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Welcome to the dog days of summer…

A good time to pause & take stock of my portfolio. Following on from my recent H1-2017 portfolio performance post, here’s my Top 10 Holdings today:

In fact, the table lists all of my current disclosed holdings. And just to add some overall context, only five of these holdings actually feature in my Total Portfolio Top 10, while Newmark Security doesn’t even make the Top 20 any longer.

I won’t add new commentary here, since I last focused on my big H1-2017 winners & losers, and covered all my disclosed holdings in this January Top Trumps post. Not to mention, the rash of new investment write-ups this year: Alphabet (GOOGL:US), Record (REC:LN) & Applegreen (APGN:ID). But for your reference, I will provide corporate website & Bloomberg links, links to relevant historic posts & write-ups (remember, good investment theses tend to evolve slowly!), plus the latest share price & market cap for each stock:

i) Alphabet (GOOGL:US, or GOOG:US)   (9.5% Portfolio Holding):

‘So Why Not Google It..?’

Share Price:   USD 940.08

Market Cap:   USD 648 Billion

ii) Record (REC:LN)   (6.8%):

‘Love That Record…Give It A Spin!’

Share Price:   GBP 44.75p

Market Cap:   GBP 89 Million     (USD 116 Million)

iii) Applegreen (APGN:ID, or APGN:LN)   (6.8%):

‘Applegreen – Just Grab & Go!’

Share Price:   EUR 5.40

Market Cap:   EUR 436 Million

iv) Donegal Investment Group (DCP:ID)   (5.0%):

‘Donegal Investment Group (DCP:ID)’     (most recent post/write-up)

‘Donegal Creameries – Low Fat Diet’

Share Price:   EUR 6.15

Market Cap:   EUR 60 Million

v) VinaCapital Vietnam Opportunity Fund (VOF:LN)   (4.4%):

‘Happy New Year! – A (Baker’s) Dozen for 2012′

Share Price:   GBP 298.25p

Market Cap:   GBP 595 Million     (USD 775 Million)

viTetragon Financial Group (TFG:NA, or TFG:LN)   (4.3%):

‘Tetragon – Ready To Be A Star’

Share Price:   USD 12.80

Market Cap:   USD 1,254 Million     (fully diluted)

vii) Saga Furs (SAGCV:FH)   (3.7%):

‘The Saga Continues…’

‘Quite A Saga…’

Share Price:   EUR 15.85

Market Cap:   EUR 57 Million

viiiRasmala (RMA:LN)   (2.9%):

‘European Islamic Investment Bank – Tender Offer/AGM Reminder’

‘A Letter to the CEO (& Board) of European Islamic Investment Bank’

‘EIIB – Closing The Value Gap’

‘EIIB…Ex-Bank – Love It!’

Share Price:   GBP 135p

Market Cap:   GBP 41 Million     (USD 53 Million)    

ix) Zamano (ZMNO:ID, or ZMNO:LN)   (1.9%):

‘Zamano…So, What Now?!’

‘Zoom, Zoom…Zamano!’

Share Price:   EUR 0.04

Market Cap:   EUR 4.0 Million

x) Newmark Security (NWT:LN)   (1.7%):

‘Newmark Security…A Real Steal!’

Share Price:   GBP 1.35p

Market Cap:   GBP 6.3 Million

Now, time for a closer look at my current portfolio allocation:

If you really want some context, why not enjoy my original 15-part portfolio allocation series: Parts I to XV! Despite being almost 5 years old now, I’d humbly submit it still offers a relevant & useful primer. But presuming you’re not a total sucker for punishment, here’s a more recent series (Parts I to IV) (my mid-2015 portfolio allocation wraps it up), which specifically focuses on the market bubble/new global Nifty Fifty thesis* that continues to guide my portfolio & stock selection today (and really came together/paid off in spades in H1-2017!). [*Like any market thesis, this should be & is an evolving thesis…which I must strive to try disprove, as much as prove]. However, I published my most recent portfolio allocation a year ago, so I’ll reference it here for comparison purposes:

Emerging & Frontier Markets (up from 10% to 14%):

At this point, Rasmala (RMA:LN) & VinaCapital Vietnam Opportunity Fund (VOF:LN) remain my only disclosed holdings. I’m happy with their performance, but clearly my thesis emerging & frontier markets would lag developed markets hasn’t played out this year. In H1-2017, on average, they actually delivered about double the S&P’s 8.2% return! But in terms of their trailing medium-term returns & significant valuation discounts (see here & here), this burst of out-performance is none too surprising… Regardless, I’d expect the vast majority of investors to remain focused on seeking gains closer to home for the foreseeable future, while any developed market wobbles would likely infect emerging & frontier markets anyway – so exposure via high quality/growth Western companies still appears to offer better risk/reward.

Fortunately, I can’t resist some cherry-picking!

Which is probably the only sensible way now to approach emerging markets…as I’ve done, for example, with Vietnam. I’ve now sold a legacy/undisclosed Chinese holding, and I’m building exposure to two new markets instead – both offer high long-term GDP growth rates & a compelling alternative to China (without the obvious property & banking risks), while also boasting attractive secular investment trends of their own.

Luxury Goods (down from 15% to 8%):

Well, this was a fortuitous accident! And since I revealed it here, the acquisition of Moleskine (an undisclosed holding) was the welcome culprit behind this otherwise unintended allocation decline. And while it didn’t help my blog portfolio performance, I highlight it here as a reminder we should presume & anticipate the same schizophrenic high-end/low-end demand from luxury goods shoppers, as we see elsewhere across the consumer/retail spectrum. Hermes (RMS:FP), of course, is an extreme high-end example – in terms of its retail offering & actual market valuation. While at the low-end, we have what I’d describe as affordable luxury, Moleskine being a classic example. Then there’s the rest…who got lost somewhere in the middle, as Michael Kors Holdings (KORS:US) & Coach (COH:US) discovered to their cost.

I’d happily double my exposure again here, but unfortunately most of the obvious luxury stocks are priced accordingly at a premium – which instead, suggests a focus on:

Consolidation: Over the years, luxury goods companies diworsified into volume & brand-extension strategies, which was always going to end in tears & even permanent damage to their brands. Only the French got it…you have to diversify across brands in your portfolio, not within individual brands! Hence, the success of the luxury conglomerates, LVMH Moet Hennessy Louis Vuitton (MC:FP) & Kering (KER:FP) – only now, are Kors & Coach finally catching on with their recent acquisitions (the Jimmy Choo acquisition sets a nice valuation benchmark!). Except more sector consolidation to come…

Hidden/Affordable Luxury: The best value in luxury’s often hidden in companies which were/are generally not considered luxury stocks by investors. At the high-end, this may offer a massive valuation disconnect, since few other sectors can match premium luxury valuations – but in reality, hidden luxury usually shows up as affordable luxury. The catch, of course, is trying to bloody identify it… But when you do, the valuation’s often quite reasonable. [I’m eyeing up a high quality affordable luxury buy right now which trades well south of a 15 P/E!?] [On the other hand, Starbucks (SBUX:US) isn’t cheap…but that’s due to its execution & expansion record, I’m not convinced shareholders necessarily recognise it’s a quintessential affordable luxury stock]. What’s also particularly exciting about affordable luxury is the untapped volume & growth opportunity still ahead, based on the astounding growth of aspiring middle-class consumers in emerging & frontier markets.

For now, my only disclosed holding is Saga Furs (SAGCV:FH).

United Kingdom (down from 4% to 2%):

Sacre bleu, am I deliberately avoiding #Brexit and #MAGA like the plague here?! Haha, not quite…though I am convinced they originate from the same wellspring of nationalist & nostalgist fantasy.

Truth is, I don’t much care… I’ll still focus on London-listed international companies & funds, but loading up on the UK right now sounds about as exciting as a game of slap & tickle with Theresa May. It seems likely that Brexit confusion & anxiety will loom over the market for the foreseeable future – obviously compounded by the train-wreck May & her government’s turned out to be… [Only the Corbyn & Abbott Show could have made a bigger pig’s ear of it!?] But there’s a silver lining down the road here: i) politically, a Hard Brexit seems like a total non-runner now, ii) the EU’s highly motivated to enforce a ‘take it, or shove it’ negotiating stance (& back Ireland to the hilt), and iii) there are even rumblings of a possible #Breversal (but clearly this also reflects widespread disgust with lame-duck May).

Which leaves the UK in my too-hard pile, with Newmark Security (NWT:LN) my only disclosed holding (pattern) here.

United States (down from 4% to 3%):

Which may seem counter-intuitive…in my last post, I argued the S&P’s forward P/E isn’t anything out of the ordinary, particularly in the context of an unprecedented interest rate/monetary environment. [Plus, the drought is well & truly over – corporate earnings growth’s firing on all cylinders again]. But that’s in absolute terms – most markets globally offer cheaper multiples, and I don’t see America necessarily boasting superior economic prospects. And the American consumer may be the last consumer I want to bet on at this point…

It’s not just about the #deathofretailAmazon.com (AMZN:US) gets all the blame, but in reality decades of ridiculous retail over-building sealed the sector’s fate regardless. And a schizophrenic consumer’s just as much to blame. Even though analysts always insist you can count on said consumer…this time, maybe it really is different? The American Dream’s been dead for decades now, the American Presidency’s reduced to late show fodder, American banks are still #TBTF, while the American consumer may be almost tapped out now in terms of debt/savings, just as his economic & employment prospects grow more uncertain. [Not to say the rest of the world won’t face the same risks ultimately, but US consumers have far more to lose]. Eventually you reach a point where you’re simply pushing on a string… And if I’m wrong, I’m wrong (& glad to be), but does it really matter – betting on the rest of the world’s consumers is likely the best (relative) bet anyway!? And in reality, I do own US stocks…they just got classified as specific sector bets/investment themes in my portfolio.

[Though I suspect my underlying allocation’s still less than the average investor (who buys tech, and/or invests globally), and obviously a fraction of the insane home-bias allocation most US investors maintain.]

I also own one undisclosed holding (dedicated readers may recall the sector), where my averaging-in now seems to be stretching towards infinity…not due to any unexpected bad news, but sometimes you’re just better off waiting patiently & then paying up for confirmation!

Europe (zero to 10%):

Well, I did signal I was on the hunt in Europe…which I reckoned was more of a stock-pickers paradise, particularly in terms of finding some potential hidden champions. Frankly, I still feel like I’ve barely scratched the surface: Excluding Europe’s well-known global giants, each individual EU/European market & its listed companies still feels very much a local affair to me – presuming most other investors feels the same way, the continent’s obviously a far more challenging stock universe than the US.

But so far, I’ve managed to build decent positions in two undisclosed holdings. The first is better described as an obvious champion – you’d know it, if I told you – but it’s one of those curious stocks/sectors where investors will invariably refuse to award a multiple appropriate to its current/historic fundamentals & performance, let alone its unique competitive advantage. [And I should confess – I’d actually started building this holding last year, but have since re-allocated it to Europe (from where I can’t say, you’d probably guess the company!)]. As for the second, it’s a true hidden champion – totally off the radar for most investors, I suspect, despite the fact it boasts 20%+ (organic) revenue growth for 15-20 years now (with a huge growth runway still ahead), and a P/E ratio to match (and yes, you can assume its historic PEG ratio is well below 1.0).

Ireland (up from 12% to 16%):

Who could resist…Ireland now looks set to boast the fastest EU GDP growth for four years running! While I’ve discovered a couple of European stock-picks since, I’d still recommend Ireland as the best macro proxy bet on Europe (& the UK) for aggressive investors. Of course, in terms of world GDP, Irish GDP’s a rounding error – alas, the UK’s 3.5% share isn’t much of a boast either – so a portfolio bet on Ireland would demand a massive & deliberate over-weighting. Which is complicated by the ISEQ being perhaps an equally bad proxy for Ireland itself (as I’ve noted before). [A possible alternative – there’s one actively managed listed fund available, in the world: New Ireland Fund (IRL:US). Yep, it’s NY-listed!?] By necessity, Ireland’s always been a stock-pickers market. Which fortunately, hands me a natural competitive advantage…I know all the trees intimately, while never losing sight of the forest!

[As a primer, may I suggest: The Great Irish Share Valuation Project. I’ve analysed/valued most Irish companies a number of times over the years. And rest assured, I’ll return to the series again (picking up on my Dec-2016 post).]

With Ireland’s debt-to-GDP ratio falling rapidly, Brexit’s the obvious macro risk – but like most Irish investors & citizens, I’ve become less shocked & more relaxed since about its implications. As I noted above, the disastrous UK election result (not that May’s leadership/government was all that impressive before) persuades me a Soft Brexit’s now far more likely an outcome…and perhaps we even see the UK reconsider this quixotic misadventure entirely. Leo Varadkar taking a harder line re Brexit is also useful/welcome – it should visibly & positively impact investor/consumer confidence, and help dispel the notion we’re just some helpless passenger who inevitably gets dragged down by a sinking Brexit ship.

Applegreen (APGN:ID) is my only disclosed holding.

My first undisclosed holding is a totally neglected high quality growth stock – in fact, judging by its valuation, I suspect most investors have never considered it as an actual growth stock. It trades on a low double-digit P/E, a substantial discount to its medium & long-term earnings growth rates…and may feature as a new investment write-up in due course. While my second holding’s arguably just as neglected, though clearly a bit more controversial – however, it also offers attractive re-rating & long-term compounding potential.

Mobile (down from 21% to 17%):

Surely, I’m a true believer now…so why the lower allocation?! Well obviously, Zamano was never a true believer stock – so now it’s gone, re-allocated as a wind-down (& a disappointment). But I still must salute it as being my original inspiration (followed by King Digital, which got snatched away by Activision Blizzard (ATVI:US) before I could write it up) to finally consider & fully appreciate the mobile/smartphone revolution. Don’t worry, I won’t start waxing lyrical (?) here again. Instead, I’ll just point you to a16z – since they say it so much better (here & here) – and suggest a fresh look at my recent Alphabet write-up.

Never before have we been on the verge of seeing the world’s population connected in real time & space (i.e. right here right now, always-on, wherever you may be), via mobile/smartphones. Nor have we seen companies who can instantly sell (and/or monetise) low-value/high-quality products & services (i.e. digital content) to virtually all of humanity. Not to mention, the smartphone (as we know it today) was only introduced a decade ago…I guarantee we’ve only barely scratched the surface in terms of their utility & exploitation. I’m not trying to justify a new paradigm here in terms of valuation multiples, but I will certainly argue we’ve entered a new paradigm in terms of potential global revenues & market caps.

Alphabet (GOOGL:US) is my largest disclosed holding (notably, it exceeds my normal 7.5% stock allocation limit – ultimately, I see it as a portfolio of businesses, which deserves a higher 10% limit). I’ve recently been building an undisclosed holding in a mobile-focused software/platform company at a sub-12 EV/EBITDA multiple, a bargain for a business that’s dominated its global market vertical for years now! The rest of my Mobile allocation will also remain undisclosed for now.

Property (up from 1% to 6%):

Per my more recent property commentary, this huge allocation change may come as a surprise! With so many investors (esp. income-oriented investors) still hiding out in property, I can’t find much in the way of compelling value relative to equity markets. Luxury residential in emerging & frontier markets remains interesting, but it’s still challenging to access decent exposure (as I’ve highlighted before). And increasingly dysfunctional & ridiculous planning/supply situations in Ireland & the UK promise a multi-year housing crisis to come, which presents opportunity for investors…but also the risk of unpredictable government intervention. It would be wise to focus on firms which consistently profit from house-building itself (& development), not just land-bank speculation – and they’re a much rarer breed. And when I say house-building, I don’t necessarily mean house-builders – they’re most at risk of becoming scapegoats – I mean apartment/multi-family & mixed-use/urban regeneration specialists. UK & Irish planners/developers still have a lot to learn from the US…

After selling a small legacy/undisclosed holding, my one undisclosed holding offers a cheap multiple (despite looking expensive to traditional investors), is well-financed, operates a quite unique business model, and offers exposure to an exceptional secular trend – so much so, it recently inspired an additional portfolio holding.

Natural Resources (zero to 1%):

Last year was great for natural resource stocks…this year, performance is far more mixed. Companies have spent almost a decade now scaling back their cost structures & capital investment, while investors have vainly tried to call the bottom nearly every single year. Which was rather silly – and bloody painful – because in reality, resource cycles tend to play out over 10 & even 20 year (super) cycles! [Here’s a long-term GSCI chart]. So there’s no rush, but I suspect 2017-2019 may finally be the perfect accumulation period for a balls-to-the-wall generational bet on natural resources…with the prudent version of this bet being focused on picks & shovels providers, which should be less dependent on timing/leverage & even offer the opportunity to own a great business or two. And take a look at this chart – while it’s naive to believe a GSCI/S&P 500 ratio’s somehow mean-reverting (a long-term low in 2017 is nothing like the same low in the late-90s, or early-70s!?), it’s still pretty damn compelling:

Clearly, I haven’t even got started here…but my one undisclosed holding’s potentially an ultra-high beta stock, so meanwhile it should compensate somewhat for my miniscule allocation (though not necessarily positively!?).

Agri-Business (down from 8% to 7%):

This could well be described as another event-driven allocation. So many listed agri-biz companies out there boast poor management, inadequate returns, and even negative cash-flows – you really have to focus on value catalysts. [As an alternative, agri-biz picks & shovels providers tend to be expensive, and obviously don’t offer the potential for biological gains & long-term land appreciation].

With my undisclosed holding, unfortunately that catalyst’s probably still over the horizon, but its underlying agri-driven value remains buried within a non-agri portfolio & the stock’s priced at a radical discount to its estimated NAV. Fortunately, when it comes to my disclosed Donegal Investment Group (DCP:ID) holding, it recently realised a major asset, with the valuation of its other major asset to be determined by year-end (thereby triggering a disposal), and management committed to returning capital to shareholders via share buybacks.

Alternative (down from 8% to 4%):

This used to be my Distressed (& Hedge Fund) allocations…but those opportunities obviously aren’t so compelling any more. [Remember when we couldn’t get enough of (leveraged) hedge fund of funds?! Crazy days, indeed…] Post-crisis, who knew we’d have ample chance to buy, for example, Loeb on a 16% discount, or Ackman on a 19% discount (tsk, what a comparison!?), while Einhorn at a 2% premium is another reminder US investors will always pay up! As for distressed, if we look at high-yield bonds as a proxy, 5% yields now leave little room for error…and let’s not even mention Euro high-yield, where the spread actually fell below the most recent default rate!?

But in terms of alternative investment assets & managers, there still exist interesting pockets of opportunity (albeit, perhaps more limited in size) – while private equity firms have accumulated unprecedented levels of AUM/dry powder, and can thrive as well as ever in today’s world, noting their gradual move into property & looking forward to a huge untapped opportunity ahead in infrastructure. Particularly so in the US, when it finally gets round to admitting it can’t afford its necessary infrastructure renewal & development. [See also my final commentary on the sale of Fortress Investment Group (FIG:US)].

I remain very happy with my only disclosed holding, Tetragon Financial Group (TFG:NA) – unless SoftBank/Fortress would like to take it off my hands – in due course, it may be high time for a fresh investment write-up.

Volatility (up from 5% to 7%):

Record (REC:LN) is my only disclosed holding – read my recent investment write-up to understand how potentially compelling a high quality volatility-exposed business can be in this environment. I’d happily double/triple my allocation here, except that poses a real challenge…

I can’t afford to be wrong on timing & end up exposed to volatility decay, and/or a horrendous negative roll-yield. As for brokers, they generally trade today on what are perhaps ludicrous multiples, in light of the possible existential risk large parts of their business now face (from robo-advising/passive investing). While high-frequency trading & other trading-dependent firms aren’t just suffering from all-time lows in market volatility, they’re also trapped in a latency & automation/algorithmic race to the bottom…which means opportunities are few & far between.

Ideas on a postcard, please…

Event-Driven/Cash (down from 12% to 5%):

Over the last year, I’ve ended up pretty much tapped out on cash – not surprising, considering my rash of new & undisclosed holdings – this allocation’s now mainly devoted to wind-downs/liquidations in Alternative Asset Opportunities & Altas Investments (ex-NTR), both of which I’ve previously re-designated as undisclosed holdings. Plus my disclosed holding, Zamano (ZMNO:ID) – management has now finally confirmed (no doubt, due to Wednesday’s AGM!) the potential disposal of its underlying business, which should shortly free up its cash for distribution.

I did expect to trim some holdings & free up cash over the summer – ahead of what is often a fragile season for stocks – but I must admit I’ve been surprised & impressed by this continued market momentum (even during these dog days!?). But as long as a substantial Trump tax-cut plan potentially remains on the table, or actually gets passed, the Trump Bump looks sustainable to me. [Despite inept White House & Congressional performances to date]. And that’s despite a looming Fed balance sheet move – which I certainly don’t think is a given at this point, noting particularly the fading odds re upcoming Fed rate hike(s), and the likelihood the market will aggressively discount anything Yellen does/says as the end of her term as Fed Chair approaches. But a stronger euro also bears watching, as it potentially underscores a widening rift between Fed & ECB policy…

I’m also finding it difficult to trim a portfolio that’s increasingly filled with what I hope are long-term high quality/growth holdings. [Um, does writing that immediately make me a hostage to fortune? Or nuclear war?!] Maybe this is just the euphoria kicking in? You decide… Maybe I just need to take a far more ruthless approach to portfolio-pruning.

Or maybe, just maybe, this is a good thing…because my recurring problem with GARP stocks was never really related to buying, it’s always been about selling…far too soon! And unless you’re Druckenmiller et al, thinking you can successfully bob and weave in & out of the markets is fool’s gold – almost inevitably, the real ‘money is made by sitting, not trading’, so long as you always keep a weather eye open for over-leveraged risk-taking (nope), an irrationally exuberant public (nope), and totally insane valuations (um, pockets!?).

And so, as always…best of luck!

 

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