Results Nov 2019: +1.88% Active Return vs S&P 500

US Portfolio Performance

Another good month for our Optarix US portfolio. Our objective is a result that is roughly in line with the S&P 500, doing +1.88% better than the index over the last 12 month and 1.39% better each each over the trailing 2 years is quite satisfactory.

Looking at the performance of our own Optarix US Portfolio as of 30 Nov 2019, the results are quite satisfactory, too: +15.68% for 12 months and 10.31% annually for the last 2 years. All of these is after taxes and fees.

	1 year	2 years
S&P 500	+13.80%	+8.92%
Optarix US Portfolio	+15.68%	+10.31%
Optarix Active Return	+1.88%	+1.39%

Values in this table are annualized for periods of over one year.

Here are 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 November 2018 to November 2019.

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

Other Developments

Since the last block post we have also completed our goal to add posiitions for all dividend aristocrats in the S&P 500 to our portfolio. The dividend aristocrats, i.e. companies that have increased their dividend each year for at least 25 consecutive years, represent our base investment.

In addition we have a small selection of investments in the hightech sector. Examples are companies such as Microsoft (MSFT) or Atlassian (TEAM). We select these companies based on our opinion about their business model, their growth perspectives, their profitablity and - where present - a history of increasing their dividends from when they started to pay dividends.

Over the last few months the trade wars and the looming Brexit were topics that we think influenced the markets. Surprisingly despite the trade tensions, the economies in the US has been astonishingly robust. The Federal Reserve has cut the rates this year and believes that for now they are in an observing position. If needed, however, they will act when and as appropriate.

The ECB is keeping interest rates low as well. They have also restarting their bond buying program, pumping even more liquidity into the markets. Interest rates for German Bunds remain negative and it doesn't appear as if they move into positive territory any time soon.

At the time of writing the newly elected parliament in the UK has approved Boris Johnson's Brexit deal. The plan is that the UK will leave the EU at 31 January 2020. For the relationships after the Brexit the UK wants to negotiate an agreement with the EU by December 2020. We believe this timeframe is very ambitious looking at past examples of trade agreements. In all cases the upside is that finally there is clarity: The UK will leave the EU, with or without an agreement.

In the US two articles of impeachment against President Donald Trump have been approved by the House of Representatives. However, they have not been passed on to the Senate. We believe that unless something material changes, the impeachment will struck down in the Senate by the republican majority. We also believe that for the time being the impeachment will have little impact on the financial markets.

It terms of US politics we think it will be more interesting to follow reliable polls after the democratic challenger has been determined and as both large parties prepare for the elections at the end of 2020. We think the result of those polls is likely to have a bigger impact on the markets in particular if they are tight, i.e. within the margin of error, or inconclusive.

Portfolio Changes

In November we increased our positions in Colgate-Palmolive (CL), Ecolab (ECL), Mc Donald's (MCD) and McCormick (MKC).

Suggestions For Your 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. People's United Financial Inc (PBCT)
2. Franklin Resources (BEN)
3. AT&T Inc (T)
4. Chevron Corporation (CVX)
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. The Sherwin-Williams Company (SHW)
2. Becton Dickinson and Company (BDX)
3. Brown-Forman Class B (BF.B)
4. Abbott Laboratories (ABT)
5. Ecolab Inc. (ECL)

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 WBA in the next 3 trading days. We have no intentions to change any of our other positions.

Shopping List March 2019 (Beta)

As an experiment, we want to provide on a monthly basis a list of dividend aristocrats from the S&P 500, that we believe are more attractive in relative terms than all other dividend aristocrats. At Optarix we call this list our "shopping list". To determine what goes on the list we are using a combination of price/earning ratio (P/E ratio) and dividend yield that is then translated into a score.

The list for March 2019 looks as follows:

Rank	Name	Ticker	Price (USD)	P/E ratio	Yield
1	AT&T Inc.	T	30.67	8.713	6.74%
2	AbbVie Inc.	ABBV	81.34	10.283	5.35%
3	Cardinal Health Inc	CAH	50.27	10.473	3.75%
4	People’s United Financial Inc	PBCT	17.36	13.252	4.01%
5	Exxon Mobil Corporation	XOM	80.15	16.094	4.08%
6	Franklin Resources Inc.	BEN	33.32	10.413	3.20%
7	Chevron Corporation	CVX	125.31	15.963	3.82%

As a reference: As of writing the S&P 500 (SPX) stands at 2,822.48 and the S&P 500 Dividend Aristocrats stands at 1,187.79.

The intention is to publish our shopping list on a regular basis and then revisit the list in the future.

How To Use The Shopping List
At Optarix we use this shopping list to compile a shortlist of positions we consider adding or increasing in our portfolio. At present we have shares in all of the above except for People's United Financial and Chevron. So we may choose to add these or we may choose to increase our positions in any of the other five over the next five months.

If you wish, you could use this list in different ways:

1. To start a portfolio, invest an equal amount in each of these seven stocks
2. If you have a diversified portfolio already, you can use this list to pick one or several to your portfolio
3. If you have all of them in your portfolio already, then you could consider adding to one or several of these seven positions in your portfolio

Please note that there are several other factors that you may want to consider.

If you choose to start a new position, buy the stock only with an intention to keep them for at least 10 years. At Optarix our preferred holding period is "indefinitely".

The stocks in the shopping list are attractive on our view relative to the other dividend aristocrats in the S&P 500. We cannot say - in fact nobody can - how these stocks will perform in the future, relatively or absolutely. In particular we cannot make any predictions for these stocks as a group or for any of these individual stocks.

We believe, though, that all dividend aristocrats as a group represent a good, long-term investment and should see satisfactory average yearly returns over the next 10 years and beyond. "average yearly returns" means for any give year we may even see a negative return, e.g. the stock market may decrease a large percentage. Keep in mind that in the first decade of the century, the S&P 500 was down by over 60% year-on-year at a point.

You need to do your own due diligence. This post is not investment advice. If you choose to use the information in this post for inspiration and then go on doing more research on your own, then great! The stocks in the shopping list are a great fit for some portfolios. But they can be very bad choices for other portfolios, e.g. in terms of risk exposure to specific markets, industries, currencies, etc. or in terms of your investment goals and many more factors like these.

For the Optarix US portfolio we are considering to start new positions in either People's United Financal (PBCT) or Chevron (CVX) or both in the future. We may also choose to add to our positions that we hold in the other five stocks in the list.

Happy Investing!

Disclosure: We have positions in T, ABBV, CAH, XOM and BEN. We have no plans to initiate new or change existing positions in the next 48 hours.

Nov 2018 Results: +0.94% Active Return vs S&P 500

Another month and another one with volatility. The Optarix US Portfolio gained 5.19% in the twelve months ending 30 November 2018. Since the S&P 500 gained 4.25% in the same time frame, this means that our portfolio achieved an active return of +0.94%.

We are quite pleased with this result. It’s not as good as compared to the other benchmark we use, the S&P 500 Dividend Aristocrats (stock symbol SPDAUDP). This latter index gained 5.27% in the past 12 months. Therefore, our portfolio lost slightly with a performance of -0.08%.

Overall there seems to be a downward trend, i.e. the active returns decreasing. While we enjoyed the higher active returns in the past, we are equally aware that it’s hard to beat an index in the long run. The best you can hope for is to be approximately in the vicinity of the index’s performance.

With the trade conflicts, the looking budget crisis in the US, the uncertainty about further interest hikes of the Federal Reserve, we believe that volatility in the market stays high and there is a possibility that the long bull market comes to a halt.

Happy investing!

September 2018 Results: +1.67% Active Return vs S&P 500

In the 12 months ending 30 September the S&P 500 gained 15.66%. In the same time frame the Optarix US portfolio gained 17.33%. This represents an active return of 1.67%. This means that our portfolio performed better in nine of the ten rolling 12-months period from 31 December 2017. The active return is somewhat lower than for the 12-months ending 31 August 2017 which was 1.81%.

The index representing just the dividend aristocrats - SPDAUDP - gained 12.53%. The Optarix US portfolio yielded an active return of 4.80%. Compared to this index our portfolio performed better in all ten rolling 12-months periods from 31 December 2017.

Our intention is to keep our portfolio as close as possible to these two indexes in terms of performance. Since we started to publish results at 01 January 2018, this has worked out as planned. Keep in mind the usual caveat: Past results are no indicator for future results.

We had a couple of changes in the portfolio in September. We sold some of the Atlassian (TEAM) shares. Shares of Exxon Mobil (XOM) were added. Both transactions served the rebalancing the portfolio and spreading the risk further.

In light of the increase of the yield of 10-years US government bonds from 1.5% in Q2/2016 to about 3.2% as of writing we continue to be concerned about the relatively high evaluation of the US share market. While there are still high-quality companies that currently have a PE-ratio of less than 10, most are above 15, some even above 20 or 30. And that does not account for high-tech companies that have PE-ratios that are even higher. If a company has a sustainable growth rate of 50% year-to-year then PE-ratio of 50 may be justified. No all companies with that high of a valuation will have that kind of sustainable growth rate.

In addition the US labor market continues to be very strong. The unemployment rate is now at the lowest level since 1969. Increasingly employers find it harder to find suitable staff or they may have to pay significantly higher wages or salary. If some of the new trade barriers result in even more jobs being created in the US while at the same time immigration is decreasing, then this will result in even more pressure to improve compensation packages.

As the workforce has more money to spend and as manufacturers or service companies have to pay more for their staff, prices will inevitably increase. With more tariffs in effect, imported goods become more expensive as well.

All of these factors, we believe, will cause continued upward pressure on interest rates. The Federal Reserve has just indicated that they are far from taking a neutral stance. This suggests that they may increase interest rates more and faster than the market may have anticipated so far. And following suit we believe that the share markets won't do as well in the next 12 months as they did in the previous 12 months. In particular the next few months leading up to the mid-term elections in the US could bring quite a few nasty surprises.

By spreading risk further and by choosing shares of high-quality companies we believe the Optarix US portfolio should continue to do quite well in comparison to stock market in general.

Happy Investing!

Disclaimer: We are merely sharing our experience with investing our own money. You are responsible for your own investment decisions. Always do your own due diligence and consult your certified financial advisor before making a decision regarding your financial assets.

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!

May 2018 Result: 1.35% Active Return TTM

The results for May 2018 again yielded in a return better than the S&P 500 in the trailing 12 months (TTM). The active return of our US portfolio was 1.35%. While this is still a good result – we beat both of our two benchmarks - the active return has been decreasing since February. We believe this is mainly caused by the fact that our US portfolio contains to a large degree of dividend aristocrats. With most investors buying dividend aristocrats for their dividends, when the actual interest rates increase dividend aristocrats tend to under-perform the broader market.

This effect is further amplified with the strong job report on Friday, 01 June 2018 for the US labor market. US businesses created 223,000 new nonfarm jobs and the rate of unemployment decreased to an 18-year low at 3.8%. At the same time pressure to increase wages suggests that businesses increasingly compete to keep existing and attract new employees. This upward pressure may require the Federal Reserve to move faster and more substantially in order to keep inflation at bay.

The increases in interest rates are reflected in different ways. The yield on 10-year treasury notes has increased to about 2.9%, the highest since December 2013. The yield on 3-month treasury bills is at about 1.89%, the highest since the GFC in 2008/2009. We can also see this in the dividend yield of our US portfolio which is at about 2.29%. This, too, is the highest since Dec 2013.

We expect our portfolio to not perform as well as the S&P 500 until the interest rates stops increasing. When that will be and by how much the interest rates will be answered in the future. Regardless of this we believe that the dividend aristocrats in our portfolio will continue to increase their dividends by about 5% to 8% per year. This should put some safety cushion under their market value. The other positions in our portfolio represent companies with very strong positions in their respective markets and a fantastic growth trajectory in each case. In combination, we believe that our US portfolio will continue to do well in the long run.

Happy investing!

April 2018 Result: 2.41% Active Return TTM

April 2018 was yet another month where our US portfolio performed better than the S&P 500 in the trailing twelve month period (TTM). This time it was 2.41% which is noticeable lower than for the 12-month periods ending in Dec 2017 and Jan, Feb and March 2018. With raising interest rates dividend aristocrat behave a little bit more bond-like, that is as the interest rates go up the share prices will have some downward pressure. As a result the dividend yield for the dividend aristocrats tends to move somewhat in parallel with the yield on interest-free investments like for example the 3-months US treasury bills in the secondary market. Our US portfolio has allocated about 80% of its funds to dividend aristocrats at the moment.

We have previously discussed the rising interest rates. We continue to believe that these represent the biggest threat to gains in the share market for the time being. Unless the US Federal Reserve indicates that interest rates have reached the desired level, we believe the rising interest rates will continue to put downward pressure on share prices.

Taking a much longer timeframe such as 10 years or more, history tells us that interest rates fall and rise. After each rise there was a fall in the past. After each fall there was a rise. At the moment we are in a longer period where interest rates are trending up. At some point this will come to a halt. Nobody knows yet when that will be as it would require to predict the future.

If you buy shares with the intention to keep them indefinitely the current share prices doesn’t really matter at all. All that matters is what you think the earnings are doing which in turn feed dividend payments. Companies like Stanley Black & Decker (SWK) have paid dividends for 140 years and have increased their dividend each year for 50 consecutive years. It looks as if at least for SWK the ups and downs of the interest rate over the last 50 years didn’t really matter when it came to increasing the dividend. It just was more each year. We don’t expect this to change any time soon for SWK but also for a few more positions we have in our US portfolio.

Obviously we like a higher active return over a lower. Still, we are happy with 2.41% over the S&P 500 over the last 12 months. We are also prepared that until the interest rates in the US stop rising our portfolio may not return as much as in scenarios where the interest rates are flat or even falling. We’ll see. We cannot predict the future either.

Happy investing!

March 2018 Results: 4.09% Active Return TTM

The US stock markets had a negative quarter with declines of -2.49% for the Dow Jones and -1.22% for the S&P 500. The NASDAQ was hit in February and March as well but was able to hold on to year-to-date gains of +2.32%. The NASDAQ benefitted from a 7.36% gain in January.

How did the Optarix US portfolio do in this time frame? Year-to-date it’s down by -1.17% so did better than Dow Jones and more importantly better than our benchmark the S&P 500. Compared to end of March 2018, the S&P 500 is up +11.77% while the Optarix portfolio is up +15.86% given our portfolio and active return of +4.09% over the trailing twelve months (TTM). The S&P 500 gained about 7.89% per years over the last decade. If our active return would have been 4% of that time period, our portfolio would have made about +11.9% per year, and that would have been after tax.

The graph shows the active returns for the twelve months periods ending in Dec 2017, Jan 2018, Feb 2018 and Mar 2018. On average the active return was +4.36%. Any data we have from periods before Dec 2017 is not meaningful as our investment strategy change from about mid of 2016 to Feb 2017.

Of course, past results are never a guarantee for future results. Perhaps we were just lucky with our particular investment style. On the other hand we believe that our reasoning is plausible and this has so far been confirmed by the data. We typically invest about 80% to 90% in companies that have a track record of delivering increasing earnings per share (EPS) and/or increasing dividends, and combine that with 10% to 20% growth stocks that we believe have a proven business model with substantial growth. Frequently this will be well-established high-tech companies.

Obviously we look at other factors as well. For example we believe that if a company pays dividends, the payout ratio should not be too high. We prefer companies with a payout ratio of less than 50%. We also look at figures like the debt level and free cash flow. Typically we review our position in companies as soon as they become the target of an acquisition. With a buyer in the picture we think this brings with it a lot of speculation around the stock price. Sometimes it is just a rumor that doesn’t materialize. At other times the deal will fall through. We certainly will always do some research about the potential acquirer. Fundamentally, we are more interested in long-term potential than short term trading gains. Generally we follow a buy-and-hold strategy.

We have mentioned in earlier posts that we believe the increasing interest rates in the US represent a risk to the stock market. We continue to believe that the climbing interest rates will put at least a damper on stock prices. Perhaps what happened in the first quarter of 2018 was just an early taste of how much more negative things in the next quarters. We believe that the stock market is still a bit overvalued, so are not holding our breath that we’ll see another 20% or so gain in the S&P 500 in 2018. We are happy to be proven wrong, though.

Happy Investing!