Performance review 2019 – Comment “Value Trading & Portfolio Decay”
In 2019, the Value & Opportunity portfolio gained +15,0% (including dividends, no taxes) against +27.9% 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 2019:
Partners Fund TGV: +4,26%
Squad European Convictions +22,6%
Ennismore European Smaller Cos +6,9% (in EUR)
Frankfurter Aktienfonds für Stiftungen +8,1%
Evermore Global Value +23.9% (USD)
Greiff Special Situation +1,2%
Squad Aguja Special Situation +18,2%
Since inception (01.01.2011), this translates into +189,8% or +12,5% p.a. vs. 113,0 % or 8,8% p.a. for the Benchmark.
Current portfolio / Portfolio transactions
The current portfolio can be seen as always on the portfolio page. Transaction in 2019 were as follows:
I sold Kinnevik, Expedia, Cars.com, VanLanschott Kempen, Kanam Grundinvest, Ahlsell and Record Plc. New “permanent” positions were German Startups Group, Zur Rose AG and UBER as a “contrarian” stock.
Temporary special situations in 2019 were Innogy, April SA, KAS Bank, Osram.
The average holding period of the portfolio is now around 4 years, the top 6 positions account for around 40% of the portfolio. Cash at the end of the year is ~18% of the portfolio.
Looking at the annual returns we can see that 2019 was the first year in 9 years with an underperformance vs. my benchmark and a pretty drastic one:
|Bench||Portfolio||Perf BM||Perf. Portf.||Portf-BM|
A quick look at monthly returns also shows that it was a pretty consistent underperformance:
|Bench||Portfolio||Perf BM||Perf. Portf.||Portf-BM|
So what were the reasons for this drastic relativ underperformance ? In short, I think this can be attributed to 4 main root causes:
1) Too much cash / special situation exposure
on average, i had around 15-20% cash and “cash like” special situations. The special situation themselves were only small one with little pay-off. In a year where the benchmark does 28%, this alone is responsible for ~4-5% underperformance.
2) Again – mistakes
2019 I made 2 major mistakes: Not selling Cars.com early and not really researching SFPI after the DOM security merger. These 2 together were responsible for around -3%.
3) General underperfomance of “value”
Looking at my peer group above, only a very few funds even came near the benchmarks. Without deep analysis it is hard to tell, but I guess overall the “Value universe” only offered a limited amount of upside in 2019.
4) Portfolio decay
Finally, I was not able to generate enough good new ideas to counter a certain “portfolio decay. A significant portion of my portfolio are now stocks that I am not super happy about. More on that in the comment.
“Value Trading and Portfolio Decay”
As I have mentioned in the past, one of my goals was to increase the holding period of my investments as I assumed that less trades will somehow improve performance and lower stress. So far, I have to confess that only the second part came true, it clearly is less stress if you look at your portfolio only in larger intervals.
On the other hand I noticed that my in my portfolio I have more and more positions that I am not entirely happy about such as for instance Draegerwerke, SFPI etc.
I think the main problem is the following: I didn’t pay enough attention so far which of my position were rather “Value trades” than real “value investmenta”. What is the main difference ? A “value trade” is a stock that for some reason is temporarily cheap and is hopefully repricing to create some hopefully decent returns in the mean time. A real “value investment” in contrast is a stock that is cheap relative to its long term potential. Warren Buffett has become famous for investing into the latter type of stock. Sometimes, like the famous Amex salad oil scandal, you can actually get such a long term “compounder” at distressed prices .
If I look back over the 9 years of blogging, I have to confess that many of my (successful) investments were actually value trades: Stocks that I were cheap for some external reason (financial crisis, Euro crisis) but not necessarily cheap in relation for their long term potential. Some positions like TFF Group, G. Perrier or Bouvet turned out to be good long term winners, but to be honest this was more luck than anything else.
Just to be clear: I don’t think that there is anything wrong with “value trades” as such. Some of these stocks (for instance after the Euro crisis) offered spectacular returns. However the most important point is the following:
“Value trades” have to be managed much more actively. Especially if the story changes and underlying assumptions do not materialize, I had reacted to slow in the past. “High quality” and well managed companies in contrast can withstand adversity much better. Some examples for “value trades” gone wrong are Cars.com, Metro and to a certain extent also Silver Chef. In all cases, the investment thesis was much more relative valuation than belief into the long term prospects of a company.
When I look at my current portfolio, I would consider these positions rather as a “value trade” than a really long term value investment: Installux, SFPI, Paul Hartmann, Electrica, Uber, German Startups Group, Handelsbanken, Naked Wines and Draegerwerke.
My inactivity over the years led to what I call “portfolio decay”: The share of Stocks that I am actually not so happy about and where the underlying story has changed significantly is going up. Currently, if I add all my positions where I am not that happy, I come to something like 15-20%. The share was even higher before my last three sells, Record, Expedia and Cars,com.
Clearly only assuming that an investment is a long term value investment does not guarantee success (see for instance Handelsbanken, Naked Wines or TGS Nopec), where the story has changed a lot. But I think I need to improve my monitoring in general, however going forward I will try to makes sure that I don’t just blindly try to increase my average holding period independent of the nature of an investment.
I think it still makes sense to use holding period as one KPI but not to compromise on the quality of the portfolio.
Changes in 2020:
The first change that I will be implementing form now one is the following: Additionally to a cap on new investments (max 1 per month), I also try to push myself to at least replace one position per quarter with a new idea. Let’s see how this works but this should counter a little bit the above mentioned “decay”.
A second change will be that I reset the size of the portfolio. As some remembered, I started with a fictional size of 10 mn EUR that has now grown to almost 30 mn. At 30 mn, it is quite difficult to build up positions in small cap stocks like German Startups Group or other interesting illiquid stocks. My private portfolio (which is unfortunately less than the virtual 30 mn…) has therefore diverged more and more from the blog portfolio. Currently I am holding privately 4 positions in relatively illiquid small caps (total portfolio allocation ~10%) that I didn’t dare to publish on the blog. Going forward, I will divide the amount of the portfolio value by 10, so from 1.1.2020 I assume that the portfolio is worth “Only” 2.9 mn instead of 29 mn.