US Interest Rates Are Rising

Over many years investing in shares benefitted from falling and low interest rates. The yield on 3-Month Treasury Bonds was between 0% and 0.2% from January 2010 to about September 2015. From then it started to increase moderately, then faster. As of market close on 02 March 2018 this number is 1.63%. This still appears to be a small number but the diagram shows how this actually does indicate a sharp rise in short term interest rates. The yield on 3-Month Treasury Bills is often used as the reference for the yield of a risk-free investment. There is a general opinion that the likelihood of the US government to default is close to zero for a three-month time frame.

Another metric worth monitoring is the yield on 10 Years US Treasury Notes. These have been falling until about March 2016. Since then they have been moving up as well with the latest number being 2.862% (as of market close 02 March 2018).

Why is this important? Yields increase as the price for bonds and bills decrease. For investors it means that as the yield on investments with a lower risk increases, they either pull out money from investments with higher risks or they need the investments with higher risks to create a higher return. Shares are generally considered to be an investment option with a higher risk than T-bills or government bonds. Given that the US share markets have enjoyed gains of almost 20% in 2017, their valuations have now reached lofty levels. Rising interest rates will put pressure on shares prices as gradually more investors will tend to sell shares and invest in lower risk assets.

So far, some companies have been able to stem the tide somewhat in that they have raised dividends and share buybacks. Both are ways to return money to shareholders. The total return, being the combination of share price increases plus dividend payments and other distributions (e.g. stock splits), improves. However, this works only so far. Some of the dividends are special one-off dividends. And even though the tax reform in the US helps companies to reduce their tax bill, the amount of interest they have to pay increases. The low interest rates over many years was a big incentive to take on more debt in the balance sheets. As the interest rates increase, this can backfire and offset the gains from reduced tax payments.

Also, some companies experienced windfall profits as they need set aside less reserves for future tax obligations. Some have opted to give their employees a pay increase which also increases the cost base.

And then there is the Federal Reserve. It is expected that they will continue to increase the interest this year. Most commentators seem to expect three or four increases in 2018. We don’t know yet by how much. In any case they have several reasons to increase the interest rates. Inflation is picking up and this is driven by several factors including the low rate of unemployment in the US driving wages up and also the weak dollar that drives up prices on everything that needs to be imported. And that is even before tariffs are imposed, tariffs currently known (steel and aluminium) and potential future ones. Even the “most American” of cars consists of at least 50% parts that are imported.

Inflation, the weak dollar and tariffs are potential topics for future posts, so we won’t go into further details here. Suffice to say, interest rates are more likely to continue to rise than they are to stay flat, let alone fall. And this is likely to be a factor for the time being that puts a downward pressure on the US share markets.

We believe, though, that our Optarix US Portfolio is in a good position to do as well as its benchmarks if not better. Stay tuned and observe how all of this will play out. It’s exciting times!

Happy investing!

Optarix US Portfolio February 2018: Active Return +5.07%

Feburary 2018 turned out to be a very volatile month. After a very long period of new highs each month the US stock market saw wild swings and are down for the month. They are still up year-to-date, though.

The Optarix US portfolio is up year-to-year by 19.89%. However as always this number is not what we focus on. Instead we look at our benchmarks, which are the S&P 500 index and the S&P 500 Dividend Aristocrats index. The S&P 500 is up 14.82% year-to-year while the S&P 500 Dividend Aristocrats is up by 11.89%. This means that our portfolio had an active return of 5.07% compared to the S&P 500, and of 8.00% over the S&P 500 Dividend Aristocrats. Active return is the additional return that a portfolio produced compared to a benchmark.

Of course, it is possible that we just got lucky with our selection of stocks. There are reports that a monkey throwing darts at the news paper page with the stock quotes does as well as the average active fund manager or stock picker. We also need to keep in mind that the results for a single time frame are not statistically significant. Instead we need to look at multiple time frames.

We started the Optarix US portfolio in January 2017 based on decades of investment experience. For the US portfolio now we have data for three 12-months periods. Admittedly, they overlap but as we add one data point each month we expect the numbers to establish a trend as time goes by.

The active returns (i.e. the additional gains) over the S&P 500 are as follows:

• 12 months ending December 2017: +4.31%
• 12 months ending January 2018: +3.96%
• 12 months ending February 2018: +5.07%
• Average of these three months: 4.45%

Please be aware that past results do not guarantee future results. We believe, though, that with our set of simple rules, discipline and a long-term investment time frame, the Optarix US Portfolio is well positioned to generate returns similar to our benchmarks. For the last 10 years the S&P 500 returned about 9.51% per year while the S&P 500 Dividend Aristocrats increased by about 12.36%. Going forward, if we continue to manage creating a positive active return, then the Optarix US Portfolio might be able to even beat both benchmarks long-term.

Happy investing!

Disclosure: We have no plans to change any existing position in our portfolio or start new positions within 48 hours after publishing this post.

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.

The Letters from Warren Buffet

One of the most closely followed source of investment insights by Warren Buffet are his yearly letters to shareholders of Berkshire Hathaway (BRK-A, BRK-B). In case you ever wondered where to find them, here is the link as of writing: The Letters

Happy Investing!

Disclaimer: We do not own shares of Berkshire Hathaway. We have no plans to start a position in the next 48 hours after publishing this post.

Correction: In the original post we accidentally used an image of Charlie Munger. We apologize for the mistake.

Image: By USA International Trade Administration - https://www.youtube.com/watch?v=GLKDFhCjaY4, Public Domain, Link

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.

Gone Fishing

We love reading about people who we see as role models in terms of how they invest their money. Warren Buffet is one of them. John C. Bogle is another one. We just found a quote from Charlie Munger, long-time investment partner of Warren Buffet at Berkshire Hathaway (BRK-A, BRK-B). Since we like the quote, we thought we'd share it with our readers:

"There is a rule of fishing that's a very good rule. And the first rule of fishing is 'fish where the fish are'. And the second rule of fishing is 'don't forget the first rule'. Investing is the same thing. and some places have lots of fish and you don't have to be that good of a fisherman to do pretty well. Other places are so heavily fished that no matter how good a fisherman you are, you aren't going to do well." (Source)

I think this is an awesome metaphor. He was also referring to the investment style he and Warren Buffet use. It won't be as useful going forward as conditions have changed and today the "prospects are worse" according to him.

We think, it's never wrong to look for inspiration in particular when wildly successful investors share their thoughts. It's definitely worth considering Charlie Munger's words.

Happy investing!

Disclosure: We do not own BRK-A or BRK-B shares. We have no plans to change our position in the next 48 hours after publishing this post.

Coca-Cola increases Dividend, Aflac splits Stock

After the last week of January and the first week of February had really bad results the US stock markets rebounded to some degree and ended the past week being one of the best for many years. Markets go up and down. We believe there was an exaggeration building up in particular in November, December and January when P/E ratios were too high in our views. The correction brought them back in line somewhat. Compared to historical values we think some shares are still too expensive. Or they have become too expensive again after the rebound this week. Our US portfolio did better again than the S&P 500. Unless something bad happens, this should show in the results for this month which we will announce early March. Let’s instead look at a few companies that made the news this week.

Coca Cola (KO) announced results that in our view are encouraging. Management continues to work on improving KO’s operation. For example they are moving back to having franchisees own and operate bottling. As a result overall revenue decreased by 20% but organically volumes were flat while the tea and coffee segment increased by 2% and so did the water and sports-drink volumes. Juice and dairy beverages decreased 2%. For the 2017 year organic sales are up by 3%. The tax changes in the US cause a one-time cost of USD 3.6 billion, resulting in a quarterly loss of USD 2.8 billion. Without the tax impact, this would mean profits of about USD 800 million compared to about USD 550 million a year prior. Factors helping with the bottom line were smaller packages sizes and improving sales from markets like India and Brazil. KO has increased their dividend for 55 years and this year is no difference with an increase to USD 0.39 per share from USD 0.37 per share payable this quarter. And as a kind of icing on the cake we also take note that Warren Buffet has held KO shares for many years.

While we are at it, a note regarding Warren Buffet: We very much like his buy-and-hold approach. This is very much in line with our thinking, too. At the same time, we don’t just buy what he is buying. Instead, we try to apply his investment principles and they influenced significantly our set of rules that we use for managing our US portfolio.

Next up is Aflac (AFL). They have just announced a 2-for-1 stock split. That means for each share you already hold you will get one for free. Don’t get overly excited, though, as it will not increase the value of your position. At the moment the shares are at approx. USD 80. After the split there are twice as many shares but their price will be roughly half at perhaps USD 40. So if you had 100 shares at USD 80 worth USD 8,000, then after the split you’ll have 200 shares at USD 40, again worth USD 8,000. So, then, you ask, why would a stock split be beneficial? It keeps the stock price visually low. To a lesser degree it makes the stock more accessible for smaller portfolios, ie it’s easier to adjust the number of shares to exactly that amount of money you want to invest. If the price was at, let’s say USD 1,000 and you want to invest only a small amount, then you could buy one share or two or something like that. Note this applies mostly for very small portfolios. In comparison if a share is at USD 100 you can decide to invest USD 1,500 by buying 15 shares. You can’t buy 1.5 shares of the other company. And there is a similar effect when selling. In general, we take a stock split as a sign that the management and the board of directors are very confident that their company will continue to do well in the markets. So, AFL’s announcement is positive news.

Happy investing!

Disclosure: We hold shares of Coca Cola (KO) and Aflac (AFL). We have no plans to change our positions within 48 hours after publishing this post.