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% 
Profitlich/Schmidlin: +12,7%
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.

Performance analysis

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
2010 6,394 100
2011 5,510 95.95 -13.8% -4.1% 9.8%
2012 6,973 131.81 26.6% 37.4% 10.8%
2013 9,017 175.04 29.3% 32.8% 3.5%
2014 9,214 183.60 2.2% 4.9% 2.7%
2015 10,363 209.53 12.5% 14.1% 1.7%
2016 10,835 235.56 4.6% 12.4% 7.9%
2017 12,582 284.72 16.1% 20.9% 4.7%
2018 10,651 252.63 -15.3% -11.3% 4.1%
2019 13,620 289.62 27.9% 15,0% -12,9%

A quick look at monthly returns also shows that it was a pretty consistent underperformance:

Bench Portfolio Perf BM Perf. Portf. Portf-BM
Dec 18 10,651 252
Jan-19 11,385 272.72 6.9% 8.0% 1.1%
Feb-19 11,809 275.63 3.7% 1.1% -2.7%
Mar-19 11,920 273.50 0.9% -0.8% -1.7%
Apr-19 12,598 282.52 5.7% 3.3% -2.4%
May-19 11,918 275.70 -5.4% -2.4% 3.0%
Jun-19 12,532 283.74 5.2% 2.9% -2.2%
Jul-19 12,521 279.44 -0.1% -1.5% -1.4%
Aug-19 12,346 270.69 -1.4% -3.1% -1.7%
Sep-19 12,712 274.76 3.0% 1.5% -1.5%
Oct-19 12,961 277.51 2.0% 1.0% -1.0%
Nov-19 13,370 282.14 3.2% 1.7% -1.5%
Dec-19 13,620 289.62 1.9% 2.7% 0.8%

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.

 

15 comments

  • Congrats on the returns and thanks for writing. What are your views on Naked Wines, as you note the story has changed a lot but the capital allocation , in my view, has gone in the right direction. Ok, so they have lost their “outsider” ceo, but the culture seems strong and momentum appears strong in the US business. Punch Card Management has recently taken a stake which is a good sign. I continue to hold, though it has been painful.

  • Congrats on your 15% gain !

  • Why is no one speaking openly? Are we afraid of saying the king runs nude ?

    Getting only 15% against a benchmark gain of 27%* is a LOSS OF TIME AND MONEY. Period !

    (* many ref.indices gained around 25%).

    I just hope your readership are intellectually honest enough to question themselves if v&o creates or destroys value & time. And to correctly conclude that v&o is about financial soap opera & romances.

    Good luck to those that dare to challenge the prophet of nothing.

    • “Der Teufel”, I am not sure what motivates you for this comment. This is a free Blog and those who like it can read it. You don’t seem to like it and therefore I kindly ask you to bugger off. You are definitely waisting your time here although I feel honored to actually have a personal troll now.

    • GNP-GlobalNosePicking

      This is only correct for 2019. For other years our loved v&o fared better ! 🙂

      It would be interesting the long-term comparison of V&O vs S&P500 and MSCI China !!! 🙂

  • Hey MMI
    Happy New Year and thanks for contributing on a regular basis.
    In your 2019 reveiw you made a little mistake. The annual return for the portfolio and the benchmark was calculated using the 8th root (8 years) of the return since inception vs. actually the 9th root (9 years from Jan 11 to Dec 19). The resulting annualized returns are closer to 12.55% and 8.8%.

  • I especially liked your reflection of Value Traded (temporary) vs Value Investments (long term)!

  • Wonder how you taxwise manage privately hold positions that gained big time? I own for instance a lot of RWE AG (I know you don’t like it;-) ) on which I had to pay ~25% tax if I sold. This stock and others in my portfolio
    https://bailonginvesting.wordpress.com
    are clearly not long term compounders so I’d like to get rid of them at some point in time, if there was not the tax issue. So currently my strategy is just to hold and invest the dividends and new deposits in new stocks. This way I think the relative size of the stocks I’m not 100% convinced of shrinks over time.
    Thanks for sharing your ideas on this great blog and congratulation to 9 years of outperformance!

  • 2019 was a little special for performance reviews,I think. I have found that many portfolios claiming performance of 25% or higher in 2019 actually had a very large draw down in the Nov/Dec 2018 period. So this huge performance 2019 can be attributed at last partially just to a lower entry in Jan 2019. I have found this effect dominating my 2019 results as well. I don’t know the end of 2018 figures for your portfolio, but this would certainly be interesting. May be the different performances in 2019 are just spurious and the reason can found in slightly different investment styles.

  • Hi MMI,
    happy new year to you + thanks a lot for another very instructive blog post!

    Regarding your planned process changes for 2020:

    Why are you planning to replace a position every quarter = 4 stocks out p.a. + 4 new stocks in?

    Earlier in the blog post you write (as far as I understand it) that you’d like to increase the portfolio weight of value investments vs. value trades.

    Aren’t these two goals conflicting?

    I can imagine that you might be better off in the long-term (!) by just focusing more on holding compounders + reduce value trades. However, this would mean less trades + would lead to abandon any hard and fast rules like “exchange one stock p. quarter”.

    What do you think?

    • Thanks for the comment. Making a honest self assessment, i think I am better at finding “vlaue trades” than finding compunders. However I need to manage value trades more actively, that’s why I want to introduce the new rule.

  • Thanks for your comment. Usually I do a holding by holding review in late December but I haven’t had the time. I hope I can do it this week…..

  • Great honest thoughts about your holdings! I have been going through a similar thought process and conclusions as you regarding the two types of value trades. Thats why I created different investment buckets, where one is Speculative in that sense that they are value trades. I didnt buy Handelsbankem, but I did buy Swedbank into this bucket. My speculative bucket is a bit more speculative than your value trades though. What i missed from your blogpost was a short comment on the holdings you are still really happy with and why!

    I would be interested to hear your thoughts on Handelsbanken and Paul Hartmann, why dont you feel that they are good long term value investments? Are you doubtful about the company mgmt, just the industry they are in and the future competition or something else?

    The illiquid companies is something I thought a lot about lately too. Your blog is much more popular than mine, but even my little blog could drive prices in illiquid stocks. I have very mixed feelings about this, at the one hand some of the best value cases are small and/or illiquid. I got a comment once on my blog which I took very seriously. Somebody had more or less copied my whole portfolio and was complaining he did not get the same returns as the blog due entry/exit costs in illiquid holdings. Since then I have considered to keep the illiquid stuff outside the blog and actually keep 1 such holding outside at the moment.

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