Jan 2019 Results: +1.39% Active Return vs S&P 500

After the previous month saw sinking indexes, January 2019 went better in terms of stock prices. The Optarix US portfolio again performed better than the S&P 500. For the twelve months ending 31 Jan 2019, the S&P dropped by -4.24% while our portfolio dropped -2.85%. As a result the active return was +1.39% for those twelve months.

We are quite pleased with this result. Again, the Optarix US portfolio performed better than the broad market. Again there was no change in the composition of our holdings. As mentioned previously we anticipate the next action to happen in Q2 or Q3 of this year. Most like that move will add one position to the portfolio.

Please note that we calculate returns after fees and taxes. Since your tax situation might be different and since you may have a different cost structure, your number may deviate from our results.

We'll continue to stick with our set of rules. Doing so takes biases and emotions out of the picture. Also, we don't believe that we will be able to "time" the market. Instead over time we will buy shares at times at favorable prices and at other times we may see a drop in the share price. That is of no concern to us as it will be on paper only. Our preferred holding period is "indefinitely". Therefore the actual share price is of no consequence once we started a position.

As with all rules there can be an exception. Let's assume we create a position at a price of $50 per share. If after a longer period of time, let's say 6, 12 or 18 months, the share price of that position has dropped significantly, we may add to that position if we continue to be convinced that the business in question is an excellent long-term investment.

We started publishing about our Optarix US Portfolio in January last year with announcing the results for the 12 months ending 31 Jan 2018. This means we are now in a position to also announce the results for the 2 years ending 31 Jan 2019. In those 24 months the S&P 500 increased by 8.93% annually while the Optarix US Portfolio grew by 11.46% annually. That's an annualized active return of 2.53%. The past yearly results were already encouraging. This first data point for a 2 year period indicates that the Optarix US Portfolio might be doing better than the S&P 500 over 2-year-periods as well.

Happy Investing!

Dec 2018 Results: +1.43% Active Return vs S&P 500

December 2018 was yet another very volatile months for the US security markets. The main indexes ended the month near their low for the month.

The Optarix US portfolio was down as well. However, compared to the S&P 500 we managed to achieve an active return of +1.43% over our benchmark in the trailing twelve months (TTM). At the maximum, our portfolio was off the recent peak by about 18% in line with the broader market. Any number greater than 10% is typically seen as a correction, numbers greater than 20% as a bear market (Source: The Motley Fool). Based on that definition we are experiencing a correction but not a bear market yet.

The following diagram shows the active returns for all 12-month periods ending between Dec 2017 and Dec 2018. With the exception of June 2018, the Optarix US Portfolio performed better than the S&P 500. In other words achieved a positive active return.

(Click for Larger Version)

There were no changes in our portfolio in December 2018. Unless something unforeseeable happens we anticipate the next trade to be in Q2 or Q3 of 2019.

We rare sell shares. Our preferred holding period is "forever". We may sell shares once they appreciate in value too much so that their weight is beyond what we feel is commensurate to their chance/risk profile compare to our other holdings.  If that is the case we sell a small portion to bring the weight back in line. This plus cash flow from dividends is then used for entering new positions or adding to existing position. We roughly follow an equal weight approach. However, we are fairly patient in terms of the threshold at which we reduce or increase any of our positions. At times we may let a position continue to increase before we act.

While we cannot predict if the current correction will turn into a bear market, we continue to believe that using our set of rules for managing the Optarix US Portfolio should yield returns similar to the S&P 500. If things go well, we might see a better return than the index.

Happy Investing!

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!

Top 5 Positions as of 16 Nov 2018 - Nvidia

Again, no change in the Optarix US Portfolio in the last four weeks. The market volatility in October and in particular the bad performance of high tech stocks has had quite an impact on the top 5. Apple (AAPL) has left the group, so did Aflac (AFL). New entrants are Wallgreen Boots Alliance (WBA) and Stanley Black & Decker (SWK).

The updated top 5 list contains these positions. The percentage values is the change since we started the position:

1. Vanguard Total Stock Market (VTI) +27.29%
2. Emerson Electric (EMR) +23.18%
3. Wallgreen Boots Alliance (WBA) + 26.75%
4. Johnson & Johnson (JNJ) +25.74%
5. Stanley Black & Decker (SWK) +20.79%

Technology stocks got quite a hammering in October. Nasdaq's decrease by about -9.20% in Oct 2018 is an indication as it's still considered to be tech heave. By comparison, the S&P 500 lost only -6.94% and the Dow Jones -5.07%. November so far saw the S&P 500 increase by 0.9% and the Dow Jones by 1.18% while the Nasdaq is down -0.79%. It almost looks as if there is a "crash" spread out over several months. The still increasing interest rates don't help. The trade conflicts don't help. 

The tightening job market doesn't help either as companies find it increasingly hard to find people to expand their business. If the measures of the current administration in fact lead to more (manufacturing) jobs being created in the United States, then this begs the question: Who will fill those jobs? And at the same time there is a trend towards reducing immigration which puts a limit on the labor pool as well.

Quite a few stocks are now in correction territory with more than 10% off the top. Some have suffered even more (see below). Going forward we believe that the volatility in the stock markets will continue for some time. Increasing interest rates will continue to put a downward pressure on share prices. The pressure may decrease as soon as there are noticeable signs that the Federal Reserve sees an end to the current cycle of increasing interest rates and assumes a neutral position.

Nvidia

The shares of Nvidia (NVDA) are now down about 42% from their top on 02 October 2018. While we agree that at levels of USD 292 per share the valuation of the company is quite ambitious, we equally believe that the current levels may represent buying opportunities. Our position in NVDA is down about 34% which we often use as a trigger to assess if we should close our position or to add to our position.

In this case we believe that main factor for the stock crash - minus 18% on Friday 16 Nov 2018 alone - is that there was a lot of speculation in this stock. People expected the company to grow at 30%, 40% or even more year-over-year. It turned out that there is still a lot of inventory in the sales channels for the gaming range of products which represent a little more than half of all revenues. Nvidia won't sell a lot this quarter which often is one of the more important quarters each year. 

However, the extreme level of inventory in the channels is an aftermath of the hype around crypto currencies and mining of Bitcoin and similar. Taking a step back, we believe this is a one-off situation, nothing permanent. The fundamental business model of Nvidia works. They have good growth rates for their three other business areas, namely data centers, AI and autonomous vehicles.

Disclaimer: We hold shares in all companies mentioned in this post. We have no intention to change or initiate positions within 48 hours of this post. This post is not financial advice. Consult with your certified financial advisor before making any financial decisions.

Oct 2018 Results: +0.20% Active Return vs S&P 500

Wow, what a ride! Last month saw a number of ups and (mostly) downs in the US markets. People who got into the market only after the GFC (Global Financial Crisis) in 2008/2009 were given quite a scare.

Some pension funds and also ETF’s (Exchange Traded Funds) had annualized returns of more than 10% after tax until end of September. If you have bought shares or ETF’s after the GFC, then you might have grown accustomed to Y2Y performances in excess of 10%. The 10-year bull market was the biggest ever.

For example, some pension funds or ETF reported an average return of 10% or more per year after tax for many years. October however may have seen the value of your retirement savings drop by 5% or 10%. If you became nervous you are not alone. We are still in correction territory with more than 10% off the all-time highs reached earlier this year. Long term you shouldn’t be concerned too much. For example, in 2008 the S&P 500 was down by -37.22 percent at the end of that year. However, that was more than compensated since then with a CAGR (Compound Annual Growth Rate) of about 15.29% in the time January 01, 2009 to December 31, 2017. In this time frame USD 1.00 grew to USD 3.60. Not bad at all!

Results Versus S&P 500

Let’s look at October results now. Our Optarix US Portfolio increased by 5.50% from October 31, 2017 to October 31, 2018. In the same time the S&P increased by 5.30%, resulting in an active return of our portfolio of +0.20%. This means that in the 11 twelve-months periods from December 2017 to October 2018, our portfolio performed better in 10 of them. Only in the 12-month period ending June 30, 2018, our portfolio lagged the S&P 500 by -0.47%.

Results Versus S&P 500 Dividend Aristocrats

In comparison to the S&P 500 Dividend Aristocrats Index (SPDAUDP), our portfolio did better in that it has outperformed the SPDAUDP for the 11^th twelve-month period. Still the October active return of 0.59% for the 12 months ending October 31, 2018, is the lowest on record. Note that we started the Optarix US Portfolio only on January 01, 2016, and published results only from January 2018. We cannot look into the future. The result of our portfolio may be better or worse in the future.

Interest Rates

In our opinion the bull market has come to a grinding halt because interest rates continue to increase. Over the last 2 years the effective date at which the US federal government can borrow has increased from 0.29% to 2.20% at the end of October. In lockstep the yield on 3-Months treasury bills grew from 0.26% to 2.29%. The yield for 10-years treasury notes has increased from 1.940% to 3.217%. At the same time the divided yields didn’t increase accordingly, both because the bull stock market and because dividends weren’t increased by a similar amount. As a result the stock market has now reached a point where an increasing number of investors sell shares and park their money in either bonds or cash.

Other Factors

While the interest rates are the most influential factor in our opinion, we also believe that other factors play a role as well. For example, one might ask why the Federal Reserve increases the interest rates in the first place. Well, the labor market is as strong as it hasn’t been in a very long time. In fact, the rate of unemployment at 3.7% represents the lowest value of this metric for 49 years. Businesses want to hire more people but with a tightening supply of qualified workers they have to offer higher wages and salaries. As a result, the labor costs for businesses go up which negatively impacts their profits. At the same time workers have more money in their pockets, both by higher wages but also to some degree by the tax cuts instituted by the current US government.

The problem is that both the tax cuts and the increased wages push interest rates higher. The tax cuts lead to the US government having to offer higher interest rates for borrowing money. The increased wages create more demand and hence businesses can charge higher prices. This we call inflation. To fight the inflation the Federal Reserve has to increase the interest rates so that it becomes increasing more attractive to save more instead of just consuming it.

Are the Market Turbulences over?

It will be very interesting to see if the wild swings (mostly down) in October were all there was. We suspect that there is more to come in the next couple of months. The result of the midterms may play a role but probably only if there was a surprise in terms of the power allocation in the House and in the Senate. The trade tensions with China will keep the market down as well unless there are tangible resolutions of that problem. And we shouldn’t forget the developments in security politics, e.g. the military tensions in the South China sea or the cancellation of missile treaties with Russia.

We estimate the downward potential at another 10% to 20% but that should then be it. And even if that happens, the yearly increases are likely to be more moderate than in the last 10 years until the interest increase cycle ends.

We have no plans to sell any position as we have bought them for the long run (at least 10 years). As cash becomes available, e.g. via dividends, we will continue to buy shares of companies that fit our requirements, e.g. dividend aristocrats and select high-tech companies. And we will stick with our rules to avoid decisions based on emotions instead of sound reasoning.

As always, please be aware that this post is not financial advice. We just want to share our experience with investing our own money. Do your own due diligence and ask your financial advisor.

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.

Top 5 Positions as of 19 October 2018

We didn’t by or sell anything since we last published the list of the five biggest positions in the Optarix US Portfolio. However, since 26 September there have been a couple of changes in the list. As of 19 October, the five biggest positions and their gains were as follows:

1. Emerson Electric (EMR) +27.87%
2. Vanguard Total Stock Market (VTI) +28.44%
3. Apple (AAPL) +74.48%
4. Johnson & Johnson (JNJ), +19.77%
5. Aflac (AFL) +20.72%

Emerson Electric (EMR) remained our largest position. Stanley, Black and Decker (SWK) dropped out. Instead Johnson & Johnson (JNJ) entered in fourth. Apple moved up from fifth to third position. 

In particular in the last two weeks there were quite a few market drops for 2% or even 3% in a single day. Occasionally, there was a day with a slight uptick but overall it has become clear in our opinion that market participants have become much more cautious in light of the current challenges. 

For one the interest rates keep rising in the US for the time being. As of writing the yield on 10-year government bonds has increased to 3.195%, which is up from 2.339% at the end of September 2017. The interest rate for 3-months treasury bills increased from 1.04% to 2.27% in the same time frame. Looking at our portfolio the dividend yield changed from 1.99% to 2.20% in the same time frame. Given this data we believe that there is not much upside at the moment in the markets until it becomes clearer by when the US Federal Reserve will change from tightening to neutral. 

Rising interest rates are poison for the stock market. In addition to that we also have the increasing trade tensions but also political uncertainties. For example, the Jamal Kashoggi case is threatening the relationships between the US and Saudi-Arabia. The United States are considering recreating from nuclear arms agreements with Russia. The trade war with China as well as the military issues in the South China sea don’t really help either. The outcome of the midterms, which looked like a homerun for the Democrats, is no longer certain either. These just some of the factors that we believe negatively influence the market participants at the moment. 

What does this mean for the long-term investor? We believe it is more important than ever to spread the risk across a large number of positions. And it is critical to invest only in high-quality companies such as dividend aristocrats. As an investor it’s important to minimize emotions as much as you can when observing the daily ups and downs of the market. Long-term we are confident that shares still represent a very good option to participate in the long-term growth of an economy. If the market falls, then what it really means is that you can buy the same quality shares at lower and hopefully more reasonable prices again. Rising profits could also help to get valuations back to a more reasonable level. 

Happy Investing! 

Disclaimer: We own share in all the companies mentioned. We have no plans to initiate or change any position in any of the stocks mentioned in this post in the next 48 hours. This post is not financial advice. You are responsible for due diligence before making financial decisions. Always consult with your financial advisor.

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.