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!