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!