The start into calendar year 2019 was quite impressive. The
upside is that – on paper – the portfolios of many US stock market investors have
seen a very good increase of value. On the downside this means that the
price/earning ratio (P/E ratio) is increased again significantly. The pool of issues
to choose from that are fairly priced, let alone underpriced, has reduced again.
Among dividend aristocrats there are only two companies with P/E ratios below
10, i.e. Nucor (Symbol: NUE) and AT&T (Symbol: T). At the other end of the
spectrum there are 5 with a P/E ratio above 30, and no less than 27 with a P/E
ratio of over 20.
Generally, we use a rule of thumb that the P/E ratio should be
no more than what we estimate the annual growth of earnings per share (EPS) will
be for the given company over the next 5 to 10 years. Obviously, we cannot look
into the future. We don’t know what the share market will be doing this week,
this month or this year. It will fluctuate up or down (or both) in some random
manner. We are convinced, though, that high-quality companies will do as well
as the overall stock market, and dividend aristocrats will increase their
dividend each year. And if one them doesn’t, we’ll sell shares that we may have
in that company over a short period of time and close that position.
Equally, it’s good to see that occasionally there is a new
addition to the list of dividend aristocrats. In Feb 2019 the new entrant was
People’s United Financial Inc. (Symbol: PBCT). Using our own ranking system,
PBCT is on position 1 of our “shopping list” at the moment. Generally, this
means we may start a new position, typically by spreading several buys over the next 12 months.
Let’s now turn to the specific results for the Optarix US
portfolio. For the 12 months endings 28 Feb 2019, the S&P returned 2.85%
while our US portfolio returned 4.39%. Remember that we calculate all numbers after
fees and after all taxes. These numbers mean that the Optarix US portfolio created
an active return of +1.54%, i.e. this is the percentage in addition to what the
S&P 500 returned for the same period. In the following graph you’ll see the
active returns for the 12-month periods ending Feb 2018 to Feb 2019. There are
13 such periods.
This graph shows that overall the Optarix US portfolio did
better than the S&P 500. One metric to assess the additional performance considering
the additional risk is called “Information Ratio”. The metric is a number without unit. The higher the value the better. For the 12 months period
ending 28 Feb 2019, the information ratio of our portfolio vs the S&P 500
was 1.43. Generally, any value greater than 0.6 is considered good or very
good.
The following graph shows how the information ratio has developed from Nov 2018 to Feb 2019. Please do not read an upward trend into this graph. There is way too little data to support any trend in any direction. We are sharing this data just so that you get an impression of how the Optarix US portfolio is doing in terms of additional return and additional risk versus the S&P 500.
The annualized performance of the Optarix US portfolio as of
28 Feb 2019 is summarized in the following table:
Optarix US
|
S&P 500
|
Active Return
|
|
Trailing 2 years
|
11.87%
|
8.67%
|
3.20%
|
Trailing 1 year
|
4.39%
|
2.85%
|
1.54%
|
As always, please keep in mind that past performance is no
indicator for future performance. Numerous studies have shown this. We don’t
believe that the Optarix US portfolio is any different. If we can get close to
the performance of the S&P 500 in the long run, that’d be great. At times we will fall short, e.g. in the 12 months ending 30 Jun 2018 (see graph above).
If the
performance is better from time to time, we take that as a bonus not as
something that happens just because we are so much smarter. We are not. We are just trying to apply some common sense including a buy-and-hold strategy. And we are happy to share our experiences both good and bad.
Happy investing!
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