value and opportunity

As this is the 10 year mark of the portfolio, there will be a two part performance review. This is part 1 for 2020, part 2 for the 10 year period will follow in short time.

In 2020, the Value & Opportunity portfolio gained  +27.6% (including dividends, no taxes) against +4,5% for the Benchmark (Eurostoxx50(25%), Eurostoxx small 200 (25%), DAX (30%), MDAX (20%), all performance indices including Dividends).

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 2020:

Partners Fund TGV: +28,2% (15.12.) 
Profitlich/Schmidlin: +9.54% (30.12.)
Squad European Convictions (30.12.) +20,4%
Ennismore European Smaller Cos (30.12.) -10.9% (in EUR)
Frankfurter Aktienfonds für Stiftungen (30.12.) +0.83%
Evermore Global Value (30.12.) -7,0% (USD)
Greiff Special Situation (30.12.) +0.2%
Squad Aguja Special Situation (30.12.) +34,8%
Paladin One (30.12.) +30,1%

Current portfolio / Portfolio transactions

The current portfolio can be seen as always on the portfolio page. Transaction in 2020 were as follows:

I sold Uber, Paul Hartmann, Draegerwerk, German Startup Group, Handelsbanken, Vostok New Ventures, Electrica, TGS Nopec. Partial selling happened in Zur Rose and Bouvet. I bought and sold within the year (Covid-19 driven): Metro Bank, Mutui Online, Disney, Amadeus IT, Sino AG, JDC AG, SHS Viveon, Fitbit, Tiffany’s, Sol Spa, Interactive Brokers, Coface, Freenet, Grenke Bonds and Brenntag.

New positions were: Siemens Energy, Play Magnus, Netfonds AG, Richemont, Sixt Pref, Mediqon, AOC fund, FBD Holding, Agfa and the travel basket (Hostelworld, Dufry, ENAV SpA, Anheuser Busch, JD Wetherspoon, Southwest).

During the year I increased positions in Naked Wines, TFF Group and Admiral.

The average weighted holding period of the portfolio is now around 3.4 years, the top 10 positions account for around 56% of the portfolio. Cash at  the end of the year was ~9% of the portfolio. A short review of every position can be read at my recent “21(+6) Investments for 2021” post.

Performance analysis 2020

If someone would have given me a crystal ball at the end of the year showing me the Covid-19 pandemic, a -7% drop in World GDP, Donald “The Grinch” Trump trying to steal the election, Brexit negotiations until year end and then offered me a digital option to either stay fully invested or go 100% in cash in 2020, I would have gladly taken cash.

Thank god I didn’t have a crystal ball, as in the end, 2020 turned out to be not only the 3rd best year since inception of the portfolio (after 2012 and 2013) but also the best year in relative performance by a wide margin. It is a clear lesson that stock markets do not adhere to any “rules” or formulas that link them to macroeconomic variables.

If I would be in the Asset Management business and trying to increase my AuM, I would boast that my incredible analytical skills combined with my superhuman portfolio management has produced this inevitable outperformance and will do so for the foreseeable future. As I am however not selling anything here, I can be very honest: The 2020 out-performance was mostly a “Freak Accident” based on 80-90% luck and maybe 10-20% skill. 

Just as a reminder: My portfolio by design is a relatively defensive one. Not because it is the best way in general but the best setup that works for me.

I always keep some cash, most of my stocks have conservative balance sheet, some have counter cyclical business models and I don’t bet the house on single positions. That means that usually draw downs are a lot shallower than for the market and even during the Covid-19 crash, none of the portfolio companies experienced any existential issues at any time. However during up moves, my portfolio usually underperforms. Therefore the monthly returns of 2020 are very unusual as we can see in the next table:

Month	Bench	Portfolio	Perf BM	Perf. Portf.	Portf-BM
Dec 19	13,620	$290.30
Jan-20	13,371	$288.07	-1.8%	-0.8%	1.1%
Feb-20	12,275	$277.63	-8.2%	-3.6%	4.6%
Mar-20	10,270	$238.97	-16.3%	-13.9%	2.4%
Apr-20	11,120	$271.06	8.3%	13.4%	5.1%
May-20	11,910	$283.34	7.1%	4.5%	-2.6%
Jun-20	12,345	$293.73	3.7%	3.7%	0.0%
Jul-20	12,351	$298.47	0.1%	1.6%	1.6%
Aug-20	12,904	$306.38	4.5%	2.6%	-1.8%
Sep-20	12,681	$301.09	-1.7%	-1.7%	0.0%
Oct-20	11,828	$304.39	-6.7%	1.1%	7.8%
Nov-20	13,728	$350.79	16.1%	15.2%	-0.8%
Dec-20	14,238	$370.12	3.7%	5.5%	1.8%

A good part of the out performance was achieved in the first 3 months which were significantly negative for the benchmark and somehow “by design”. However, and this is very unusual, another large part of the outperformance was generated in the big up month April and in “Vaccine November” the portfolio almost matched the benchmark. 

Another remarkable feature of 2020 was that it included the two best months in the 10 year history of the portfolio (April and November) but also the worst month so far (March) with the only double digit % loss in the last 10 years. Interestingly also for the Benchmark, 2020 contained the best and worst month over the last 10 years (November & March).

The luck part clearly has to do with the fact that some of my positions turned out to be winners of the “Covid-19 lottery”, especially Zur Rose, Naked Wines and Bouvet which contributed between ~17% in absolute performance and that I wasn’t exposed to any big losers. Towards the end of the year in the “risk on” mania, even positions that are not obvious winners such as Vostock Emerging Finance went up a lot. This is a very rough contribution analysis of the Top 10 contributing stocks:

Stock	Contribution 2020 approx
Zur Rose	6.0%
Naked	5.9%
Bouvet	4.8%
Grenke	2.7%
Sixt Vz	2.2%
Admiral	2.1%
Richemont	1.5%
TGV Partners	1.5%
Sino	1.4%
Vostok Emerging	1.1%

One “proof” for the luck factor is clearly that among the Top Ten contributors, there were only 2 positions that I would have considered “high conviction”: Admiral and Grenke. Naked Wines for instance was on my “watch list” for 2020 as a potential sell due to the sudden retirement of the founder/CEO. Luckily I did not sell. The other positions were mostly “Half position” at inception without full conviction. To me this conforms that I am not a “fat pitch” type of investor but that I need to have a certain amount of stocks in my portfolio including a couple of “Half conviction” positions in order to be somehow successful and prepared for luck to strike.

A small skill based contribution to the 2020 outperformance was  that due to not needing to commute for the main part of the year, I could invest a little more time into analyzing stocks. Usually I’ll try to manage according to a 20/80 approach. I’ll try to put in about 20% of the time that would be normally needed to manage the portfolio “professionally” and I’ll try to get to 80% of what needs to get done. In 2018 & 2019 I ran it more at a 10/60 level which was maybe not enough given the character of the portfolio. In 2020 I was able to source some interesting and profitable new investments like Sino, Siemens Energy, Play Magnus or dig deep into the Grenke situation.

In order to quantify this effect and to measure the impact of my partially quite hectic transactions, I did a very simple exercise: I went back to my 2019 year end portfolio and just updated it for 2020 year end prices and any dividends paid in 2020. If I would have done nothing, my 2020 performance would have been 24,5%. So my activity added overall 3,3% to performance for 2020. Not that much but nevertheless not insignificant. In a pandemic year I think it was Ok to violate my 1 trade per month/quarter rule.

It clearly also doesn’t explain why 2020 was in relative terms so much better than 2019 which in relative term was the worst year ever with a double digit percentage under performance. I didn’t do anything different with regard to process or technique. Therefore I consider 2020 as a positive “Freak accident” whereas 2019 was more like a negative freak accident.

Mistakes made 2020

What I found personally remarkable was that the performance was so good despite a number of (significant) mistakes I made in 2020. The biggest mistake was clearly selling Draeger Participation rights at EUR 220 just a few days before Draeger made a repurchase offer after waiting 9 years for the gap to close. This alone cost me around 3% of absolute performance. I knew that Draeger wanted to buy these securities at some point in time cheaply but I just lost my nerves back then. Other mistakes were to sell TGS Nopec pretty much at the low point, Selling Mutui Online after a few days into the crash with a modest profit (instead pf +150% now) and losing the nerves on Tiffany. Overall I think these big mistakes cost me around 5-6% portfolio performance in 2020 which I could have avoided if I would have behaved a little less hectic in March.

Peer Group Discussion

Again, similar to 2019, especially in my “virtual peer group” listed the wide distribution of returns is striking, from +35% for Squad Aguja to -10% for Ennismore. In 2019, the reason was clearly that Tech shares had driven the market and either you had (a lot) of tech shares and outperformed or you didn’t and under performer. In 2020 that structural Tech outperformance got turbo boosted plus the already described “Covid-19 lottery” effects which created a similar or even wider distribution of returns within the stock picker universe especially for small cap stock pickers that for instance happened to own (mediocre) E-Commerce stocks. I guess long/short mandates that were even short expensive titles were in the worst place possible which might explain the Ennismore outlier.

2021 Outlook

At the time of writing, I am quite happy with all my position because I think I have achieved a good mix of defensive qualities with positions that do have good upside (famous last words maybe…). One of the benefits of the Covid-19 crash was that I really cleaned up my portfolio and exited positions where I had only little conviction left.

My biggest “structural” bet is on a recovery of tourism/Leisure where I have directly allocated ~13% of the portfolio and might increase this exposure further. Also, I have no lack of ideas and a solid pipeline of situation that I find interesting. I think this is the result of a bifurcated market: Lots of highly/overvalued shares in certain sectors, significant opportunities in some other areas.

It is always difficult to make any prediction however I dare to make one prediction for next year: My relative performance will very likely be (a lot) worse than in 2020. Hopefully the level of portfolio activity will also be lower than in 2020.