Portfolio Update - October 2017

Time for an update on our portfolio in the 'Millionærklubben' Radio program. 

A refresher for those of you not familiar: at the beginning of the year 5 portfolio managers invest 250.000 DKK (roughly 40.000 USD) and then compete over the course of the year for the highest return (or lowest loss...).

We entered the competition as the 5th competitor on March 11th this year. Our investment philosophy is two pronged:

  1. We think the market will reward a traditional fundamental value approach in the long run. So that is our strategy.
  2. We also think that humans aren't particularly well designed to follow investment strategies, so we've built a comprehensive investment process around our decision making in order to execute our strategy well.

We benchmark against the S&P 500 and pick US stocks primarily (and so far exclusively).

The results so far

After roughly 7 months invested we've achieved a 15.8% return on the portfolio against the S&P 500's 7.0% in the same period. 

We are obviously pleased with a 8.8% outperformance over the market.

For the Danish readers we do need to comment further, though:

The Danish Index (OMXC20CAP) is up 11.3% in the same period, so we have an outperformance there of 4.5%.

HOWEVER: we have faced strict currency headwinds as the USD/EUR ratio has dropped like a rock from roughly 0.95 to 0.85, which means that our real return in DKK is just about 5.0%. 

The contest is about stock picking and we are not allowed to hedge or gear the portfolios, so this is part of the game - all good clean fun. And we are not overtly concerned: the US economy is growing faster than the Eurozone and US interest rates are being slowly increased, both of which should provide a long term macro upwards push on the dollar

AUGUST - What the hell happened????!

As you can also see we had a very interesting month of August as the portfolio dropped like a rock from a 15% gain to a net loss of 5%. This was due to three pieces of unrelated bad news:

First: Seadrill Partners was trading ever lower as the restructuring deadline of embattled parent Seadrill Ltd came closer. Ultimately Seadrill Partners escaped unscathed (as we had hoped and predicted) and regained lost ground and then some + paid out a hefty dividend in arrears.

Second: Amira Nature Foods had climed tremendously in July after - we assume - having had some luck making their case to institutional investors at industry conferences in late June. We assume that a sell-off happened as the more jitterish of retail investors decided to take some gains. Only to see a rebound as the American Association of Individual Investors added Amira to it's model portfolio putting it on the map of tens of thousands of US retail investors. The stock has climbed steadily ever since.

Third - and worst: Natural Health Trends came out with a less-than-good quarterly result showing a 5% drop in the number of distributors of it's products in China. This is a real problem and selling ensued. We continue to believe, however, in the excellence of the management team (who warned of the result well in advance of the quarterly report, above and beyond their reporting duties) and it's ability to get back on track.

Also NHTC remains one of the absolutely cheapest stocks out there when considering both earnings to enterprise value (EBIT/EV - a fancy P/E variation) and return on capital. It's just a wonderful business - even with a 5% dent in it's windscreen.

 

Volatility is the price of performance

This is part of the game in very concentrated portfolios like ours. The absolutely imperative thing is to anticipate that this will happen. Because it will happen. Also to you. Yes: You! The fewer stocks you own the more anxiety you will be asked to endure.

But the more anxiety you are confidently and calmly sure that you can, in any and all events, actually bear: the more you get to invest in your very best ideas. If you have a portfolio of 30 or 50 or 100 stocks you get lazy with your research. No single stock can destroy you, so you treat them as such.

With only 5 stocks in the portfolio you know them like the back of your hand, follow them closely and know their businesses inside out. This is good investor fundamentals. 

 

The Positions

The 5 stocks are:

  • Seadrill Partners (NYSE:SDLP)
  • Amira Nature Foods (ANFI)
  • Collectors Universe (CLCT)
  • Natural Health Trends (NHTC)
  • Xinyuan Real Estate (XIN)

The Portfolio as of yesterday

We don't recommend any of them (we don't have the license nor the liability insurance to go about recommending stocks), but we do own all of them because we personally believe they are the best we were able find out there in the univese of US stocks at the moment - given our knowledge.

For the next 1-2 quarters we look particularly forward to seeing the results of Xinyuan, which has promised a lot, and Natural Health Trends, which has a downward trend to break. 

Let us know what you think about all of this in the comments below - or ask questions about one of the positions.

 /Ulrik

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