Alphabet, annual review, bubble thesis, crypto, financial repression, inflation, KR1, KR1 plc, multi-bagger, pandemic, portfolio performance, Record plc, Saga Furs, VinaCapital Vietnam Opportunity Fund
Time to celebrate – we made it through the #pandemic!
Vaccine roll-outs continue, some fast some slow, but crossing the actual finish line remains maddeningly elusive here. Unfortunately, as so often proves the case, the loudest & craziest perspectives tend to control the narrative. On one side, we have the #antivaxx nutters & their ever-expanding conspiracy theory complex to debate – you may as well wrestle a pig (you both get dirty & the pig likes it!), so the sooner we abandon them to herd immunity & their Darwinian fate the better. And on the other side, we’ve got the #Delta nutters who apparently don’t believe in vaccines either – like them, they’d prefer we all stay masked up & locked down forever, despite being vaccinated. [Seriously, imagine being told two years ago most people would be walking ’round in masks in 2021…after being vaccinated!?] And since the latter are still imposing their will on all of us – to a greater or lesser degree – arguably, they win the crazy selfish stakes. As Upton Sinclair might have said:
‘It is difficult to get a man to understand vaccine efficacy, when his cushy new working-from-home white-collar career depends on his not understanding it.’
But hey, touch wood, we’re still almost home free! And while it may be hard to believe right now, history’s proven it time & again…we’re gonna move on just as quickly, with little reason to presume this specific pandemic leaves any radical permanent change in its wake. But clearly, as I’ve argued from the start, it has & will continue to accelerate certain existing trends – both positive & negative – including America’s heroic fiscal & monetary stimulus, and its disproportionate impact on the S&P 500. How many investors have forgotten (or never even noticed) its +16.3% gain last year was actually a total outlier – my 2020 index benchmark, for example, was still flat regardless:
2021 has been far more democratic though, with most indices chalking up at least a good year’s worth of gains (albeit led by the S&P, as always!) in H1 – no real surprise, as investors applaud successful vaccine roll-out programmes & the still breaking tsunami of #YOLO re-opening spending. [And maybe even a New Roaring Twenties to come?!] As usual, my H1-2021 Benchmark Return (a +11.7% gain) is a simple average of the four main indices which best represent my portfolio:
I’ll take a breath & resist the urge for some grand macro/index summary here. ‘Cos I’ve been pounding the table for years now with the exact same macro investment thesis: We continue to travel down a relentless & irreversible road of fiscal & monetary debasement that will ultimately end in tears…but meanwhile, it’s gonna be one hell of a ride! Of course, you can’t necessarily anticipate all the turns along the way – who knew a pandemic would come along & accelerate our journey?! As I argued in my H1-2020 portfolio performance blog: Thanks to COVID, we’ve now crossed the Rubicon & there’s no turning back…after all the trillions spent & sacrificed on the pandemic, how can we not end up believing we can just buy permanent economic growth AND a solution for all of society’s other ills, via the alchemy of print & spend (& an easy zero-rate payment plan):
Again, I must bewail my major thesis error…not being more aggressive! But that’s OK, my portfolio’s always been a strange mix of prudence & aggression – nowadays, I simply accept that’s how I roll. And I know there’s still a huge wall of worry to climb… Which may include a little post-partum bout of depression or two in the next year, as normal post-pandemic life & reality is re-established – some extra-frothy sectors/stocks already got a taste of this, with significant losses since Feb/March. But as usual, I don’t feel sufficiently prescient or qualified to attempt to trade around this…and in the end, the market’s just gonna set up the Fed (& government) for failure all over again. A test they’ve been failing for years (& even decades) now, which has ultimately normalized much the same behaviour in all the major economies. ‘Cos as I asked before the pandemic:
‘Do you really think we came this far…after decades of deficits, trillions in money-printing, and tens of trillions in sovereign debt…to suddenly decide one day to get fiscal religion, turn off the money spigots, and embrace the agony of full-blown cold turkey?!
Yeah, of course not…’
I see slim odds of the Fed successfully over-riding the market & raising even nominal interest rates by more than a token amount – regardless of whether the inflation we’re now seeing is transitory, or not. And even if rates can be raised, it seems very obvious that negative real interest rates & financial repression will remain as deliberate policy for many years to come – Russell Napier provides some great perspective here.
And eventually, if/as this continues to evolve into a normal social/market consensus, I’ll probably just stop asking the question I’ve asked for years now, ‘cos it’ll just be too absurd…’cos it’s already so true, we won’t even know it:
‘We’re over a decade now into what’s surely the most unprecedented fiscal & monetary experiment in the history of mankind…is it so crazy to ask/wonder whether this ultimately leads to the most unprecedented investment bubble in history too?’
Meanwhile, I’m definitely enjoying the macro investment thesis feedback I’m seeing in my own portfolio results – here’s my Wexboy H1-2021 Portfolio Performance, in terms of individual winners & losers:
[All gains based on average stake size & end-H1 2021 vs. end-2020 share prices. All dividends & FX gains/losses are excluded.]
And ranked by size of individual portfolio holdings:
And again, merging the two together – in terms of individual portfolio return:
I did marvel at my +56% portfolio gain/outperformance in 2020 – all of which occurred in H2 – but it’s nothing now compared to my H1-2021 Portfolio Performance:
Yeah…that’s a +158.6% gain!
And a +147% out-performance vs. my benchmark…or as Chamath would insist, a 1,250%+ return relative to my benchmark!
In H1, Donegal Investment Group (DQ7A:ID) was marginally negative (a 4% loss), as its seed potato business continues to deliver improving margins, but the pandemic lockdowns significantly dented (on-the-go) sales in Nomadic Dairy (albeit, it remained profitable). Unfortunately, this unit probably won’t be back on the block ’til high teens sales growth is restored, and/or it surpasses pre-pandemic peak sales. Presuming an eventual sale though, Donegal will no longer make much sense as a listed company – we can then expect a relatively fast liquidation, via an MBO/sale of the seed potato business.
Tetragon Financial Group (TFG:NA) gained +1% & also continues to tread water as a (deep) value stock awaiting a catalyst. It does remain unfairly cheap – trading on a 64% NAV discount today – since it continues to compound NAV at 10%+ pa in the medium/long-term. But potential investors still distrust management, while long-suffering shareholders remain frustrated with their lack of interest in closing/realizing the obvious value gap here & their failure to IPO its asset management business as promised. But as long as the bull market in alternative asset managers continues (& more hit the market this year), a much bigger IPO prize will continue to tempt management (who now own 35% of TFG), if/when they finally decide to potentially sacrifice their current governance & external management/incentive fee structure.
VinaCapital Vietnam Opportunity Fund (VOF:LN) gained +13%, which perhaps understates the importance of the VNI finally breaking a 14 year 1,200 double top in April & printing new 1,400+ all-time highs since. While we’ve seen a subsequent price-reversal in July, buying into Vietnam as the New China is a more compelling thesis than ever…esp. when China itself acts more & more like a potential US adversary, rather than a trade partner. And while VOF may be expected to lag its rival – Vietnam Enterprise Investments (VEIL:LN) – in a bull market, its multi-asset approach continues to offer substantial private equity IPO gains to come & best-in-class long-term buy & hold returns. Its current 19% NAV discount is also compelling for new investors.
As for Alphabet (GOOGL:US)…so much for becoming a trillion dollar behemoth, it still managed to deliver a +39% gain! In its most recent quarter, Google Search revenue growth came in at +30%, while both YouTube Ads & Google Cloud grew almost +50% yoy…again, the pandemic accelerated existing trends, with Alphabet & Facebook capturing the lion’s share of continued digital marketing growth, the diversion of old media spend and a growing re-allocation of other marketing spend* as e-commerce/D2C penetration also accelerate. [*A substantial % of FMCG/brand marketing is devoted to other traditional non-ad channels, i.e. coupons, draws & (in-store) promotions, end-caps/POPs/signage, slotting fees, etc.] On a SoTP basis, allowing for potential YouTube/Google Cloud/Waymo market multiples, the value of its net cash/securities & the capitalized value of its Other Bets, Alphabet: i) boasts an (impregnable) core search business that still offers much the same valuation & risk/reward as when I first wrote it up 4 years ago, and ii) potential upside from anti-trust action, even though it clearly presents far less social & political risk than Facebook for investors.
Saga Furs (SAGCV:FH) gained +80%, capitalizing on the ending of last year’s buyers’ strike and the demise of its two main global rivals (NAFA went bankrupt & Kopenhagen Fur chose to wind-down). But it’s astonishing how cheap it still remains, despite this year’s rally…a sign of a true deep value stock! Its H1-2021 auction sales (to end-April) more than tripled yoy, delivering €1.73 H1 EPS – annualized, this puts Saga Furs trading on a 4.7 P/E. Except its monster June auction produced €188 million in sales, surpassing both its H1-2021 & FY-2020 sales…so now the stock may even offer a sub-3.5 P/E! [Notably, these pelt/sales/earnings run-rates are entirely feasible & sustainable, in terms of historical results]. Saga Furs still offers plenty of upside as auction news, results & a radically lower P/E filter through & more investors discover it…though a longer-term multiple re-rating will again depend on how Chinese producers choose to take advantage of this new supply-demand situation.
Record (REC:LN) was a double in H1, gaining +99%. The roots of this lie in founder/major stakeholder Neil Record appointing Leslie Hill (ex-Head of Client Team) as CEO 18 months ago, to focus on re-igniting growth (potentially ahead of an eventual sale of the business?!). This led to a game-changing $8 billion dynamic hedging mandate win last September…but for some reason, the rally only kicked off a couple of months later. I note this ‘cos Record’s a wonderful example of a cheap & neglected stock that finally & somewhat inexplicably begins to re-rate. Since then the stock’s climbed relentlessly, as more & more investors have discovered it & better understood the quality of its incredibly sticky recurring revenue business. And now we’ve had FY-2021 results & a Q1 trading update, consensus FY-2022 EPS estimates have steadily increased & investors have doubtless noted Record’s expected to deliver almost 80% EPS growth this year & still trades on an ex-cash sub-17 P/E! The CEO’s even done three investor videos (inc. here & here) in the last few months – a huge development for what was previously a classic (low-touch IR) owner-operator – with the icing on the cake being a new high-fee $0.8 billion ESG bond fund launch & plans to explore new #crypto/#DeFi yield & investment opportunities later this year!
And again, KR1 (KR1:PZ) is the pièce de résistance…it delivered close to a 450% gain last year & was a total monster again this year, enjoying an incredible +360% gain! Alas, the inevitable begrudgers* will dismiss this as YOLO #crypto luck, but I make no apologies for enjoying it…and if you’ve followed my #KR1 journey on Twitter & the blog for any length of time, you’ll know I’ve always viewed it as a unique once-in-a-lifetime play on what is still an emerging foundational technology. And while my original (4.125p/share) entry price & Fair Value target(s) were a small fraction of today’s share price, my NAV process, FV multiple & investment thesis essentially remain the same today. And yeah, I’ll take some of the credit for KR1’s re-rating since my Nov post – on average, it consistently traded around a 0.7 P/B last year & about double that multiple year-to-date – that’s what happens when you decide to become a suggestivist vs. activist investor! But noting new & untapped multibagger opportunities in its portfolio, the $8.5 million+ pa in net profits it now enjoys from its zero-hardware/energy proof-of-stake operation, the parachain auctions & emerging Polkadot/Kusama ecosystem, its (ultra) cheap valuation vs. the average crypto stock, and its 5 year 150%+ NAV/share CAGR track record, I still believe KR1 deserves (at least) a 2.5 P/B Fair Value multiple today. It’s now Chairman Rhys Davies‘ job to ensure the necessary structure, process & IR function to keep growing KR1 into Europe’s leading digital asset investment company, while the team focus on what really matters…the compounding! Meanwhile, Raoul Pal of Real Vision has just shared the KR1 story & introduced the team to a whole new universe of potential investors.
[*And worth highlighting that excluding KR1, my H1-2021 Portfolio Performance would actually have been a +43.8% gain – still almost four times my benchmark return!]
And now, since I’m painfully aware I may never see returns remotely like this ever again, permit me the luxury of also going back, measuring & setting my current one year return in stone. Let’s start with my 2020 published returns:
My H1-2020 portfolio return was a (3.2)% loss, so that would imply an approx. +61% gain in H2-2020 – compound that with my H1-2021 +159% gain, and we’re looking at a 300%+ LTM return! In reality, the year-end resizing of positions (& KR1) flattered my return – if we re-calculate properly, using actual/average mid-2020 position sizes & mid-2021 prices vs. mid-2020 prices, we arrive at an accurate portfolio return:
[*As of year-end 2020, note I removed Applegreen & Cpl Resources from my disclosed portfolio, as they were both in the final stages of recommended cash offers (which subsequently completed).]
Yeah, that’s an astonishing +266.6% one year/LTM portfolio return!
And no, I don’t think it’s relevant to bother comparing it to a benchmark return… Or dismiss it as some lucky KR1 phenomenon – again, excluding KR1, my one year/LTM return would still have been a +69.8% gain, definitely NOT a return I’d ever complain about settling for instead!
And yes, I hope to do something useful with this:
What readers obviously want to know is what I’ve actually learned as an investor, looking back over the last 18 months & the pandemic – and yes, I promised this as a blog already – but now, as we approach the vaccine finish line, it finally makes sense to focus on this & hopefully get ’round to writing something that might prove useful.
So stay tuned for that…and as always, feel free to AMA about my portfolio/investing here & on Twitter.