Reducing CARR; Increasing XLK

Rebalancing

As part of the continuous rebalancing of our US portfolio, today we reduced our position in Carrier Global Corporation. The position was started early on 03 April 2020 when Ratheon and United Technologies (UTX) merged into Ratheon Technologies (RTX) and at the same time spun off Carrier Global Corporation (CARR) and Otis Worldwide Corporation (OTIS). Since this spin-off we added more shares in CARR. Today we sold some CARR shares at USD 18.51. With unit costs at about USD 14.46 this represents a gain of about +28%. An excellent yield for a holding period of about 7 weeks.

With the proceeds we increased our position in SPDR Select Selector Fund - Technology (XLK), which we had started on 15 May 2020. The reason we added XLK to the portfolio was the observation that over the last few years growth stocks and in particular technology stocks outperformed value stocks. Dividend Aristocrats are a very solid base investment and represent value stocks.

We picked the technology sector as by and large the age of internet, cloud, Artificial Intelligence (AI), big data and [insert your favorite technology buzz word here] has barely started. Previous technical revolutions such as the industrial revolution or the Age of Steam had what Carlota Perez calls an "Installation Phase" followed by the turning point. We agree with Perez in that we have most likely have reached that turning point for the Age of Information and Telecommunications. We believe that for the next few decades technology companies should be well positioned to benefit from what we think is a long-term trend. Companies such as Amazon, Google or Microsoft are just the beginning. There are many more to follow.

To spread out the risk and only gradually add technology stocks we decided to utilize an Exchange Trade Fund (ETF) to start this position. At some point we may decide to add more direct investments in technology companies to our portfolio. As of writing we already have positions in Apple (AAPL), Microsoft (MSFT), Atlassian (TEAM), Nvidia (NVDA), Texas Instruments (TXN) and similar more.

Do not assume, though, that we are moving away from dividend aristocrats. Instead we believe that those still represent a very sold core investment. Therefore we continue to own shares in all 66 dividend aristocrats. We simply are "spicing up" the portfolio with some investments in the technology sector where we believe we have a sufficient understanding of the long-term opportunities of the company in terms of benefitting from the Age of Information and Telecommunications.

By mixing in some technology stocks to the dividend aristocrats we expect the performance of our overall portfolio to be between dividend aristocrats alone and the S&P 500. In other words, we expect our specific portfolio structure to perform better than the dividend aristocrats alone.

References

For more information about the work of Carlota Perez in particular her book "Technological Revolutions and Financial Capital" see her web site at http://www.carlotaperez.org/

We do not receive any benefits from any of the source listed in references.

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!

Acquisition of NetSuite by Oracle

Oracle (ORCL) announced the acquisition of NetSuite for USD 9.3 billion. NetSuite is a cloud service provider who entered the market early on.

Larry Ellison, CEO of Oracle, is also a major investor in NetSuite, an early cloud-computing company. Larry Ellison owns 27% of Oracle’s common shares worth about USD 47.6 billion. Ellison and his family directly or indirectly also own about 40% of NetSuite. That share is worth about USD 3.5 billion at acquisition price. To address the conflict of interest, only independent directors of NetSuite negotiated the deal. Also, a majority of the non-Ellison shareholders in NetSuite have to approve the deal. This means there is still a potential of legal action, even if it’s just tire kicking.

For Oracle, this is one element helping them to catch up to others in the market like Salesforce (CRM), Amazon (AMZN) and Microsoft (MSFT). At the beginning of the cloud phenomenon, Larry Ellison dismissed cloud computing as marketing “gibberish”. Now, as late starters they have to buy their way into the market.

Disclosures

• We have a position in Microsoft.
• We have no position in any of the other companies mentioned in this post.
• We have no plans to change our positions in the next 48 hours.