Performance review June 2016 – Comment: “Brexit, Excuses and Risk Premiums”
Performance Q2 2016:
In the second quarter, the portfolio gained +0,6% against -3,5% for the Benchmark (25% EUR Stoxx 50, 25% EUR Stoxx small, 30% DAX, 20% MDAX). YTD the score is -1,4% for the portfolio against -9,5% for the Benchmark. On a rolling 1 year basis, its +1,0% for the portfolio and -8,4% for the bench.
Just for fun, here is the YTD/1 Year performance of some small funds that I follow and where I know the managers (I will track them in future reviews just to see how I am doing against the “Pros”, data from Bloomberg):
Partners Fund TGV: +1,71% / +7,20%
Profitlich/Schmidlin: -3,86% / -4,35%
Squad European Convictions -1,19% / +7,85%
As some might have noticed, I have included a new performance page in the blog which shows the full monthly record since inception including links to all performance reviews. This is how the table looks like:
The best stocks in Q2 were (in EUR, incl. dividend):
Installux (+35,1% –> don’t ask, I honestly don’t know why…)
Kinder Morgan (+12,1%)
Silver Chef (+9,4%)
NN Group (-10,6%)
Van Lanschot (-10,3%)
Interestingly, 3 out of 4 Uk investments (Admiral, Ashmore,Aggreko) did well despite the “Brexit”, only Lloyd’s suffered. The 2 Dutch financials are most likely “collateral damage”. Especially in June, the portfolio again behaved at I intended it to do despite the relatively significant exposure to UK.
Portfolio transactions Q2:
I added to Lloyd’s (some pre-Brexit, some after), Pfandbriefbank and Handelsbanken. I didn’t sell anything, mostly because of the cash inflow from dividends. Looking back it would have been better to add Admiral or Aggreko…..
The current portfolio as always can be seen on the portfolio page. The cash quote at the time of writing is at around 8%.
With KMI and Silver Chef, the percentage of non-European assets now has increased to ~7%. A further 25,5% are non-EUR denominated European stocks. At some point in time I will need to think about if I include some non-Eur index into my benchmark.
Comment “Brexit, Excuses and risk premiums”:
It’s now 2 weeks after my “Armageddon alert” post at the time of writing. UK voters have decided for a “Brexit” but, as I described in the post, no one has an idea what that means and now even less so after both, Cameron and Johnson (Edit: and Farrage) are out of the picture (for the time being).
Personally, I was surprised by the volatility on the day after, but interestingly (and not too surprisingly), most of the stock indices are actually up since when I wrote the post on June 17th (DAX+1,7%, the Footsie even +2,7% in EUR and almost 10% in GBP). Funnily enough, there were a lot of headlines like “Brexit destroys xxx bn market values” but very few which said “No problem, all losses recovered already”.
The hardest hit stocks are (as always) financials and real estate. Financials are obvious, especially considering that the 10 year GBP Swap rate effectively got halved since the beginning of the year (from 2,01% to 0,98%) and that makes it more difficult to earn spreads. Real estate is more of a surprise however, as drastically lower interest rates should lead to significantly lower cap rates and higher real estate values, as long as they are not empty. So maybe there is some opportunity to be found in real estate at some point in time.
However one thing is for sure: The Brexit will be a great excuse for any CEO who had any kind of issue in his company. So in the coming weeks and months we will hear many CEOs explaining their bad results with the Brexit, although in reality this had nothing to do with it. The usual Perma bears and fear mongerer in the press will use this to tell everyone how doomed Europe is whereas in the mean time stocks have recovered and life most likely will go on. In the UK, many struggling companies will have a great excuse to lay off workers, especially in the troubled financial sector. This FT comic greatly illustrates the point:
One of the first Continental examples for the “Blame the Brexit” game is Bayer, which already indicated that the Brexit will potentially endanger their Monsanto deal. This is quite interesting and quite obviously BS, as neither Monsanto not Bayer have a lot of business in the UK.
That brings me to my final point. Many people tell me that they don’t want to own stocks now because the situation is so bad. Negative interest rates, Brexit, Russia, China, ISIS etc., it is much too dangerous to own stocks now.
Clearly I do not have a crystal ball what will going to happen but the “equity risk premium” which a stock investment implicitly promises, does have the term “risk” in it for good reason.
You don’t earn a risk premium when there is no risk. Many investors (and even professionals) like to earn risk premiums but seem not able to stand the risk. A lot of underperformance is created when people try to be smart and try to “protect the downside” either by trying to time the market (“taking some money off the table”, “it never hurts to realize profits”) and/or use complicated products (“Alternative Assets” !!!) etc.
There are many studies which show that the return of the “average investor” is significantly lower than the average market return. In my opinion one of the major reasons clearly is that in situation like the current one, people get scared and pull money out when the market goes down quickly. Once everything recovers, they go back in and have missed out the increase in between. After big shocks like 2009 or 2002, many investors stay away for many years and only come back when the big money has already been made.
Yes, it hurts if you see your portfolio going down 5% in one day or even a stock like Lloyd’s losing -30% in one day, but the likelihood is very high that if you are out on the way down, you will most likely also miss on the way up.
Be also very cautious if someone (or a financial product) promises you to give you all the upside but no downside. The chances are high that either he is disguising a very expensive and inferior product (“Alternatives”) with a much lower expected return or it is an outright fraught.
To earn the risk premium you have to accept the risk. There are no short cuts.