2018 Performance review – Outlook 2019
In 2018, the Value & Opportunity portfolio lost -11,3%* (including dividends, no taxes) against –15.4 % for the Benchmark (Eurostoxx50 (Perf.Ind) (25%), Eurostoxx small 200 (25%), DAX (30%), MDAX (20%)).
Links to previous Performance reviews can be found on the Performance Page of the blog.
Some other funds that I follow have performed as follows in 2018:
Partners Fund TGV: +1,74% *
Squad European Convictions -9,75%
Ennismore European Smaller Cos +2,65% (in EUR)
Frankfurter Aktienfonds für Stiftungen -13,72%
Evermore Global Value -20.92% (USD)
Greiff Special Situation -7,02%
Squad Aguja Special Situation -11,7%
*TGV Partners as of 15.12.2018, to be updated
Since inception (01.01.2011), this translates into +152,6% or +14,0% p.a. vs. 66,6% or 6,0% p.a. for the Benchmark.
Current portfolio / Portfolio transactions
From a portfolio strategy point of view, I achieved most of my goals
- overall average holding period of the portfolio is now 3,5 years , up from 2,9 years end of 2017 and within my target range of 3-5 years
- the number of positions is still within my “sweet spot” of 20-25 compared
- The top 10 positions have a weight of > 50 % (51,9%)
So for the time being I am quite happy with the structural aspect of the portfolio but I still try to work hard on extending my average holding period. Although working hard is maybe the wrong expression as this is a KPI which I can improve by doing just nothing. But doing nothing is the hard part.
Performance review 2018
2018 was clearly the worst year in absolute terms since i started the blog. Here is the table of annual returns for the last 8 years:
|Perf BM||Perf. Portf.||Portf-BM|
Looking at my personal long-term track record (since 1999, the years 2008 (-16,9%) and 2002 (-34,6%) were (much) worse, but clearly a double-digit loss is not nice.
At first sight, a +4,1% outperformance (and a continuing “strike” of positive Alpha) looks pretty OK, but overall I am very dissatisfied with my outcome. Why ? Because:
- As I mentioned this year, I made a few individual mistakes (Silver Chef, Metro) where I didn’t follow my own rules and lost significant money in avoidable situation
- I have too many stocks in my portfolio where I am not convinced (any more) for the long-term
- Finally I misjudged the impact of Brexit or more precisely how much of a negative “hard Brexit” was already priced into the market
For me the look at 2018 relative monthly performance is even most interesting:
|Perf BM||Perf. Portf.||Portf-BM|
What is extremely unusual for my portfolio is the fact that the portfolio underperformed in the 4th quarter. In the past, the “alpha” of the portfolio came mostly from the bad months. This was actually one of the stated goals of my investment strategy to outperform (strongly) in a down market and slightly underperform in up markets with a portfolio of relatively low beta stocks that might have individual risks but a limited amount of systematic risk factors.
What happened in Q4 ? A few things:
- small caps underperformed large caps. Even (or especially) the low beta small caps dropped like a stone.
- Especially French small caps underperformed. I still hav a significant overweight in France (~25% of the portfolio). The French small cap indices lost around -28% percent in 2018, much more than for instance German ones or even Italian ones. A good example is DOm Security / SFPI: After the 75 EUR offer for DOM and the subsequent merger into SFPI, the stock lost ~-45% in a few weeks without any negative news from the company. Either that negative news will turn up later or somehow the market overreacted to the “Yellow vest” protesters.
- In general, my personal opinion is that a lot of “quant money” was flowing into the small cap sector in the past few years. This boosted performance but increased volatility when the Algos want out. However this is clearly a price to pay when investing in small caps. The “small cap premium” is there but you pay for it with volatility in certain circumstances.
- additionally, a few of my UK stocks got hammered, especially Majestic Wine. It looks like that I had underestimated how much of a hard Brexit was already built into stock prices
- Some of the stocks that I own had strange year-end 2017 “Peaks” that got reversed especially in the 4th quarter (Cars.com)
- Finally, even a relatively well performing stock in 2018 like Electrica got hit by an unrelated policy change in Romania that was bad luck but contributed clearly to the December underperformance.
Additionally, due to less time available, i didn’t manage to allocate more money into “pure” special situations. The special situations add to diversification especially in down turns but this is something that I have to live with in the future.
As always, I don’t find it very useful to project anything like where will the DAX be at year-end 2019 etc. However I find it useful trying to identify some major risk factors. In my opinion, the most relevant “known unknown” risk factors are.
- BBB- corporate debt. This has been accumulating for years in pension funds, bank and insurance balance sheets as it offers yield without much capital requirement. This would turn if these papers would be downgraded to “Non investment” grade and potentially trigger massive forced selling and other secondary effects. So I think it makes a lot of sense to watch this space, including credit spreads.
- Inflation and interest rates: Our current generation does not know how it is to live with rising interest rates and rising inflation. Maybe we have seen just a small uptick and then back to low inflation /low-interest rates. It he trend would actually turn, then a lot of things would suddenly become very different to the previous 3 decades.
- Brexit: This is an obvious one. Less obvious is clearly how much of this is already discounted in the market (Stocks & Pound). Something to watch and maybe I mange to create a UK Watchlist for the worst case.
- Tariffs: Of the many stupid stuff that TRump does, the most damaging for the global economy are clearly his tariffs. It is no coincidence that the German index performed worst among the large European ones as the German economy is extremely dependent on open international markets, Especially in Germany, people are very complacent and think the current boom will last forever but this could turn quickly
Some of those factors have combined impacts. For instance in my opinion, the combination of BBB- debt and rising inflation is one explanation why US Insurance stocks are so cheap, as they will be hit double if those risks actually materialize. If not, then US Insurance could become more interesting.
Overall in 2019 I will need to focus on reviewing some existing positions more intensively. Nevertheless I hope I can develop some new ideas as well.