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.

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.

Feb 2019 Results: +1.54% Active Return vs S&P 500

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!

Is the Correction Over?

Even though the markets recovered somewhat on Friday, at the end it was another bad week with losses for the leading US market indexes. The S&P 500 shed 7.23% this month and was down more than 10% at some point. Does Friday’s recovery mean the correction is over? We don’t think that anybody actually knows for sure.

We always prefer a longer term view. The volatility within a few days or even weeks is not important. One of the two main benchmarks we use is the S&P 500. It has an average return over the last 10 years of 10.41% and a CAGR of 8.49%. Our US portfolio has outperformed this benchmark since we started this portfolio in January 2017. December 2017 and January 2018 produced excess returns of about 4% on a year-to-year basis. The number of data points is still too small. Perhaps we just got lucky and in future we won’t be able to produce an excess return. Only time will tell if the excess returns are sustainable.

Let’s have a look at how the setbacks in the last two weeks influence valuations. 

For example Apple (AAPL) is now available at a price/earnings (P/E) ratio of 15.94. Forward looking P/E ratio is 12.5. When we look at the average annualized total return for AAPL, its value is 19.72% over the last 5 years. They just announced their biggest quarterly profit of all times. Apple now has an installed base of 1.3 billion mobile devices and they add more each month. While a large portion of their revenue is generated by the iPhone, their service business is growing faster than the iPhone revenue. As a result the share of services is now 9% compared to 6% of revenues. There are indications that Apple Music may overtake Spotify in the US market as the largest music streaming provider. Since Apple started to pay a dividend they have increased their dividend each year. They are sitting on a large pile of cash. Now that they can repatriate that cash into the US at a much lower tax rate, more of it could be appropriated to buying back shares and increasing the dividend. This is not to say that they will actually do that. But there is definitely more wiggle room for it. All taken together, in our view this means that the “For Sale” sign went up on Apple stock. This might be a good buying opportunities either now or until the current correction has bottomed out.

Looking at dividend aristocrats, another group of shares that we really like, the picture in terms of valuations is improving as well. Before the recent market declines most of them had P/E ratios of over 20 or even 30. Some still do. But some now some have become available at P/E’s of less than 10. For example AT&T (Ticker symbol 'T') has a P/E ratio of just 7.74 as of writing. Yes, there are reasons to be cautious in their case. AT&T’s liabilities are at 71.85% of their total liabilities and equity in the latest quarter. Long-term debt is at 34.86%, so any increase of interest rates could impact their bottom line. On the other hand large mobile phone providers like T Mobile USA and Sprint have indicated that they will scale back their discounts throughout this year removing some price pressure. This should help AT&T as well. The pending acquisition of Time Warner is not approved yet and the settlement talks with the Department of Justice (DOJ) fell through in December 2017. The lawsuit continues and the outcome is far from clear. One option that AT&T could consider is a (partial) float of their DirectTV business to generate some cash. The upside for AT&T’s stock is that their dividend yield is a generous 5.33% and they being a dividend aristocrat they have increased their dividend for at least the last 25 years. While some of their decisions are risky, the sheer fact they are willing to make significant changes demonstrates that they are taking concrete steps to secure their future.

So, perhaps, it’s best to take comfort in the knowledge that in general buy-and-hold is a long-term strategy that has worked out for other long-term investors like Warren Buffett, provided you selected quality stock in the first place. Setbacks in the stock markets could be buying opportunities!

Happy investing!

Disclosure: We own shares of Apple and AT&T. We don't have a position in any of the other companies mentioned in this article. We have no plans to change our positions within the first 48 hours after publishing this post.