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.

Results Dec 2019: -0.39% Active Return vs S&P 500

US Portfolio Performance

Because Dec 2019 saw a weak market, the yearly returns for the 12 months ending 31 December 2019 are somewhat misleading. Nevertheless, for our US portfolio we now have data for 3 years since we decided to share our experiences with investing in US equities.

We didn't quite achieve the same return for the twelve months ending 31 Dec 2019, falling short by -0.39% compared to the S&P 500. However, a gain of 28.49% is still impressive in our view.

Looking at the performance over two and three years, the results are quite satisfactory, too: +10.59% per year since 31 Dec 2017 and +14.81% per year since 31 Dec 2016. All of these numbers are after taxes and fees. The following table summarizes these results:

	1 year	2 years	3 years
Optarix US	+28.49%	+10.59%	+14.81%
S&P 500	+28.88%	+9.93%	+13.00%
Optarix US Active Return	-0.39%	+0.66%	+1.81%

Values are annualized for periods longer than 1 year.

Here are the updated graphs for both the active return over 1 year periods as well as the information ratio of the Optarix US Portfolio against the S&P 500, both for the time from December 2018 to December 2019.

Please note that past performance is no guarantee for future performance.

In Other Developments

With the killing of an Iranian general in Iraq by a US-american drone, tension in the middle east have increased. Although at the moment it appears that both sides try to dial back their threats and responses, there is no gurantee this conflict is over yet.

Meanwhile the Brexit, the trade wars and the reduced economic outlook for many economies and the world as a whole will keep a lid on markets. We believe it is very unlikely that 2020 will see returns similar to 2019. Later this year, we'll also start seeing the influence of pools and election results in the United States.

At least the Brexit has become a bit clearer. The United Kingdom will leave the US by end of January 2020. Then a transition phase starts that is scheduled to end 31 December 2020. It remains an open question if both sides, the EU and the UK, will be able to negotiate a free trade agreement by then. As this matter evolves, its impact on financial markets may increase again.

Changes in our Portfolio

In December we reduced our position in Microsoft (MSFT). We increased our positions in Franklin Resources (BEN), Federal Real Estate (FRT), Automatic Data Processing (ADP), Wallgreens Boots Alliance (WBA) and Aflac (AFL).

Suggestions for Your Own Portfolio

Generally we suggest an equal weight portfolio. That means that all your positions have roughly they same market value. Obviously this changes over time as some positions go up in value and some may go down. If that happens rebalance by buying/selling to get each position back to their average.

Increase

With this idea in mind, here are some suggestions for companies for your consideration to add to your portfolio. These are all dividend aristocrats. As of writing the look more attractively priced than the average.

1. Cardinal Health (CAH)
2. Franklin Resources (BEN)
3. People's United Financial Inc (PBCT)
4. AT&T Inc (T)
5. Wallgreens Boots Alliance (WBA)

Decrease

Equally, if you have a position of one of the following and that position is above average in your portfolio, we suggest considering reducing them. Relative to all S&P 500 dividend aristocrats they are a bit more ambitously priced at the moment.

1. Becton Dickinson and Company (BDX)
2. The Sherwin-Williams Company (SHW)
3. Abbott Laboratories (ABT)
4. Brown-Forman Class B (BF.B)
5. S&P Global (SPGI)

As always, while we can make suggestions to consider, we cannot accept any responsibility for your investment decisions. We strongly recommend that you do your own due diligence, buy only what you understand, buy only what fits your individual objectives and circumstances, and in particular that you seek professional advice from your investment advisor.

Disclosure

We hold positions in all of the companies mentioned in this post. We also intend to add to our position in CVX in the next 3 trading days. We have no intentions to change any of our other positions.

More Portfolio Changes: BF.B, GOOG

We've made further adjustments to our US portfolio. If the share in our portfolio of any position goes above a certain threshold, we tend to consider selling some of that position in order to realize gains. At the same time we free up cash that allows us to increase a different position or to start a new position.

Brown-Forman (BF.B) had a good run and we sold some of the shares. We bought them in October 2016 at USD 46 and sold them at USD 69.22, a gain of 50.5% in about 16 month which is not a bad result. BF.B is a dividend aristocrat and we believe that they continue to be a good story. Liquor may have ups and downs but long term human mankind always gave in to the craving as history teaches us. They increased the dividend again in fourth quarter of calendar year 2017. On 23 Feb they declared a special dividend of USD 1.00 per share and also a 5 for 4 stock split. The dividend of USD 0.158 declared on the same day is already adjusted for the stock split, so is equal to the USD 0.1975 amount pre-split. BF.B has been paying dividends for 77 years and has increased the dividend in each of the lasts 33 years.

After realizing gains with selling some of our shares in Microsoft (MSFT) and AbbVie (ABBV) and after also selling our entire HCP Inc (HCP) position we used the proceed and some cash to start a new position with Alphabet Inc Class C (GOOG) at a price of USD 1,115.77. Alphabet with Google being it's biggest subsidiary and cash producer has a healthy growth rate of over 20% year-to-year. They are particularly strong in the artificial intelligence (AI) space and are also making very good progress in cloud computing. Obviously the other big guys in these markets are no push-overs. However, with the amount of cash Google produces and with the vast amount of the data they already have and continue to collect they have a lot of training data to make their AI technologies smarter as this additional data comes in. We believe GOOG is a great opportunity to participate in the commercial success of these exciting technologies.

Happy investing!

Disclosure: We hold shares in BF.B, MSFT, GOOG and ABBV. We do not hold a position for HCP. We have no plans to change any of these positions or create new positions in the first 48 hours of publishing this post.

Portfolio Changes: HCP, MSFT, ABBV, DOV, KMB

As of today we have re-adjusted our US portfolio selling one position, reducing two positions and adding two positions. This post outlines these changes.


We sold our HCP Inc. (HCP) position. Initially we bought them many years ago for their status as dividend aristocrats and high dividend yield, which at times was greater than 6%. However, a couple of years ago they somehow got the wrong end of the stick with some of their properties. Those were then spun off as HCR Manor Care. Also, they reduced the dividend from USD 0.5750 per share to USD 0.3700 per share. As consequence HCP lost their status as dividend aristocrat. With an expected growth of funds from operations (FFO) in the single digits percentage, we don't see how the dividend will start growing at a rate that would make it interesting to keep at the moment. At the same time interest rates in the US have already increased. For example the effective federal funds rate increased from more or less zero percent to 1.4% since fourth quarter of calendar 2015 to 1.42% as of 20 Feb 2018. In the same time frame HCP's share price went down accordingly from about USD 33 to USD 22. As the Fed is expected to increase the interest rates at least another 3 times this year, we believe that HCP's share price will continue to behave more like a bond. This means as the interest rates increase, HCP's share price will decrease. We reduced our HCP position over the years, all with a gain, and sold off the remaining ones with a gain of 21%.

We reduced our position in AbbVie (ABBV). ABBV were added to the portfolio in 2016 and have had a very good run since then. We sold the shares with a gain of 84.78%, also taking some money off the table and generate cash. They have increased their dividend in calendar Q1/2018 and then again for calendar Q2/2018. They also have increased their share buy back program. All of this is very positive and encouraging. They remain part of our portfolio with an adjusted position as we think that they will continue to deliver good results.

The other position that we reduced is Microsoft (MSFT). We bought them in 2012 when we realized that their cloud business strategy and their embracing of the open-source ecosystem started to pay off. We believe their success story is not finished but as with ABBV we wanted to realize some of the gains. We sold these with a gain of 237.56%.

With the additional cash available we decided to add two more dividend aristocrats to our portfolio. One is Dover (DOV) and the other position is Kimberly Clark (KMB).

In summary this means that we closed a position that we believe had become a non-performer (HCP) and replaced them with two new positions, DOV and KMB. In addition we reduced two positions, MSFT and ABBV, that had an excellent run to reduce our exposure somewhat.

Happy investing!

Disclosure: We no longer own HCP. We own shares of ABBV, DOV, MSFT and KBM. Apart from what is mentioned in this post we have no plans to change these positions in the next 48 hours of publishing this post.

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.