross profit – obviously this revenue/customer base is now melting away, but Zamano’s slashed staff & eliminated the vast majority (presumably) of its marketing/customer acquisition spend. And it may seem counter-intuitive, but the fact we still haven’t seen some final wind-down announcement here is somewhat encouraging…I’d actually take it to imply: i) the company isn’t yet suffering any significant cash burn, ii) a deal to sell the underlying business may still be finalised, which could (at the v least) eliminate Zamano’s ex-cash net liabilities, and iii) the Dublin/London listings may even still be monetised in some way. Therefore, I think year-end net cash of €7.2 million (equating to 7.2 cts per share), or a small wind-down discount to this amount, is perhaps the most reasonable indicator of remaining/underlying value to focus on here.

As for my big winners, we have two:

Rasmala (RMA:LN):   A large & welcome event-driven +44% gain in H1…but the surprise is more in the timing/details, rather than the sudden closing of the value gap we’ve enjoyed here. In fact, I specifically spelled out a second tender offer in this letter to management (esp. if the first tender wasn’t a success, in terms of delivering a sustainable price rally…which obviously it wasn’t!). Unfortunately, that’s actually taken a few years of pressure & patience to finally arrive. On the other hand, management’s now upped the potential tender amount to £35 million (at 150p per share) vs. the £20 million commitment originally announced in Rasmala’s final results in April (which, bizarrely, prompted zero change in the 100-105p share price at the time!?). This larger tender would offer a potential exit to all non-HBG Holdings (& friends/family) shareholders, from what is effectively a small illiquid stock, where AUM hasn’t grown in some years, and there’s still no sign of a sustainable/positive return on equity. On the other hand, while the tender offers an attractive premium (vs. the prior market price), it’s still priced at a 49% discount to current NAV per share. But investors shouldn’t make any hasty decisions here ’til they see the tender offer itself, and they have a clear indicator/confirmation from management regarding Rasmala’s future listing status…

Fortress Investment Group (FIG:US):   NB: Per above, I’m now reporting the sale of this holding. The acquisition offer from Softbank Group was a welcome surprise – helping to deliver a +68% gain in H1 – but only a surprise really in terms of the actual acquirer. I’ve traded around my FIG position along the way, but it was always a screaming buy for me, as: i) the 2014-2016 bear market in alternative asset managers was a moronic market call, as I’ve highlighted regularly, with investors realising the error of their ways & jumping back into the sector to enjoy a convincing bull market since, ii) FIG was always the cheapest laggard of the bunch, for no good reason (likely a continuing reaction to its original post-IPO euphoria), and iii) FIG had perhaps the most shareholder-friendly management, in terms of share buybacks & its regular/special dividend yield. The offer is well below my FV estimate, but it’s fair in terms of the premium it delivers (39%, or 42% inc. additional dividends). I have no doubts the acquisition will close, but I’m leaving the last sub-1% gain on the table here for the arbitrageurs, as I’m happy to use the proceeds for new holdings.

And there we have it, this seems like a good place to finish up…best of luck in H2-2017!

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