value and opportunity

Just a quick reminder: this will be the last monthly update, from now on I will switch to quarterly updates.

Performance

In March, the portfolio gained +2,1% against +3,6% for the Benchmark (Eurostoxx50 (25%), Eurostoxx small 200 (25%), DAX (30%),MDAX (20%)). Year to date, the score is +11,5% against +20,2% for the benchmark. Since inception, the portfolio is up 104,3% vs. 73,3%.

Major winners were TFF (+19,6%), Drager (+8,4%), Hornbach (+6,5%) and Thermador (+6,0%). Losers were Ashmore (-7,1%), Van Lanschot (-6,4%) and TGS (-4,3%).

Overall, performance was again behind the benchmark but with around (2,1/3,6)= 58% of the upside fully in line with the current allocation of the portfolio with regard to cash and beta of the investments.

Portfolio transactions

In line with my self-prescribed “slowness” I only made one position change this month: The full sale of my KAS Bank position in mid march. Within my existing positions, I added to my Romgaz stake following the good results.

Cash and “cash similar” positions are now at around 27%, a pretty high percentage but maybe not too bad going forward. So far of course, the conservative approach has cost me a lot of performance, but the year is not over yet. The current portfolio, as always can be found under the respective portfolio page.

Comment “Should an active investor give money to a money manager ?”

I am currently preparing my first investment into a fund actively managed by someone else. For me, as an active investor, this is quite unusual, so far I have only invested in ETFs in order to gain exposure to sectors or directly into stocks and bonds. The big question here is of course: Why should I pay management fees for someone doing the same stuff that I actually enjoy doing myself ? So for myself a tried to rationalize the decision a little bit and came up with 5 criteria which are important to me for trusting my hard-earned money with someone else:

1. The manager has to be trust worthy
2. The manager should have most of or even better all his money in the fund
3. the manager has a different skill set than oneself or just better skills or access to different assets
4. The manager should still be “hungry”
5. The fund manager is not only in for the money
6. The investment vehicle should be a “fair” structure

Interestingly, those criteria are not that different from investing into a stock, but let’s look at them one by one:

1. The manager has to be trust worthy

This sounds more easy than it is. In order to know if someone is trust worthy, you either know someone really well or there is a long track record of this person proving that she/he will always act what in German we would call “in Treu und Glauben” or in English as a true Fiduciary of one’s money. In a standard asset management organisation, this cannot be taken for granted. In many large asset management companies, the main target is not performance but management fees and not the performance of the money invested.

One of the worst cases would be investing into someone where you know that this guy is “bending the rules” somewhere and hoping that still everything would be ok with your money. With Bernie Madoff for instance, many people thought that he was making the nice and easy money in his “hedge fund” by scalping and front running his customers on the trading side of his business and thy were OK with it. Without accusing him in any way, Bill Ackman for me would be also a questionable character. Both, with Herbalife and Valeant he is “bending” the rules to his advantage, how do you know that he will never does the same within his investment vehicles ? I think this is clearly the area where one should never make the slightest compromise.

2. The manager should have most of or even better all his money in the fund

This is something which is especially important if there is a performance component in the fee structure. A performance fee is essentially an option and the value of any option increases with volatility. If a portfolio manager however has invested all his money in the fund, he will think twice about maximizing only the option value…..

3. the manager has a different skill set than oneself or just better skills or access to different assets and the investment process is transparent

Sounds pretty obvious but is still worth thinking about. If I invest in a value investing strategy, this only makes sense if I am sure that the manager does have skills that I don’t have. This could be either very deep research and a concentrated long-term portfolio or access to markets/assets which I don’t have as a private investor. in any case this requires that the manager is transparent on what he is doing at that an investor understands the investment process. Fundholder letters or even better “manuals” are a big plus here.

4. The manager should still be “hungry”

The typical story in investment management goes like this: Manager starts small fund, has great returns, nobody is interested at first. After 3-5 years of great returns, fund gets onto the radar screen of large investors and grows quickly. Performance drops as investment style cannot easily be scaled up and/or investment manager cares more for his Ferrari collection. In any case, I think it is more interesting to invest in the early phase than in the later phase despite a potentially higher fee percentage.

5. The fund manager is not only in for the money

That sounds strange at first, why should a money manager not be in for the money ? What I mean here is that there are a lot of people in the investment management business who see this as the fastest way to make a lot of money. In my experience, those people are generally not good money managers in the long-term. The really good ones are those who actually like what they are doing and do it because its their passion. Those guys will go the extra mile and read annual reports on week ends and in their vacation because they don’t consider it as work.

6. The investment vehicle should be a “fair” structure

As I am an individual investor I would for instance have a problem with a structure where I pay upfront commissions or custody fees that an institutional investor would not pay. Also, if I plan to invest long-term, I would not want to invest in a structure where other investors could hurt my returns by either putting in a lot of money on a daily basis or pulling their investments at any time. As a long-term investor, I would need to be sure that also the others are in for the long-term and no “hot money” can disturb the investment success.

It makes also a lot of sense to look at other investors in a fund vehicle. It is an advantage if other investors are known and reliable.

Those are the 6 criteria which are important for me for trusting my money to someone else. Of course this is no guarantee that the investment will perform well, but at least the risk to the downside is limited to a certain extent if all criteria are met.

More on the specific fund investment will come in a later post this month.

Performance February

In February, the portfolio gained +5,7% against +7,2% for the Benchmark (Eurostoxx50 (25%), Eurostoxx small 200 (25%), DAX (30%),MDAX (20%)). Still worse than the benchmark but closer than in February. Year to date, the score is +9,2% against +16,1% for the benchmark.

For the first time since its inception (1.1.2011), the portfolio has now doubled in value with an overall gain of +100,6% against +67,3% for the benchmark.

Outperformers in Fabruary were Miko (+16,5%), Draeger (+14,7%), KAS Bank (+12,6%) and TFF (+12,4%). Losers were Koc (-10,2%), Installux (-5,2%) and the TRY Depfa Zero (-3,2%).

February showed the typical “catch up” of small caps which often outperform with a certain time lag to the liquid markets. Overall with around like 20-30% of cash & cash equivalents, I can clearly not expect to match the benchmark in such a phase. This is the strongest start into a calendar year for the stock market since I run the portfolio and my low beta approach then doesn’t work so well.

Portfolio transactions

February was a slow month. The two exceptions were that I sold out the remaining part of Cranswick and increased my Electrica position by 1%. Direct cash ist now at 12,8% plus a further 11% in cash like positions (HT1, Depfa LT2, MAN). I clearly see the problem of some shares reaching fair value and not generating a lot of great new investment ideas.

The number of holdings is now at a reasonable 25. Above 25 I don’t feel too comfortable, so if I would add a new position, I will most likely “kill” an old one. Most obvious candidates would be my smallest holdings, Koc and Trilogiq. The month end portfolio as alaways can be accessed via the “Current portfolio” page.

One remark here on my portfolio holdings: Currently, a lot of companies issue “preliminary annuals”. I always hesitate to fully read them because often they lack important information which is only disclosed in the annual report. I find it much more time effective to wait for that annual report and then decide what to do, unless something really dramatic happened.

Comment: “Changing interest”

Normally I tend to stay away from most macro related issues because it makes my head spin. This comment will be a small exception. First an interesting datapoint: What do you think was the best asset class in 2014 at least in “developed” markets ? Well, US stocks with 15,3% look strong but the German 30 year bund made around +34% in 2014. For many people this is surprising as how you can make +34% in a year with an instrument which had a yield of 2,8% at the end of 2013 but this is the “power” of duration and convexity.

But the even more interesting thing (at least for me) is that for the first time in my 20 year professional career in finance, most of the people I talk to have changed their expectations with regard to interest rates. Even back in the 90ties, everyone was convinced that interest rates could only go higher. The lower rates went, the louder the voices grew. Bond bubble, hyper inflation etc. etc. were the buzzwords and shorting the bund was the absolute “No brainer” trade.

Looking at the historical yield of the bund future (the proxy for 10 year Bund yield), we can clearly see that this “interest rates can only go up” attitude was to a large extent a combination of “Recency bias” and “Anchoring”:

It clearly shows that at least for the last 25 years there was no mean-reversion in interest rates.

I guess the events early this year, mainly the Swiss Franc de-pegging plus the Draghi announcement to buy 60 bn EUR monthly for the foreseeable future combined with negative yields all around have somehow silenced many of the pundits. With negative rates, being short duration now suddenly really starts to hurt. Keeping cash in a long tem pension portfolio until now did not really hurt, but now, if you really have to pay money for deposits, people do anything to get yield. It almost looks like that negative yields force many institution to “surrender” and go long duration, no matter how low yields are. It will be interesting to see for instance what “my friends” at FBD are doing after betting on rising interest rates for the last few years.

Historically, such large scale surrender situations have often marked a mid-term turning points. I would not bet on this nor am I sure that this observation is relevant. However it is definitely a change in expectations compared to the last 25 years. Which I find interesting.

Performance:

In January, the portfolio gained +3,38%. That looks good stand-alone but pretty weak against the +8,1% of my Benchmark (Eurostoxx50 (25%), Eurostoxx small 200 (25%), DAX (30%),MDAX (20%)) for January.

[EDIT: the first version of the post stated +4,14%, that was a mistake as well as the 3,54% from the second version. Somehow my spreadsheet got screwed up]

Looking at all 5 Januaries since I run the portfolio, one can see that a 4% performance difference in January rather seems the rule than the exception:
Read more

Performance:

In July, the Benchmark (Eurostoxx50 (Perf.Ind) (25%), Eurostoxx small 200 (25), DAX (30%), MDAX (20%)) lost -4,5%. This is actually the biggest monthly loss since May 2012. The portfolio lost “only” -2,6%, an outperformance of +1,9% for the month. YTD, the score is +7,4% for the portfolio against -0,5% for the benchmark, a relative outperfomance of +7,9%..

Interestingly, especially the German part of the benchmark is struggling, with the MDAX down almost -6,5% for the year. My cautious stance towards German shares seems to have been justified so far.

The biggest looser in %terms in the portfolio were not surprisingly Sistema with -19,4% and Sberbank (-15,9%) followed by Trilogiq with -12,5%. Portugal Telecom would have been even worse with -39,7% but thankfully I sold that one early. Winners were few, among them Koc with +7,6%, TFF +4,7% and Gronlandsbanken +4,2%.

My Emerging Markets “Basket” has clearly added some volatility but on the other hand I think it was a good idea to diversify and only invest small amounts in risky stuff.

Current portfolio & Transaction

In July, I sold my small position in Portugal Telecom at a loss after the connection to Banco Espirito Santo became public. My relatively quick reaction saved me from much steeper losses. Sometimes it pays to react quickly.

Additionally I sold Vetropack as my investment case was clearly not fully valid anymore. The only new position was the Sky Deutschland “special situation”, which is a relatively low risk low upside investment. Finally I scaled down the Draeger position from 6,7% to 5% as the multiple against the pref shares increased to 6 times.

Cash at month end was around 12,4%, with a further 10% (Depfa LT2, MAN, SkyD) invested in special situations which I would consider close to cash. So the portfolio should be quite well prepared for any more significant corrections.

The current portfolio can be seen here.

Comment: “Anchoring”

During the month, I faced 2 situations where I was confronted with one of the most common but also most dangerous behavioural biases: Anchoring. On Stockopedia I found a pretty good description:

The concept of anchoring draws on the tendency to attach or “anchor” our thoughts to a reference point – even though it may have no logical relevance to the decision at hand.

The first situation this month was the case of Portugal Telecom (PTC). PTC announced quite surprisingly that they had extended almost 1 bn EUR to the now bankrupt Espirito Santo Group. When I had time to look at this, the stock dropped already significantly and I was already down -30% compared to my purchase price. For a short time I was tempted to speculate on a rebound as I hated to realize such a “loss”, especially as there were some positive news like potential collateral from ESF etc. But then I realized that I was “anchored” on my purchase price. Even at a loss, the risk/return relationship for the stock had worsened significantly. Instead of a speculation on a Brazilian merger, the situation had changed to a potentially corrupt management, unreliable financial statements and a speculation of Espirito Santo not going bankrupt. If the fundamentals of an investment change so much, being anchored on the purchase price is one of the worst things that can happen. It is much sfer to sell first and then sit back and think about if you would buy the stock again at the current price.

The second instance was Vetropack. Vetropack was one of my original investments. During the 3,5 year holding period, at one time the stock price had been almost 2000 CHF, a nice round numbers. Again, when I reviewed the business case and found some significant flaws compared to my own case, I was tempted to keep the position, speculating that it may reach 2000 CHF again and then sell at least at a small profit. But being anchored on previous higher prices is as bad as being anchored on the purchase price.

Those biases are also quite common in the business world. Selling a subsidiary at a loss, despite how bad and desperate the situation is, is very often an absolute “no go” for most senior managers. Only when the old managers are getting kicked out, the successors then finish the job because it was not “their” purchase price. For me, this is by the way a sign for good capital allocation if the management of a company sells a subsidiary at a loss or closes it down if they can’t turn around the business themselves as this is clearly not easy for any management. Much more often you see companies throwing good money after bad in those situations. The argument is often: “If we sell now, we lose everything we have invested before”. This “sunk cost” fallacy is extremely common and very hard to argue against.

So how can an investor protect against this anchoring ?

An easy solution would be just to forget purchase prices. In practice, this is not that easy as you usually see your purchase price in each and every broker statement.

What works best for me is also very simple: Writing down the original investment thesis and comparing the positions on a regular basis against this thesis. If something has changed significantly to the worse, then sell independent of the purchase price or previous highs. If nothing has changed and the case is still valid, then hold.

Performance June

In June, the portfolio gained 0,9% against -1,2% for the Benchmark (Eurostoxx50 (Perf.Ind) (25%), Eurostoxx small 200 (25%), DAX (30%), MDAX (20%)) an outperformance of +2,1%. YTD, the score is +10,2% against 4,1% for the Benchmark.

For June, positive contributers were IGE+XAO (+13,2%), Sistema (+7,5%), Admiral (+6,2%). Main loosers were Van Lanschott (-4,2%), KAS Bank (-4%,0%) and Energiedienst (-2,5%).

Interestingly enough, June was the fourth month in 2014 with negative BM performance and significant outperformance of the portfolio. This is how 2014 looks on a monthly basis:

	Bench	Portfolio	Perf BM	Perf. Portf.	Portf-BM
Jan 14	8.849,21	181,48	-1,9%	3,7%	5,5%
Feb 14	9.306,80	186,34	5,2%	2,7%	-2,5%
Mrz 14	9.228,53	187,18	-0,8%	0,5%	1,3%
Apr 14	9.203,99	189,76	-0,3%	1,4%	1,6%
Mai 14	9.499,94	191,22	3,2%	0,8%	-2,4%
Jun 14	9.387,95	192,98	-1,2%	0,9%	2,1%

So whenever the market performs strongly, the portfolio underperforms significantly and when the market retreats it more then compensates. There is certainly some time lag involved here but I cannot completely explain what is happening here. At least it doesn’t look like a lot of beta 😉

Portfolio transactions

June was a very quiet month, the only transaction was to sell the remaining April SA stake. Although I introduced Admiral in June, I had invested already in April. The current portfolio as always can be seen here.

Including all the earned dividends, cash is now at ~11,8% plus the 5% in the Depfa LT2 which I consider very close to cash.

Currently, Portugal Telecom is “under review”. I bought a small position in order to keep my interest in the PTC/OI merger, the recent news about the undisclosed Rioforte investment caught me by surprise. I have sent an Email to PTC IR in order to clarify the accounting, but overall I think this is not a comapny to invest in after this incident.

As I have already written, in early July I already invested another 2,5% of the portfolio into NN Group, the Dutch IPO and insurance subsidiary of ING.