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!