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!

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.

Nvidia

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.

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 11^th 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.

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.

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.

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.

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:

Trade	Date	Transaction	Price
1	29 Dec 2015	Bought	30.79
2	02 Jun 2016	Bought	24.91
3	01 Aug 2016	Sold	29.99
4	05 Jun 2017	Sold	36.93
5	05 May 2018	Sold	62.60
6	12 Sep 2018	Sold	89.65

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.

Summary

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.

August 2018 Results: +1.81% Active Return vs S&P 500

The twelve months ending 31 August 2018 showed another good performance of the Optarix US Portfolio with an increase of 19.20% versus 17.39% for the S&P 500. This represents an active return of +1.81% of our US portfolio. The active return is the excess return over a benchmark.

Compared to the dividend aristocrats index (SPDAUDP), the second benchmark we use, the performance of the Optarix US Portfolio was +4.24% over the benchmark. This, too, is a satisfying result.

The trailing twelve-month (TTM) period ending 31 August 2018 was also the 9^th consecutive TTM period with gains in excess of 10% after tax and fees. Note, though, that we are not after absolute gains. Markets can go down, for example during the Global Financial Crisis (GFC) in 2008/2009.

The more important view is how the portfolio performs compared to benchmarks. In terms of this latter metric, the Optarix US Portfolio performed better than the S&P 500 in 8 of 9 twelve-month periods and better than the SPDAUDP in 9 of 9 twelve-month periods since December 2017. We started this portfolio in January 2017 only.

These results are water under the bridge if you like, the past. What is ahead of us?

What's Ahead?

There are the still unresolved issues around global trade and tariffs. In particular the measures taken by the Trump administration can potentially have a significant impact on the US economy and consequently on the US share markets. If history can tell us anything then we’d expect these things to be resolved eventually, if needed by a new administration. Alternatively, the mid-terms could result in a congress with a democratic majority in the House and – less likely – a majority in the Senate, which could help with resolving the problems, too.

Another challenge could be the increasingly tight labor market in the United States. Unemployment – regardless how it is measured – has been falling since the GFC. Employers find it increasingly difficult to attract and retain staff, at times only at the price of offering better compensation packages. Wages are on the rise.

With bigger paychecks retailers will be able to keep prices on similar levels or perhaps even increase them. Results from companies like Walmart or Target also indicate that the retail sector may have found a way to counter the market presence of Amazon to at least some degree. However, the upward pressure for prices can lead to higher inflation. This in turn leads us straight to the interest rates.

The Federal Reserve is poised to continue their measured approach towards increasing the interest rates as well as reduce their balance sheet from the quantative easing (QE) they used in the aftermath of the GFC. Increasing interest rates and at the same time an increasingly stronger US Dollar makes it harder for countries and companies that have debt denominated in US Dollar. Their financing costs increase, and some may even default. Turkey is an example where an increasing number of companies struggle due to the devaluation of their currency compared to other currencies.

Where does that leave us? We believe that there are significant risks ahead. However, we also believe that there have always been times with significant risks or actual bad events, including wars. And still, the markets recovered eventually, and there were always companies which got through downturns better than others. Dividend Aristocrats are just a few examples.

Bottom line: We believe that there is no need to rethink the rules we employ for the Optarix US Portfolio. We continue to be fully invested in about 80% dividend aristocrats and about 20% technology. Overall, we’ll continue to reduce the point risk by spreading the portfolio over an increasing number of positions. And of course, we take a long-term view, which means we intend to keep all positions indefinitely unless there is a significant change that impacts our assessment of a position.

As always, we only share our experience and thoughts. None of this represents a recommendation to buy or sell securities of companies mentioned or unmentioned. You need to do your own due diligence and make your own decisions. All we can be is a source for inspiration.

Happy investing!

Top 5 Positions As Of 16 August 2018

To give you some insight into which companies our Optarix US Portfolio is invested in, here are the top 5 positions in terms of value as of 16 Aug 2018:

1. Emerson Electric (EMR): +30.86%
2. Vanguard Total Stock Market ETF (VTI): +33.24%
3. Atlassian Corp Plc (TEAM): +211.36%
4. Stanley, Black and Decker (SWK): +30.06%
5. Aflac (AFL): +26.23%

Note that there are some caveats. This list represents the status at of 15 August. By the time you read this, the top 5 positions in the Optarix US Portfolio are likely to have changed. Any of the positions may have been increased, reduced or closed, i.e. we may have sold all shares of that position. Equally it is possible that we may have started a new position that has become a top five holding.

The percentage changes shown in this list are the gains in relation to the unit costs at the time of starting the position.

What this list shows you, though, is that at that time we had a mix of three elements in the top five.

Firstly we have VTI which is a passive index fund representing the entire US stock market. We have this position as a remnant from when we started this portfolio. To increase the spread of risk, we decided to just buy the entire market at the beginning. Over time we then added individual stocks for this portfolio.

The second element are three companies that are dividend aristocrats. These are companies who have increased their dividends every year for at least 25 years. SWK, EMR and AFL are dividend aristocrats.

Finally, we have a high-tech value in the top five, TEAM. Atlassian has a very interesting business model and exciting products which we have used in a former live for many years. We started this position shortly after they were listed at the stock exchange. Their share price has been growing very nicely since then. Their products are used by some of the best brands on this planet to manage their software engineering and other projects. We continue to believe they have a bright future. That's why we have this position. It's also worth noting that despite having sold some of our TEAM shares on two occasions to realize some gains and to re-balance the portfolio, they have re-appeared in the top five once again.

Happy investing!

Disclaimer: Please be aware that past results are no predictor for future results. Posts on this blog and elsewhere do not constitute investment advice. You are solely responsible for your investment decisions. Please consult with your financial and/or tax adviser before making any investment decisions.

July 2018 Result: +2.37% Active Return TTM vs S&P 500

After June was a bit disappointing when comparing the Optarix US Portfolio to the S&P 500, July result was much better. While June had a negative active return of -0.47% for the 12 months ending 30 June 2018, the 12 months period ending 31 July 2018 resulted in an active return of +2.37%.

The results in comparison to the S&P 500 Dividend Aristocrats index (SPDAUDP) were also better in July than in June although still not on the same level as in the months December to May. Compared to the SPDAUDP our portfolio produced an active return of +4.20%.

This is certainly welcome news. Obviously there is no guarantee that future performance will be similar or even near to these past results. We can’t promise any results for that matter. All we want to do is sharing our experience by describing how we allocate our funds to different asset classes and positions. If our asset allocation leads to good results, that’s great.

More important, however, is that based our experience, your do your own research, talk to your certified and trusted financial advisor, perhaps to your tax accountant as well and then form your own opinion. It’s important that you also consult other sources. Also, your individual situation plays a very important role when it comes to investing. For example, the scenario is quite different if your save for your retirement which is like 10, 20 or more years away, or if you save for buying property or a car in a couple of years’ time.

Happy investing!

Rebalancing July 2018

On 20 July 2018 a couple of our positions reached the point where their share in the overall Optarix US Portfolio became too large for our taste.

We sold some of our position in VF Corp (VFC). We started the position at a share price of USD 53.12 in February 2017. We now sold some of our shares at a price of USD 93.44. This represents a realized gain of 75.9%.

We also reduced our position in S&P Global Inc (SPGI). We bought our shares in February 2017 at USD 126.40 per share. We sold them at a price of USD 212.37, a realized gain of 68.0%.

As a result of these two sells and combined with the accumulated dividends we started a new position in Walgreen Boots Alliance (WBA). We use is picked the company with the lowest P/E ratio from the list of dividend aristocrats that we don't own yet. This was WBA this time. The share price for the buy was USD 64.90. As always when we start a position the intention is to keep it indefinitely.

This post highlights two of the rules we use. The first rule is reducing positions that have appreciated in value to a point that their share becomes too large in relation to the overall portfolio. When that happens, we want to take some of the gains off the table while at the same time reducing the exposure and risk to some degree. At the same time, we keep the majority of the position and participate in potential further increases in value.

The second rule we used in these transactions was to look at the list of all dividend aristocrats in the S&P 500 that we don’t already own. We then picked the one with the lowest P/E ratio to add to our portfolio. In total this added one more position to portfolio, reducing the average risk that any of the existing positions represents.

Note that past performance is no guarantee for future performance. We cannot look into the future. In particular the performance of VFC and SPGI described in this article doesn’t include any major bear markets like the Global Financial Crisis (CFG) so are not representative for the long-term performance of these and other shares.

Happy investing!

Disclosure: We have positions in VFC, SPGI and WBA. We have no intention to change these positions in the next 72 hours.

June 2018 Result: +3.64% Return over SPDAUDP

The past month was a roller coaster. The tariffs on steel and aluminum that the US imposed came into effect. Canada, Mexico and the European Union responded with tariffs of similar quality and quantity. The G7 summit ended without a joint communique.

We use two benchmarks for the Optarix US Portfolio: The first is the S&P 500 and the second benchmark is the S&P 500 Dividend Aristocrats index. With our portfolio selection we aim at matching these indices.

For our portfolio it means that it didn’t beat the S&P 500 in the 12 months ending 30 June 2018. The result was an active return of minus 0.47%. While disappointing it’s not unexpected that occasionally the performance of our portfolio is slightly less than the benchmark. We have allocated a significant percentage to dividend aristocrats which as a group underperformed by about 0.5% compared to the S&P500.

The average active return is still +2.96% which is not a bad number. However, as the graph shows the average return had its high point in Feb and has been in decline since then. With increasing rates and yields, dividend aristocrats – which at times tend to be have a little bond-ish – are out of fashion. This will end at some point, though. Long-term (i.e. last 10 years) dividend aristocrats delivered an average return of about 10.32% per annum, which is higher than the S&P 500 over the same time frame which had a return of about 8.31% per annum.

Since the Optarix US portfolio has a majority allocated to dividend aristocrats our second benchmark might be a bit more useful at this point. The S&P 500 Dividend Aristocrats index (SPDAUDP) tracks all of the dividend aristocrats in the S&P 500. The active return of our portfolio for the 12 months ending 30 June 2018 was +3.64%, so the picture looks better when compared to that second benchmark. On average the active return of the Optarix US portfolio over the SPDAUDP was +5.49% for the 7 months Dec 2017 to Jun 2018.

We believe that the Fed’s rate increases will continue to put downward pressure on dividend aristocrats when compare to the overall market. However, we are in it for the long-run, selling shares only to rebalance the portfolio or when a position took a bad turn.

We believe that the Fed’s rate increases will continue to cause dividend aristocrats to perform worse than the overall market. However, we are in it for the long-run, selling shares only to rebalance the portfolio or when a position took a bad turn. Rates increase will come to an end at some point. And we believe that dividend aristocrats – as a group – will continue to raise their dividends each year like clockwork. Eventually they will perform in line with or better than the market again.

The trade issues will continue for some time, perhaps even years. However, we remain optimistic that reasonable negotiation and solutions will prevail. We do not believe that any country will benefit from long-term protectionism. Where there are tariffs or other trade barriers they should be removed, even if that happens only gradually and may take many years.

We also share interesting news on Twitter about once a day.

Happy investing!

Realizing Gains as Instrument for Portfolio Management: The Example of T. Rowe Price

At Optarix, like everywhere else, we monitor how share prices are doing for all positions that we already own or companies that we might be interested in. And while we enjoy if a positions goes up in price, we are equally aware that prices can come down, too. There always seem to be shares, sectors, industries, geographies, etc. that are in favor or out of favor. As a result companies may be overvalued or undervalued. In almost all cases we don’t know if that is the case. We don’t know if selling or buying will be at a good price. We know that for any given trade we will not get the timing right.

On the other hand, with enough trades over time and following a set of rules, on average we get acceptable prices when we sell or buy. One of the rules that we use is that we sell stocks when their price has increased by a certain percentage. This percentage is not fixed and depends on a number of other factors, e.g. the share of the position in the overall portfolio.

Let’s look at our position in T. Rowe Price (TROW). We bought shares in July 2016 at a price of about USD 74.00. Their share price has developed quite nicely. Along with that the size of their share in our US portfolio increased as well. As that share increases, the risk associated with this single position increases as well. We don’t mind taking risks. However, we aim at taking calculated risks. In this case, we decided to reduce our position to some degree. We sold shares at about USD 125.00 which represents a realized gain of 68.92% since July 2016. This is quite a decent result and it freed up some cash that we then used to start a new position in a company that we believe is a good addition to our portfolio. At the same time we reduced our exposure to TROW.

Another aspect is timing. There is very well the case we got the time wrong. Perhaps we sold too early. In that case we continue to participate in the share price increased with the remainder of our position, admittedly to a somewhat smaller degree. Perhaps we didn’t sell enough and there is some bad news around the corner. We are not aware of any and don’t want to start a rumor either. But there’s always this thing call “black swan” event. How do we know what we don’t know? And in case that should happen and TROW’s price isn’t going anywhere, we have now taken some of our money off the table and put it into a new position that helps us spreading the risks.

We posted about the approach of taking some money off the table previously when we discussed our position in Brown-Forman (BF.B). Looking at that example and now TROW, here is a table with the realized gains of these two examples:

Symbol	Buy	Sell Price	Gain
BF.B	USD 46.00 (Oct 2016)	USD 69.20 (Feb 2018)	+50.43%
TROW	USD 74.00 (Jul 2016)	USD 125.00 (Jun 2018	+68.92%

Please note, that this performance is the past. And while we aim at having an annualized performance similar the S&P 500, we are only interested in the long-term performance. These examples are intended only to demonstrate a technique that helps with the following:

1. Rebalance your portfolio in terms of risk and potential,
2. Decide when to sell some of a position,
3. How to reduce exposure to a given position
4. Free up cash to increase a different position or to start a new position

We’ll also share information where we bought additional shares in a company because we got the timing wrong because the price decreased after the start of the position. Fundamentally we think that most of the time we get the timing wrong, so will use approaches that average out such transactions long term.

Happy investing!

May 2018 Result: 1.35% Active Return TTM

The results for May 2018 again yielded in a return better than the S&P 500 in the trailing 12 months (TTM). The active return of our US portfolio was 1.35%. While this is still a good result – we beat both of our two benchmarks - the active return has been decreasing since February. We believe this is mainly caused by the fact that our US portfolio contains to a large degree of dividend aristocrats. With most investors buying dividend aristocrats for their dividends, when the actual interest rates increase dividend aristocrats tend to under-perform the broader market.

This effect is further amplified with the strong job report on Friday, 01 June 2018 for the US labor market. US businesses created 223,000 new nonfarm jobs and the rate of unemployment decreased to an 18-year low at 3.8%. At the same time pressure to increase wages suggests that businesses increasingly compete to keep existing and attract new employees. This upward pressure may require the Federal Reserve to move faster and more substantially in order to keep inflation at bay.

The increases in interest rates are reflected in different ways. The yield on 10-year treasury notes has increased to about 2.9%, the highest since December 2013. The yield on 3-month treasury bills is at about 1.89%, the highest since the GFC in 2008/2009. We can also see this in the dividend yield of our US portfolio which is at about 2.29%. This, too, is the highest since Dec 2013.

We expect our portfolio to not perform as well as the S&P 500 until the interest rates stops increasing. When that will be and by how much the interest rates will be answered in the future. Regardless of this we believe that the dividend aristocrats in our portfolio will continue to increase their dividends by about 5% to 8% per year. This should put some safety cushion under their market value. The other positions in our portfolio represent companies with very strong positions in their respective markets and a fantastic growth trajectory in each case. In combination, we believe that our US portfolio will continue to do well in the long run.

Happy investing!

April 2018 Result: 2.41% Active Return TTM

April 2018 was yet another month where our US portfolio performed better than the S&P 500 in the trailing twelve month period (TTM). This time it was 2.41% which is noticeable lower than for the 12-month periods ending in Dec 2017 and Jan, Feb and March 2018. With raising interest rates dividend aristocrat behave a little bit more bond-like, that is as the interest rates go up the share prices will have some downward pressure. As a result the dividend yield for the dividend aristocrats tends to move somewhat in parallel with the yield on interest-free investments like for example the 3-months US treasury bills in the secondary market. Our US portfolio has allocated about 80% of its funds to dividend aristocrats at the moment.

We have previously discussed the rising interest rates. We continue to believe that these represent the biggest threat to gains in the share market for the time being. Unless the US Federal Reserve indicates that interest rates have reached the desired level, we believe the rising interest rates will continue to put downward pressure on share prices.

Taking a much longer timeframe such as 10 years or more, history tells us that interest rates fall and rise. After each rise there was a fall in the past. After each fall there was a rise. At the moment we are in a longer period where interest rates are trending up. At some point this will come to a halt. Nobody knows yet when that will be as it would require to predict the future.

If you buy shares with the intention to keep them indefinitely the current share prices doesn’t really matter at all. All that matters is what you think the earnings are doing which in turn feed dividend payments. Companies like Stanley Black & Decker (SWK) have paid dividends for 140 years and have increased their dividend each year for 50 consecutive years. It looks as if at least for SWK the ups and downs of the interest rate over the last 50 years didn’t really matter when it came to increasing the dividend. It just was more each year. We don’t expect this to change any time soon for SWK but also for a few more positions we have in our US portfolio.

Obviously we like a higher active return over a lower. Still, we are happy with 2.41% over the S&P 500 over the last 12 months. We are also prepared that until the interest rates in the US stop rising our portfolio may not return as much as in scenarios where the interest rates are flat or even falling. We’ll see. We cannot predict the future either.

Happy investing!

March 2018 Results: 4.09% Active Return TTM

The US stock markets had a negative quarter with declines of -2.49% for the Dow Jones and -1.22% for the S&P 500. The NASDAQ was hit in February and March as well but was able to hold on to year-to-date gains of +2.32%. The NASDAQ benefitted from a 7.36% gain in January.

How did the Optarix US portfolio do in this time frame? Year-to-date it’s down by -1.17% so did better than Dow Jones and more importantly better than our benchmark the S&P 500. Compared to end of March 2018, the S&P 500 is up +11.77% while the Optarix portfolio is up +15.86% given our portfolio and active return of +4.09% over the trailing twelve months (TTM). The S&P 500 gained about 7.89% per years over the last decade. If our active return would have been 4% of that time period, our portfolio would have made about +11.9% per year, and that would have been after tax.

The graph shows the active returns for the twelve months periods ending in Dec 2017, Jan 2018, Feb 2018 and Mar 2018. On average the active return was +4.36%. Any data we have from periods before Dec 2017 is not meaningful as our investment strategy change from about mid of 2016 to Feb 2017.

Of course, past results are never a guarantee for future results. Perhaps we were just lucky with our particular investment style. On the other hand we believe that our reasoning is plausible and this has so far been confirmed by the data. We typically invest about 80% to 90% in companies that have a track record of delivering increasing earnings per share (EPS) and/or increasing dividends, and combine that with 10% to 20% growth stocks that we believe have a proven business model with substantial growth. Frequently this will be well-established high-tech companies.

Obviously we look at other factors as well. For example we believe that if a company pays dividends, the payout ratio should not be too high. We prefer companies with a payout ratio of less than 50%. We also look at figures like the debt level and free cash flow. Typically we review our position in companies as soon as they become the target of an acquisition. With a buyer in the picture we think this brings with it a lot of speculation around the stock price. Sometimes it is just a rumor that doesn’t materialize. At other times the deal will fall through. We certainly will always do some research about the potential acquirer. Fundamentally, we are more interested in long-term potential than short term trading gains. Generally we follow a buy-and-hold strategy.

We have mentioned in earlier posts that we believe the increasing interest rates in the US represent a risk to the stock market. We continue to believe that the climbing interest rates will put at least a damper on stock prices. Perhaps what happened in the first quarter of 2018 was just an early taste of how much more negative things in the next quarters. We believe that the stock market is still a bit overvalued, so are not holding our breath that we’ll see another 20% or so gain in the S&P 500 in 2018. We are happy to be proven wrong, though.

Happy Investing!

US Labor Market Report February 2018

The US Labor Market Report for February 2018 shows an increase of 313,000 added jobs to the nonfarm payroll employment. The unemployment rate was unchanged at 4.1% (Chart 1). Both numbers were reported by the US Bureau of Labor Statistics on 09 March 2018. This compares quite favorably with economists’ estimates who thought the number would be closer to 200,000. This is the highest increase in a single month since July 2016 (Chart 2). Total employment rose by 785,000. Year-to-year average hourly earnings have increased by 2.6%. This latter number was lower than the 2.8% economists expected.

The markets took this as indications that the economy continues to grow nicely while wages do not grow as fast as anticipated. This was interpreted as allowing the Fed to continue their gradual approach towards raising interest rates. If the wages growth is lower, it is expected to create less of an upward trend on inflation. As a result the markets responded with gains of major indexes of between +1.74% for the S&P 500 and +1.79% for the NASDAQ.

Our take on this is: we believe that although this may take some pressure off the Fed it nevertheless means that interest rates will continue to rise. The rate of unemployment is already low, the participation in the labor market is increasing and therefore employers will have to offer more money. This puts upwards pressure on wages. Growing wages in turn create more demand and that may push prices further up which is what we call inflation. It remains to be seen if the Fed is able to let inflation run to the value they feel comfortable with and then bring it to a stop with the currently planned measures.

We continue to believe that the higher and increasing interest rates are not sufficiently reflected in the valuations of the share markets yet. Some companies have increased their profits and/or their dividends and share buybacks, but some of the profits were windfall profits because of the tax reform and some of the dividends were special dividends that won't repeat. While we remain fully invested with our US portfolio we believe that the overall growth for this year will be more on the more moderate end of the spectrum. We are convinced that the Optarix US Portfolio continues to be well-positioned for the current scenario.

Happy Investing!

Source for images: Bureau of Labor Statistics, U.S. Department of Labor, https://www.bls.gov/news.release/pdf/empsit.pdf (retrieved 10 March 2018)