Wednesday, December 5, 2018

Nov 2018 Results: +0.94% Active Return vs S&P 500

Another month and another one with volatility. The Optarix US Portfolio gained 5.19% in the twelve months ending 30 November 2018. Since the S&P 500 gained 4.25% in the same time frame, this means that our portfolio achieved an active return of +0.94%.

We are quite pleased with this result. It’s not as good as compared to the other benchmark we use, the S&P 500 Dividend Aristocrats (stock symbol SPDAUDP). This latter index gained 5.27% in the past 12 months. Therefore, our portfolio lost slightly with a performance of -0.08%.

Overall there seems to be a downward trend, i.e. the active returns decreasing. While we enjoyed the higher active returns in the past, we are equally aware that it’s hard to beat an index in the long run. The best you can hope for is to be approximately in the vicinity of the index’s performance.

With the trade conflicts, the looking budget crisis in the US, the uncertainty about further interest hikes of the Federal Reserve, we believe that volatility in the market stays high and there is a possibility that the long bull market comes to a halt.
Happy investing!

Saturday, November 17, 2018

Top 5 Positions as of 16 Nov 2018 - Nvidia

Again, no change in the Optarix US Portfolio in the last four weeks. The market volatility in October and in particular the bad performance of high tech stocks has had quite an impact on the top 5. Apple (AAPL) has left the group, so did Aflac (AFL). New entrants are Wallgreen Boots Alliance (WBA) and Stanley Black & Decker (SWK).

The updated top 5 list contains these positions. The percentage values is the change since we started the position:

  1. Vanguard Total Stock Market (VTI) +27.29%
  2. Emerson Electric (EMR) +23.18%
  3. Wallgreen Boots Alliance (WBA) + 26.75%
  4. Johnson & Johnson (JNJ) +25.74%
  5. Stanley Black & Decker (SWK) +20.79%
Technology stocks got quite a hammering in October. Nasdaq's decrease by about -9.20% in Oct 2018 is an indication as it's still considered to be tech heave. By comparison, the S&P 500 lost only -6.94% and the Dow Jones -5.07%. November so far saw the S&P 500 increase by 0.9% and the Dow Jones by 1.18% while the Nasdaq is down -0.79%. It almost looks as if there is a "crash" spread out over several months. The still increasing interest rates don't help. The trade conflicts don't help. 

The tightening job market doesn't help either as companies find it increasingly hard to find people to expand their business. If the measures of the current administration in fact lead to more (manufacturing) jobs being created in the United States, then this begs the question: Who will fill those jobs? And at the same time there is a trend towards reducing immigration which puts a limit on the labor pool as well.

Quite a few stocks are now in correction territory with more than 10% off the top. Some have suffered even more (see below). Going forward we believe that the volatility in the stock markets will continue for some time. Increasing interest rates will continue to put a downward pressure on share prices. The pressure may decrease as soon as there are noticeable signs that the Federal Reserve sees an end to the current cycle of increasing interest rates and assumes a neutral position.


The shares of Nvidia (NVDA) are now down about 42% from their top on 02 October 2018. While we agree that at levels of USD 292 per share the valuation of the company is quite ambitious, we equally believe that the current levels may represent buying opportunities. Our position in NVDA is down about 34% which we often use as a trigger to assess if we should close our position or to add to our position.

In this case we believe that main factor for the stock crash - minus 18% on Friday 16 Nov 2018 alone - is that there was a lot of speculation in this stock. People expected the company to grow at 30%, 40% or even more year-over-year. It turned out that there is still a lot of inventory in the sales channels for the gaming range of products which represent a little more than half of all revenues. Nvidia won't sell a lot this quarter which often is one of the more important quarters each year. 

However, the extreme level of inventory in the channels is an aftermath of the hype around crypto currencies and mining of Bitcoin and similar. Taking a step back, we believe this is a one-off situation, nothing permanent. The fundamental business model of Nvidia works. They have good growth rates for their three other business areas, namely data centers, AI and autonomous vehicles.

Disclaimer: We hold shares in all companies mentioned in this post. We have no intention to change or initiate positions within 48 hours of this post. This post is not financial advice. Consult with your certified financial advisor before making any financial decisions.

Saturday, November 3, 2018

Oct 2018 Results: +0.20% Active Return vs S&P 500

Wow, what a ride! Last month saw a number of ups and (mostly) downs in the US markets. People who got into the market only after the GFC (Global Financial Crisis) in 2008/2009 were given quite a scare.

Some pension funds and also ETF’s (Exchange Traded Funds) had annualized returns of more than 10% after tax until end of September. If you have bought shares or ETF’s after the GFC, then you might have grown accustomed to Y2Y performances in excess of 10%. The 10-year bull market was the biggest ever.

For example, some pension funds or ETF reported an average return of 10% or more per year after tax for many years. October however may have seen the value of your retirement savings drop by 5% or 10%. If you became nervous you are not alone. We are still in correction territory with more than 10% off the all-time highs reached earlier this year. Long term you shouldn’t be concerned too much. For example, in 2008 the S&P 500 was down by -37.22 percent at the end of that year. However, that was more than compensated since then with a CAGR (Compound Annual Growth Rate) of about 15.29% in the time January 01, 2009 to December 31, 2017. In this time frame USD 1.00 grew to USD 3.60. Not bad at all!

Results Versus S&P 500

Let’s look at October results now. Our Optarix US Portfolio increased by 5.50% from October 31, 2017 to October 31, 2018. In the same time the S&P increased by 5.30%, resulting in an active return of our portfolio of +0.20%. This means that in the 11 twelve-months periods from December 2017 to October 2018, our portfolio performed better in 10 of them. Only in the 12-month period ending June 30, 2018, our portfolio lagged the S&P 500 by -0.47%.

Results Versus S&P 500 Dividend Aristocrats

In comparison to the S&P 500 Dividend Aristocrats Index (SPDAUDP), our portfolio did better in that it has outperformed the SPDAUDP for the 11th twelve-month period. Still the October active return of 0.59% for the 12 months ending October 31, 2018, is the lowest on record. Note that we started the Optarix US Portfolio only on January 01, 2016, and published results only from January 2018. We cannot look into the future. The result of our portfolio may be better or worse in the future.

Interest Rates

In our opinion the bull market has come to a grinding halt because interest rates continue to increase. Over the last 2 years the effective date at which the US federal government can borrow has increased from 0.29% to 2.20% at the end of October. In lockstep the yield on 3-Months treasury bills grew from 0.26% to 2.29%. The yield for 10-years treasury notes has increased from 1.940% to 3.217%. At the same time the divided yields didn’t increase accordingly, both because the bull stock market and because dividends weren’t increased by a similar amount. As a result the stock market has now reached a point where an increasing number of investors sell shares and park their money in either bonds or cash.

Other Factors

While the interest rates are the most influential factor in our opinion, we also believe that other factors play a role as well. For example, one might ask why the Federal Reserve increases the interest rates in the first place. Well, the labor market is as strong as it hasn’t been in a very long time. In fact, the rate of unemployment at 3.7% represents the lowest value of this metric for 49 years. Businesses want to hire more people but with a tightening supply of qualified workers they have to offer higher wages and salaries. As a result, the labor costs for businesses go up which negatively impacts their profits. At the same time workers have more money in their pockets, both by higher wages but also to some degree by the tax cuts instituted by the current US government.

The problem is that both the tax cuts and the increased wages push interest rates higher. The tax cuts lead to the US government having to offer higher interest rates for borrowing money. The increased wages create more demand and hence businesses can charge higher prices. This we call inflation. To fight the inflation the Federal Reserve has to increase the interest rates so that it becomes increasing more attractive to save more instead of just consuming it.

Are the Market Turbulences over?

It will be very interesting to see if the wild swings (mostly down) in October were all there was. We suspect that there is more to come in the next couple of months. The result of the midterms may play a role but probably only if there was a surprise in terms of the power allocation in the House and in the Senate. The trade tensions with China will keep the market down as well unless there are tangible resolutions of that problem. And we shouldn’t forget the developments in security politics, e.g. the military tensions in the South China sea or the cancellation of missile treaties with Russia.

We estimate the downward potential at another 10% to 20% but that should then be it. And even if that happens, the yearly increases are likely to be more moderate than in the last 10 years until the interest increase cycle ends.

We have no plans to sell any position as we have bought them for the long run (at least 10 years). As cash becomes available, e.g. via dividends, we will continue to buy shares of companies that fit our requirements, e.g. dividend aristocrats and select high-tech companies. And we will stick with our rules to avoid decisions based on emotions instead of sound reasoning.

As always, please be aware that this post is not financial advice. We just want to share our experience with investing our own money. Do your own due diligence and ask your financial advisor.

Happy investing!

Disclaimer: We are merely sharing our experience with investing our own money. You are responsible for your own investment decisions. Always do your own due diligence and consult your certified financial advisor before making a decision regarding your financial assets.

Saturday, October 20, 2018

Top 5 Positions as of 19 October 2018

We didn’t by or sell anything since we last published the list of the five biggest positions in the Optarix US Portfolio. However, since 26 September there have been a couple of changes in the list. As of 19 October, the five biggest positions and their gains were as follows:
  1. Emerson Electric (EMR) +27.87%
  2. Vanguard Total Stock Market (VTI) +28.44%
  3. Apple (AAPL) +74.48%
  4. Johnson & Johnson (JNJ), +19.77%
  5. Aflac (AFL) +20.72%

Emerson Electric (EMR) remained our largest position. Stanley, Black and Decker (SWK) dropped out. Instead Johnson & Johnson (JNJ) entered in fourth. Apple moved up from fifth to third position. 

In particular in the last two weeks there were quite a few market drops for 2% or even 3% in a single day. Occasionally, there was a day with a slight uptick but overall it has become clear in our opinion that market participants have become much more cautious in light of the current challenges. 

For one the interest rates keep rising in the US for the time being. As of writing the yield on 10-year government bonds has increased to 3.195%, which is up from 2.339% at the end of September 2017. The interest rate for 3-months treasury bills increased from 1.04% to 2.27% in the same time frame. Looking at our portfolio the dividend yield changed from 1.99% to 2.20% in the same time frame. Given this data we believe that there is not much upside at the moment in the markets until it becomes clearer by when the US Federal Reserve will change from tightening to neutral. 

Rising interest rates are poison for the stock market. In addition to that we also have the increasing trade tensions but also political uncertainties. For example, the Jamal Kashoggi case is threatening the relationships between the US and Saudi-Arabia. The United States are considering recreating from nuclear arms agreements with Russia. The trade war with China as well as the military issues in the South China sea don’t really help either. The outcome of the midterms, which looked like a homerun for the Democrats, is no longer certain either. These just some of the factors that we believe negatively influence the market participants at the moment. 

What does this mean for the long-term investor? We believe it is more important than ever to spread the risk across a large number of positions. And it is critical to invest only in high-quality companies such as dividend aristocrats. As an investor it’s important to minimize emotions as much as you can when observing the daily ups and downs of the market. Long-term we are confident that shares still represent a very good option to participate in the long-term growth of an economy. If the market falls, then what it really means is that you can buy the same quality shares at lower and hopefully more reasonable prices again. Rising profits could also help to get valuations back to a more reasonable level. 

Happy Investing! 

Disclaimer: We own share in all the companies mentioned. We have no plans to initiate or change any position in any of the stocks mentioned in this post in the next 48 hours. This post is not financial advice. You are responsible for due diligence before making financial decisions. Always consult with your financial advisor.

Sunday, October 7, 2018

September 2018 Results: +1.67% Active Return vs S&P 500

In the 12 months ending 30 September the S&P 500 gained 15.66%. In the same time frame the Optarix US portfolio gained 17.33%. This represents an active return of 1.67%. This means that our portfolio performed better in nine of the ten rolling 12-months period from 31 December 2017. The active return is somewhat lower than for the 12-months ending 31 August 2017 which was 1.81%.

The index representing just the dividend aristocrats - SPDAUDP - gained 12.53%. The Optarix US portfolio yielded an active return of 4.80%. Compared to this index our portfolio performed better in all ten rolling 12-months periods from 31 December 2017.

Our intention is to keep our portfolio as close as possible to these two indexes in terms of performance. Since we started to publish results at 01 January 2018, this has worked out as planned. Keep in mind the usual caveat: Past results are no indicator for future results.

We had a couple of changes in the portfolio in September. We sold some of the Atlassian (TEAM) shares. Shares of Exxon Mobil (XOM) were added. Both transactions served the rebalancing the portfolio and spreading the risk further.

In light of the increase of the yield of 10-years US government bonds from 1.5% in Q2/2016 to about 3.2% as of writing we continue to be concerned about the relatively high evaluation of the US share market. While there are still high-quality companies that currently have a PE-ratio of less than 10, most are above 15, some even above 20 or 30. And that does not account for high-tech companies that have PE-ratios that are even higher. If a company has a sustainable growth rate of 50% year-to-year then PE-ratio of 50 may be justified. No all companies with that high of a valuation will have that kind of sustainable growth rate.

In addition the US labor market continues to be very strong. The unemployment rate is now at the lowest level since 1969. Increasingly employers find it harder to find suitable staff or they may have to pay significantly higher wages or salary. If some of the new trade barriers result in even more jobs being created in the US while at the same time immigration is decreasing, then this will result in even more pressure to improve compensation packages.

As the workforce has more money to spend and as manufacturers or service companies have to pay more for their staff, prices will inevitably increase. With more tariffs in effect, imported goods become more expensive as well.

All of these factors, we believe, will cause continued upward pressure on interest rates. The Federal Reserve has just indicated that they are far from taking a neutral stance. This suggests that they may increase interest rates more and faster than the market may have anticipated so far. And following suit we believe that the share markets won't do as well in the next 12 months as they did in the previous 12 months. In particular the next few months leading up to the mid-term elections in the US could bring quite a few nasty surprises.

By spreading risk further and by choosing shares of high-quality companies we believe the Optarix US portfolio should continue to do quite well in comparison to stock market in general.

Happy Investing!

Disclaimer: We are merely sharing our experience with investing our own money. You are responsible for your own investment decisions. Always do your own due diligence and consult your certified financial advisor before making a decision regarding your financial assets.

Tuesday, September 25, 2018

Top 5 Positions As Of 26 September 2018

Because of the changes in the Optarix US portfolio in September 2018 as well performance of individual positions, the top five positions in our portfolio has changed. As of 26 September 2018, the five positions with the highest weighting are now:
  1. Emerson Electric (EMR) +36.6%
  2. Vanguard Total Stock Market (VTI) +36.9%
  3. Stanley, Black and Decker (SWK) +38.5%
  4. Aflac (AFL) +29.5%
  5. Apple (AAPL) +76.9%

The position that dropped from the last list is Atlassian Corp Plc (TEAM). We reduce that position earlier this month. It was the 4th time that we reduced TEAM to reduce our risk exposure and rebalance our portfolio.

Apple (AAPL) has re-appeared in the top 5. We started this position in July 2015 at a share price of USD 125.00. We sold some shares in December 2017 at USD 174.89. As of writing AAPL is traded at about USD 222.00.

While we like it a lot when shares gain in value, we use the right opportunity to reduce larger positions and to either add to smaller positions or - more likely at the moment - we start new positions altogether. At the moment the portfolio is still in a very early stage. By that we mean it has only 35 positions. We are aiming for about 50 to 100 positions in total, most likely a combination of dividend aristocrats and high-tech growth companies.

We see high-tech growth companies as a higher risk. However, at the moment they also tend to produce gains faster. Effectively we are accepting the higher risk for better returns. At the same time we also take money of the table at the right time to generate cash for starting new positions in either dividend aristocrats or other high-tech stocks.

Happy investing!

Disclaimer: We own shares in all companies mentioned. We have no plans to start or change a position in any of the stocks mentioned in this post in the next 48 hours. This post is not financial advice. You are responsible for due diligence before making financial decisions.

Saturday, September 15, 2018

Portfolio Changes 12 Sep 2018

The Sell

One of the rules we employ to manage our US portfolio is to reduce positions that have grown much faster than other positions. That point is reached if a position’s share in relation to the total portfolio has become too big.

Our position in Atlassian (TEAM) has reached this point for the second time this year. In May we already sold some shares, and now – on 12 September – we sold some more but will hold on to most of our position. While the share price was USD 62.90 in May, we now received USD 89.65 per share. Because this is also a significant relative increase in such a short term, in our view the risks associated with this position has increased, too.

Here is a list of our trades in TEAM for the Optarix US Portfolio:
29 Dec 2015
02 Jun 2016
01 Aug 2016
05 Jun 2017
05 May 2018
12 Sep 2018

Trade 1 was for starting the original position. Trade 2 added more shares at a reduced price. We did trade 3 when the price allowed selling to break even for the overall position. As you can see, each time the price was even higher. Between Dec 2015 (shortly after IPO) and Sep 2018 the share price almost tripled. Therefore we took more money off the table with trades 4 to 6 and move the proceeds into other existing or new positions. Bottom line we see a gain of 275% at the moment. We continue to participate in future increases with the remaining position in TEAM.

Note that TEAM are investing all cash back into the business and as a result don’t show a profit, let alone pay a dividend. Therefore the only way to generate cash from this position is to sell shares when the price is right. This high-tech company is therefore fundamentally different than a dividend aristocrat. The latter create cash in the form of a dividend that increases once a year.

The Buy

With the available cash from selling some TEAM shares and from dividends, we started a new position in Exxon Mobil (XOM). From the dividend aristocrats in the S&P 500 that we don’t already own, this was the one with the lowest price/earnings ratio (P/E ratio). Exxon has been pay a dividend since 1911. It has increased its dividend for about 35 years. The dividend yield is currently at 3.96% which is quite nice.

We are aware that some investment funds and asset managers are selling assets in the oil industry. To some degree this is a personal decision in our view, in some cases driven by ethical or moral reasons. We respect that. However, we also believe that XOM is a great addition to the Optarix US Portfolio. The dividend yield is great and if XOM continues to raise the dividends each year (as it did in the last 35 years) it represents a good source of cash that we’ll be happy to use in the future to broaden our investments even further.

This is yet another of how we use the opportunity to reduce a position that has seen substantial gains and start a new position with the proceeds of the sale and the accumulated dividends of the portfolio positions. Both, reducing one position and adding a new position, reduce the point risk each position represents. We review our positions regularly and rebalance our portfolio as needed.

In total the Optarix US Portfolio now has 35 positions plus a small portion of cash. Going forward we intend to eventually have a position in each of the S&P 500 dividend aristocrats combined with a selection of positions in hightech companies.

Happy investing!

Disclaimer: We own shares in TEAM and XOM. We have no plans to change these positions or to start new positions of any company that may be mentioned in this post. This post does not represent a recommendation to buy or sell any securities (mentioned or not). You are responsible for your own decisions. Do your own due diligence and speak to your financial adviser before deciding.