value and opportunity

Performance
October has been a “normal” month for the portfolio. The Benchmark (Eurostoxx 50%, Dax 30%, MDAX 20%) gained 2.5%, whereas the portfolio “only” gained 1.5%. Year to date, The portfolio now shows a gain of +30.6% against 21.1% for the Benchmark. Since inception(1.1.2011), the portfolio is up by 25.3% against 4.4% for the benchmark.

Main performance drivers in October have been Dart Group (+15.1%), AS Creation (+11.8%), HT1 (+7.5%). Main “detractors” were Cranswick (-5.1%), Vetropack (-4.9%), Bouygues (-2.2%) and Rhoen (-2.1%)

Just for fun, I calculated the Sharpe ratio based on the 22 available monthly returns, both for the portfolio and the benchmark. The sharp ratio for the Benchmark is 0.2, however for the portfolio it is an incredible 0.90. I don’t think that I will manage such Sharpe ratios over the long run but it is still interesting to see.

Portfolio as of 31.10.2012:

Following the “autumn cleanup” post, I have already sold down all the “low conviction” positions, as the two last days of the month were “up days”. I increased only IVG and Rhoen so far.

In detail, the following positions were closed:

EVN, total return -4.87%
Mapfre +44.75%
Short Kabel Deutschland -52.87%
OMV -3.92%
Fortum -24.17%

Apart from the hedges, the portfolio has now 23 “single names” which is something I consider within the optimal range considering the amount of time I can spend on the portfolio.

The other announced position increases will be executed in November and as a general rule only on “down days”.

Comment & Outlook

One fascinating aspect of the current stock market is in my opinion the obsession of many money managers with the US Fed and the ECB and low interest rates in particular. Just as an example, one could read for instance the latest publication from Steve Romick (FPA) which argues quite strongly against the current policy of Fed Chairman Ben Bernanke.

The argument more or less goes as follows: The low interest rates inflate asset prices (Bonds, real estate, stocks) which distorts capital allocation and will in the medium to long run create even bigger problems than today’s problems.

I have to admit that I can only partly follow this logic. It is true, that interest rates are relatively low and maybe artificially so for certain segments. On the other hand we see a lot of deflationary developments for instance within the Euro zone.

However, I find it strange that many people relate the level of the stock market directly and exclusevily to the interest rate level. Interest rates are one of many factors in valuing stocks. Although many people make their living in trying to explain on CNBC or Bloomberg why the stock market has moved up or down, obviously no one knows the reasons, otherwise they all would be rich and counting their money from successfully predicting the market.

Many people seem to think that stocks should be cheaper because of “macro uncertainty”, although in my opnion this is wrong. There is always macro uncertainty, for me it seems that only the majority of commentators seems to forget about that sometimes.

Going back to Steve Romick: I guess his commentary might have something to do with the recent underperformance of his flagship fund which has missed out a significant part of the rally. Although I really like those guys, this comment sounds a little bit like a lame excuse to blame the “market bubble” for the underperformance.

So to make it short: In my opinion one should either ignore all those commentators which try to explain why the market is over- or undervalued based on macro factors or consider them as “entertainment”. Uncertainty and central bank intervention are part of the market since many many decades. For all those pundits who think that a “free” capital market without central banking is the answer, I would highly recommend to read some history books how markets and banks behaved BEFORE central banking had been established.