Portfolio update and larger portfolio change

2019 has been the toughest year for the GlobalStockPicking portfolio in terms of under-performing against the MSCI World benchmark, YTD the return stand at 3% vs 15% for MSCI World. I did very well up until about April this year, when I posted about a new all time high for the portfolio. Such boasting was immediately punished with severe under-performance. Both US and European markets have performed well, whereas Asia is more in line with my portfolio. With quite a lot of Asia exposure the portfolio has fallen behind, but even taken that into account I have under-performed.

Obviously I’m disappointed, but more so I have been scratching my head. Is this how it should look like at a market peak, as irrational investors pile into Beyond Meat like investments and rational investors fall behind? Or am I on the wrong track and investing in poor value trap companies etc? Before going further into that topic, below is the return in a more digestible format:

Two portfolio “issues”

  1. First “issue”, I’m sitting on a few Hong Kong small cap investments which are pretty much dead in the water. The market sentiment in Hong Kong currently is not very good and although my companies (thinking foremost of Tonly Electronics, Modern Dental Group and Dream International) seem to have little exposure to trade tariffs (for Dream it’s actually a positive) or exposure to Hong Kong protests, the stocks are not moving. These three holdings at 17% of my portfolio seem to be pretty much in value trap land at the moment. Sure they might be cheap, but there is no interest in the market to price these stocks at higher multiples. So is this an issue then? Well yes and no, if it’s important to keep measuring yourself against a benchmark which keeps moving upwards, then it is an issue. If you are long-term and the underlying businesses are doing all right, it’s a non-issue, at some point the market will wake up and revalue the companies. Given that I want to be very long term, I have decided that this is not an issue for me. Obviously that might change when the semi-annuals soon are released for this companies.
  2. I’m having too many large cap companies in my portfolio where I have no reasonable edge against the market. Not having an edge on the market is something I thought a lot about lately and something I realized is critical for long term out-performance. I see two main cases (there might be others) where I think I could still have an edge in large caps:
    1. That I have a much longer investment horizon than the market (my investment in Diageo, Inditex,, Essity, Dairy Farm and LG Chem are based on this).
    2. Irrational selling flows in certain market segments, for example Hong Kong listed stocks right now, or stocks not fitting into the ESG portfolios which seems to go into everything right now (my investments in Swedish Match, BATS and Philip Morris are based on this).

Basically this gives me a few large cap holdings which have not really been bought with these “edges” in mind: NetEase, Gilead Science and partly NagaCorp. But NagaCorp being a Cambodian investment, listed in Hong Kong and after a big run-up trades around 6bn USD in MCAP. I would say it’s not really a main stream large cap investment just yet.

Portfolio Changes

Selling Gilead Science

Already back when I invested in Gilead I “confessed” that I had struggled to find a really great Pharma investment case. I relied heavily on other investors and their analysis when I invested in Gilead (Another Portfolio change Aug 2017). I think shows a bit how my investment style has changed since then. Today I would not do such an investment without doing my own due diligence a bit deeper first. Given the “no edge” argument, it’s time to let this one go and invest in something where I think I found an undervalued company, which the whole market is not aware of.

Selling British American Tobacco (BATS)

I might be right that ESG tilts in portfolios have put tobacco stocks on the no-go list of investments, but I can’t just base such a large portion of my portfolio just on this. I need to see that these companies long term are capable of delivering great returns in my portfolio. Swedish Match I think qualifies there, that’s why I increased my position there. Philip Morris might qualify long term, I do like the IQOS product and long term it’s success will be pretty crucial for delivering really strong shareholder returns. In BATS case, I’m pretty confident that this is a good defensive company which will deliver decent shareholder returns, if I was a corporate bond investor I would like BATS quite a lot. But I’m looking for slightly higher returns and I gambled a bit too much on this ESG angle having 3 tobacco companies in the portfolio, two is enough and BATS is the weakest link.

Selling Essity and switching into it’s subsidiary Vinda

This switch is something I haven’t mentioned, but looked at for a long time now. Vinda being a Chinese tissue paper products producer, majority owned by Essity and listed in Hong Kong. Basically the case is that given demographics, Vinda will see much stronger growth than the rest of Essity, which is also confirmed in historical results. So all else equal given higher growth Vinda should trade at a higher multiple, but it’s rather trading just in line with Essity. Why? Probably because Vinda being somewhat illiquid in comparison with a small float of some 25% on 2.2bn USD MCAP. But you get a Swedish governance run company, with full exposure to China’s growing middle-class and elderly population. This is truly something to put in the long term bucket.

Some pictures showing how Essity and Vinda traded since Essity got listed as a separate entity (spun out from SCA):

I was unfortunately asleep at the wheel during the summer when the spread was at it’s largest. The spread shrunk after great H1 results from Vinda, but has increased again on back of Hong Kong stocks under-performing in general (probably due to protests etc). So this gave me another opportunity to switch into Vinda.

Initiate new position in AK Medical Holdings

Another twitter inspired holding (LiveChat being the other), which I feel a bit ashamed of not having found myself (given how much time I spend looking for stocks on the HK exchange). Again my timing here is not the best given that the stock has rallied quite a lot recently. A full write-up will have to wait, but this is the holding I hinted at in my 3-D printing post. The company produces orthopedic implants, mainly for the hip and knees. The sell their products almost exclusively in China. Over the last few years the spent quite a lot of resources to use 3D-printing technology to create better custom made hip implants. Just as I wrote about in the 3D-printing post, the most successful examples of 3D-printing so far has been for the human body, where the need for customization is high. The companies sales of 3D-printed implant parts is still fairly small compared to total revenue, but it’s growing very nicely. It also shows the companies ambition to not just be the low cost option for implants compared to international players.

I think the company partly have traded so strong lately due to trade war speculation. If the trade war intensifies, probably international companies selling hip implants will face difficulties, which could favor a local player like AK Medical. My investment thesis is not based on this though, although of course it’s nice to have a trade war hedge in the portfolio.

This company is not trading at very cheap levels, so I will start with a fairly small position. You will have to wait a while longer for a full write-up.

Sizing and adding in Sbanken

I sell the full holdings in Gilead Science, BATS and Essity as of close Friday. This takes my cash level to about 14.1%. Of this I allocate a 5% to Vinda and a 3% position to AK Medical Holdings. Of the cash left I decided to increase my position in Sbanken again, which has traded down significantly on general Nordic bank stock weakness. I take my Sbanken position back to 5% of the portfolio, leaving a small cash buffer.

 

16 thoughts on “Portfolio update and larger portfolio change

  1. I wonder what’s your take in the current thunderstorm in the tobacco industry. Looking very much fwd the next earnings release, investor updates to seize the actual impact to profitability. Analysts say this may revive the traditional/combustible cigarrete industry (wonder whether they have a crystall ball!!). Ultimately only time will tell. Yet, is good to explore different views …

    1. Just a Tobacco Insight: in Boston’s Science Museum, an exhibition provided latest stats on US population (over)weight problems: 70% adults are overweight, and ca. 40% obese. Some say this impact is heavier / worse than tobacco (I am personally disgusted by tobacco). Should responsible investment ban all business creating addiction (and this may even include electronics, which are also proven addictive by multiple studies!!)

    1. I think its good that they are not plowing more money into this area to defend market share etc. but not sure they were paid that well? Wouldnt that business be worth a bit more than that? Whats your view?

      1. Yes indeed, I think it’s too low, haven’t done the exact calculations yet… I haven’t found much information on the deal. Not on the company website. So to me it’s still a rumour.

  2. Great post as always, thans for sharing your thoughts. How do you buy stocks like Vinda and AK Medical?

    Regards
    Henrik

    1. Thank you Henrik for the kind words. I use multipel online brokerage firms to access as many markets as possible. I managed to get good coverage almost everywhere except south america

  3. Good one + thanks for sharing! Hopefully time will put you back on track. Patience!

    I see you keep PMI, same approach as TerrySmith. Yet he does not get into banks as you. ;-). He finds insufficient Roce for the risk level

    On the China exposure, you may be delighted to read R.Vinall’s H1.2019 letter, with good perspectives on China. He’s view: one needs to follow closely the investments as industries are extremely competitive, hence market is very dynamic. Of course the wise approach is to play on secular growth topics (eg. tourism, which you did w NagaCorp).

    Recalling the high roce companies aforementioned investors took exposure to Alphabet/Microsoft/Facebook with significant success. I see you prefer betting smaller caps for what concerns tech. 😉

    Last but not least. Anyone knows what’s the representative investment horizon of mr.market? How can I say I have longer term approach ? :-s

    1. Thanks for your advice, high ROCE companies have indeed been a great factor to screen for and invest after during this bull market cycle.

      It’s a good question what mr markets investment horizon is. I guess the answer should be some type of weighted average of all market participants. Perhaps some guidance could come from how much of a company turns over every year. Or on aggregate level, how much of S&P500 or other benchmarks turns over every year. Without referencing any studies, my view is that mr market at best is able to focus 2-3 years out. Longer than that its a very tiny portion of investors that think (although there of course are some, but not enough to scew the stock price towards their thinking).

      1. IMHO, the market’s practical time horizon is really more like 6-18 months generally. That window will wax and wane for certain industry groups (e.g. industrials/cyclicals vs tech/SaaS vs staples) depending on sentiment at any given time. The way I think about it is that the only real price setters (active managers medium-to-long term, algos/quants in the extreme short term) are the marginal drivers as passives continue to eat more of the market in AUM terms (but just blindly buy/sell depending on flows). Given the active managers are largely beholden to calendar year performance hurdles/checks, that creates the “roughly one year out” time horizon.

  4. Short term performance is always deceptive, good job nonetheless!
    At least you sold URG on time, I regret arguing against that move back then.

    I have also thought about edge recently. Your point of a longer investment horizon than the market makes sense, but somehow I struggle with that. After all the long term is just a series of short term steps and if you could buy cheaper in the short term your long term performance would be much better if you are ultimately right.
    So is this really an edge? I am not sure. Nor am I saying it’s not. Just some confused thoughts on a Sunday evening…

    1. Yes even with my poor performance I actually dodged some bullets, URG and Cheetah Mobile being two.

      I agree that entry point does matter, as you might have noticed I try to stay mindful of the price I’m paying for entering a position. I think what I mean is more like this: I researched the EV investment theme a long time ago now. I realized that LG Chem would be one of the major players to deliver battery cells. I did not know who would produce the best EVs (Tesla, BMW, VW etc) but I knew LG Chem would be one of the companies to produce the batteries. So I took a long term position for that, way before the market cared much about LG Chem’s small battery segment. The stock only traded after how it’s Chemical business was doing. Now that has changed, but I have still to reap any greater returns, just been on a rollercoaster ride so far. I hope I’m right in the end, but there are as always no guarantees.

    1. Swedish Match is a tobacco company making money on peoples addiction to snus which contains a lot of nicotine. Fund managers today get pressure from many of their investors to invest according to environmental, social and governance guidelines which makes a better society etc. Tobacco companies would not qualify under the social requirements for an ESG fund in most definitions. Definitions of ESG might of course vary

    2. The biggest untold story in the ESG realm is that a lot of the “scoring” on various factors for companies is based on legions of sweat shop-esque min wage workers (predominantly in SE Asia) sifting through regulatory filings and to a very limited extent other public docs (annual reports, etc) and basically flagging keywords. If a company doesn’t specifically throw buzzwords in their filings, the scores for various sections of an ESG report will basically read 0/20 which can completely tank a company’s ESG score if a primary scoring metric is zeroed out.

      The US tobacco companies ironically tend to score pretty well on the ESG stuff (RAI sported a mid-70s score when it was public, MO/PM are similar) but get flagged frequently for client accounts that want to avoid “vice” investing.

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