Smokin’ the S&P…H1-2015 Wexboy Portfolio Performance!

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Alternative Asset Opportunities, Argo Group, Bloomberg Euro 500, Donegal Investment Group, EIIB, FTSE 100, ISEQ, KWG Kommunale Wohnen, Newmark Security, NTR plc, One51, portfolio performance, S&P 500, takeover offers, Universe Group, value investing, Zamano

Oh Lord, where did July go..?! I’d hoped to publish my H1-2015 portfolio performance report a week/ten days ago, but I guess the days kinda slipped away – who can fault a bit of fun in the sun, esp. when my portfolio holdings are slowly but surely marching higher (despite all the China volatility & the fact the US market’s totally sucking wind this year).

Now, if you’re a regular reader, I recently detailed my (still) developing bubble thesis (Parts I to IV), suggesting an increased focus on large cap stocks (a new global Nifty Fifty) might be more profitable. [Though I’m also v conscious of certain small/micro cap successes in the past 12-18 months – a bar-bell strategy, in terms of market cap, may ultimately prove more compelling]. But in terms of immediate portfolio changes, I hastened to add: ‘I don’t believe there’s any great rush here, necessarily’. Well, that being said…let’s first kick off with some (end-June) portfolio changes!

Portfolio Sales:

Alternative Asset Opportunities (TLI:LN):  TLI had a great H2-2014 run – gaining over 22% (inc. a 2p return of capital), making it my top holding at year-end (at 11.1%). Since then, the insured have enjoyed a real stroke of luck, with just one maturity announced. Not surprisingly, the shares are off YTD in sympathy (reducing my holding, in % terms). But I’d focus on TLI’s portfolio instead – adjusting for minor FX unfavourability, and an additional 2p ret. of capital, TLI’s underlying NAV decline was limited to just 3%.

And I see no change in prospects: We’re at the end of a long & painful life expectancy adjustment process (in fact, June NAV inc. a meaningful positive LE impact), and the insured are now 91.5 yrs old on average – maturities will inevitably accelerate (peaking in 2019-20). There’s little financial risk (with an available credit facility, zero debt & cash on hand), and TLI’s focused on regular returns of capital. Sure, we can debate valuations, but shouldn’t lose sight of the big picture – as per the latest results, the portfolio now consists of $132 million in death benefits vs. a current carrying value of $45 million.

But owning such a defensive & uncorrelated investment isn’t as compelling a requirement for me today, and I see equally attractive (albeit, more correlated) opportunities elsewhere. I’ve reduced my shareholding accordingly, from 9.1% to 7.0%. [NB: I normally don’t add to individual holdings beyond a 7.5% limit – TLI remains a substantial position for me].

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Catalysts – A Summary (Part I of II)

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Alternative Asset Opportunities, asset allocation, catalyst, correlation, dividend tax treatment, Event Driven, Expected Value, fighting the Fed, Investegate, IRR, Liquidations, Margin of Safety, offer premium, portfolio allocation, QE, Recommended Cash Offer, Risk Arbitrage, risk-on risk-off, takeover offers, Takeover Panel, VIX, volatility, wind-down

My 10-part series on catalysts last year (stretching from Jan to Dec!) was well received, judging by the readership & links. I vaguely promised a summary to wrap up the series – as we’re well into the new year (already?!), it now seems appropriate to deliver that post (& hopefully it proves useful).

By the end of last summer, I concluded there’s little point fighting the Fed… A fortunate decision, as the market’s been decidedly risk-on since then! Though I must say, the power of central bank liquidity still surprises me. If you recall, last summer, we appeared to face a pretty bleak outlook both sides of the Atlantic: The fiscal cliff in the US & the sovereign debt crisis in Europe. [Hmmph, different stories…same destination!] Personally, I considered the cliff to be just like those periodic kerfuffles over the US debt ceiling – no genuine threat, but divisive political rhetoric could certainly roil the markets (& perhaps prompt a rating-agency response). On the other hand, the European crisis…er, what happened, where the hell did that go..?!

This risk-on attitude’s left my portfolio light on investments with shorter-term/lower-risk catalysts (i.e. event-driven investments). However, I still strive to pick new investments which (ideally) possess at least one longer-term/higher-risk catalyst. That type of catalyst doesn’t necessarily mean you avoid downside risk, but hopefully it stacks the deck in your favour vs. what the average value investment (complete with margin of safety) might offer. It may also accelerate the time-line for a stock’s realization of its intrinsic value/upside potential. Anyway, much of my event-driven exposure was ultimately re-invested in Alternative Asset Opportunities (TLI:LN) – so I simply exchanged a low return/relatively uncorrelated risk for a cheap/high return/totally uncorrelated risk! Go on, you might want to give it a try..! 🙂

How About Another Catalyst? (Part X)

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Adrian Williams, Alphameric, alternative assets, Argo Group, asset managers, Avangardco, Bear Stearns, binary outcomes, capital expenditure, catalyst, delisting risk, DM plc, Dresden, emerging markets, Expected Value, Fair Value, Fortress Investment Group, Gagfah, government regulation, intrinsic value, IRR, Joe Lewis, litigation, major sale, Net LTV, P/E ratio, P/S Ratio, risk aversion, risk management, share buyback, share repurchase, takeover offers, Timeweave

Continued from here, & here’s the first post in the series.

vi) Litigation/Regulation is the final catalyst on my list. It’s also, without a doubt, the most difficult to exploit & to write about (note I’ve tackled this series in reverse order)! In fact, if it doesn’t (immediately) appeal to you, I might perhaps discourage you from ever bothering with this catalyst? To some extent it suffers from the same issues/perceptions I highlighted with v) the Major Sale catalyst.

First, most litigation/regulation risk/events are simply part & parcel of normal corporate operating activity. For example, certain sectors are almost permanently marked down due to their increased risk level (perhaps something politicians like to mouth off about?!). These risks usually aren’t of any fresh/major significance to a company’s business model or valuation, and/or they’re routinely priced in anyway – they are not catalysts.

But occasionally a real game changer comes along… A lawsuit, or a regulatory change/threat/action/approval, that could prompt a major change in a company’s future intrinsic value. It may also cause a rapid/significant adjustment in the company’s current market cap. So how exactly do we separate out & identify such a catalyst vs. the merely hum-drum? A similar approach, like v), seems sensible – something like:

How About Another Catalyst? (Part IX)

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Anhui Chaodong Cement, catalyst, David Wong, Dhir India, FBD Holdings, German bunds, intrinsic value, major sale, NAV discount, Ovoca Gold, Polymetal, Prosperity Minerals Holdings, Sirius Real Estate, takeover offers, Tim McCutcheon, Trinity Biotech, wind-down

Continued from here. We were looking at a major sale as another catalyst.

Recently, I confess I’ve been less focused on this (and my next) catalyst. No bad reflection, it simply reflects my ‘bar-bell‘ approach – investing in lower-risk catalyst situations nicely balances out higher risk positions (like emerging & frontier market equities, as most would characterize them). This can mean higher risk catalyst stocks get crowded out of my portfolio… But if I want to shift overall risk lower, as I suspect I’ll continue to do, this catalyst category should make a nice comeback in my riskier portfolio allocation. Let’s illustrate with some examples:

i) I did a Dhir India (DHIR:LN, delisted) writeup last November. An initial catalyst attracted my attention in September – in their Final Results they stated: ‘…The Board has decided to seek to accelerate the process of returning value to shareholders through a review of the investment and realisation strategy and over the next twelve months steps will be taken to try and achieve this aim‘. Not quite definitive, but this obviously offered a wind-down strategy as a catalyst.

Asset Managers – Another Look at Valuation

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% of AUM, activist investors, alternative assets, asset managers, catalyst, earnings growth, Goldman Sachs, hedge funds, P/B Ratio, P/E ratio, P/S Ratio, Price/Sales, REIT/MLP sector, short sellers, takeover offers

Continued from here. I was glad to see some comments/debate come back to me re my previous asset manager valuation statement:

‘Obviously each manager has their own unique story/valuation, but big picture these metrics really work: 2.25%-3.25% of AUM for traditional managers and 7.5%+ of AUM for alternative managers.‘

‘Big picture‘, of course, just means on average & over time, there will be plenty of exceptions to the rule..! Actually, readers were really just (smartly) anticipating something I wanted to highlight in my Part 2: I’ve highlighted the benefits/logic of using a % of AUM valuation approach, but how about related risks & questions? Like:

AGI Therapeutics – Anatomy of a Takeover (IV)

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AGI Therapeutics, AIM stocks, compulsory acquisition, delisting risk, EUR/USD, Event Driven, Expected Value, Gross IRR, Irish shares, market-makers, Recommended Cash Offer, Risk Arbitrage, takeover offers, technical analysis

Continued from here.

OK, to recap the latter part of my previous article, I put forward 2 (hopefully strong) arguments why you should embrace (unhedged) FX risk in your event-driven investing (and, of course, elsewhere in your portfolio). With AGI Therapeutics (AGI:ID/LN), however, I essentially faced no FX risk on the deal in the end.

Remember, AGI traded in EUR (or GBP) but the takeover price was $0.1171 per share (and holders could opt for equiv. EUR proceeds). My solution was to round-trip surplus USD I had available. Yes, I’d incur a small FX spread to convert USD for my EUR share purchases, but by opting to receive USD takeover proceeds I’d eliminate subsequent FX risk, and end up back in USD cash.

AGI Therapeutics – Anatomy of a Takeover (III)

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AGI Therapeutics, currency allocation, denarii, Event Driven, Expected Value, FX rates, Gross IRR, Gross Return, home bias investing, probabilities, Recommended Cash Offer, takeover offers

Continued from here.

Expected Return‘s probably the most important, and most difficult, return to calculate & focus on. In its simplest form, it’s binary (deal success or failure), but by all means incorporate multiple outcomes into your analysis, if appropriate. In fact, if you’re contemplating other types of Event Driven investing, this multiple outcome approach will prove essential. However many outcomes, you calculate a Gross Return and a likely probability (which must sum to 1.00, of course) for each, and then combine these to arrive at an Expected Return. This will give you a much more accurate (and lower) deal return. Of course, you won’t actually see this return on any single deal – but over time, this is the best risk/reward measure to employ to evaluate deals & your potential average return. Of course, you can calculate an Expected IRR also, if you wish, but let’s not go crazy here..!

How About Another Catalyst? (Part IV)

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Expected Value, Greencore, IFG Group, IRR, Margin of Safety, offer premium, preliminary approach, recommended offer, Risk Arbitrage, takeover offers, Takeover Panel

Continued from here:

iii) Takeover Offers are a catalyst with a much shorter duration than Liquidations or Wind-downs, usually within 2 to 8 months. In the UK, for example, Takeover Panel rules keep things on a fairly strict timetable. In terms of risk, they probably fall somewhere between the two: Your Gross Return is reasonably stable/well-defined, but price volatility and the chances of failure are a lot higher.

It’s not so prudent to give examples of current takeover offers, as price volatility and news flow can change things all too quickly. But I’ll give a brief update on a current Risk Arb situation in which I’m investing, and share my own observations and approach to this type of catalyst: