Friday, March 31, 2023

FY-2018: What The Market Gods Giveth, They Additionally Taketh Away…

Again in a lot happier days (final July!), confronted with indices that had been (on common) broadly flat, I sagely accepted that:

‘Trying again, the primary half this yr appears type of inevitable now…’

After all, this now haunts me as absurd understatement. And an unlucky reminder the toughest time to promote is…inevitably, when you need to promote! However after a crackerjack 2017, I did see 2018 as extra of a market time-out, than the rest – as mirrored right here, consciously or not, within the lack of weblog posts & commentary. My dangerous…however generally it’s higher to take inventory & simply take pleasure in how great actual life might be!

The identical is true of my disclosed portfolio – my solely reported exercise was to: i) high up my Record (REC:LN) holding (which I nonetheless favor to name dangerous timing, vs. an precise dangerous resolution), and ii) re-establish my Donegal Investment Group (DQ7A:ID) portfolio allocation, after administration redeemed over 50% of its excellent shares. Elsewhere, after having fun with fast/substantial worth run-ups on sure undisclosed holdings (the principle motive they by no means fairly made it onto the weblog), I centered on positioning myself for a tough October. Buddies will again me up on that…however clearly it wasn’t seen right here, it’s by no means sufficient if you’re proper (low-cost buys received’t offset harm in the remainder of your portfolio), the market proved far worse than I anticipated, and solely fools consider in all or nothing market timing anyway.

[Forget the guy who pissed you off the other day – you know the one, that dude boasting only an idiot wasn’t all in cash & set for the crash – because he’s also the guy forgets how many other times he (wrongly) went to cash, plus all the gains he’s missed out on over the years].

So let’s simply go forward & survey the precise market carnage – right here’s my FY-2018 Benchmark Return – as standard, it’s a easy common of the 4 essential indices protecting most of my portfolio (& my readers’ too, I count on):

Ouch…a (13.5%) benchmark loss! 

Wow, it’s actually a whole decade since we’ve seen an annual S&P loss (on a complete return foundation)! Which have to be all of the extra galling for European traders to see it, regardless of a 6.2% decline, as soon as once more outperform their native indices by such an enormous margin (right here’s my FY-2017 Benchmark). Perhaps it was inevitable, however Trump – as in his #TrumpBump (taxes) & #TrumpSlump (tariffs) – was clearly each the making & unmaking of the market final yr. Sadly, abroad markets had been solely graced with the latter…once more, galling.

Trying again, traders had already anticipated (& discounted) an eventual Trump tax bundle – an apparent driver of the S&P’s 19.4% acquire in 2017 – so there was little motive to count on contemporary shopping for final yr on the precise headlines. However momentum issues – exuberant traders had been taking part in with home cash, so the S&P managed to beat world reversals in each early-February & late-March/early-April, ship a optimistic H1-2018 return, and solely lastly peak in September. [The Nasdaq & AIM All-Share Index also peaked just weeks prior to the S&P, after enjoying 25%+ returns in 2017]. In distinction, the bounce in European markets failed again within the latter half of Could, with the indices in relentless decline for the rest of the yr.

Nonetheless, the greenback did get better about half his prior yr losses – benefiting from a tighter Fed coverage & particular bouts of rising market foreign money weak spot – gaining 5% vs. sterling & the euro. So returns for well-diversified US & European traders had been nearer than the desk above would possibly recommend. Then once more, when did you final meet a mean US investor who truly owned abroad shares?! Home bias is bliss. ‘Til it isn’t…troublesome to consider now, however inevitably there’s an extended laborious street of relative under-performance forward for US traders.

As for the FTSE’s 12.5% correction, it looks as if excellent affirmation of the overall idiocy & incompetence surrounding #Brexit. Enjoyable to suppose,…however in all probability, any life like Brexit situation’s already discounted by traders, and the FTSE’s fall merely mirrors that of Europe. [Sure, the FTSE isn’t a great UK proxy…but when’s that ever stopped investors buying it?!] The AIM All-Share’s 18.2% decline could appear extra of an indictment – however as above, I believe it was truly tracing a lot the identical trajectory of momentum & then threat aversion/revulsion as we noticed within the US. Ultimately, it’s extra instructive to look to the overseas change market: As I discussed, Cable fell in tandem with EUR/$ on greenback power…so regardless of all of the hysterical headlines, sterling was solely 1.2% weaker vs. the euro in 2018, a mere day’s value of actual FX volatility! And specializing in what merchants/traders do (moderately than say!), this degree of sterling stability looks as if a greater gauge of underlying Brexit nervousness.

After all, Europe delivered the same old in 2018, with the Bloomberg European 500 falling 13.2%. [Being a value investor may suck right now…but it sucks a hell of a lot more in Europe!] Banks are an apparent perpetrator…whereas US financial institution valuations are nothing to boast about, a minimum of the US authorities have ensured they’re all well-capitalised. Clearly, the identical isn’t true of Europe – regardless of an much more aggressive financial coverage (finally), it’s astonishing the ECB’s nonetheless did not correctly re-capitalise & renew confidence within the banking sector proper throughout the board. Not that the sector itself is any assist: It stays a punching bag for US regulators, Deutsche Financial institution looks like ‘Titanic II’, the Italian banks are merely pretending & extending, Greece is a black gap, whereas Danske Financial institution looks like simply the beginning whistle for a decade of cash laundering revelations & prosecutions to return. [Kudos reserved only for the Irish & Spanish banks!] Then once more, the notion Draghi could lastly begin tightening financial coverage/liquidity this summer time appears fairly ludicrous now…so an accommodative coverage will stay as a doubtlessly useful backdrop (albeit, to this point, how useful is debatable) for companies, traders & customers.

Then we’ve got the ISEQ’s 22.1% collapse – not what I used to be anticipating! However once more, I don’t truly see this reflecting any actual Brexit nervousness, or the underlying financial system (which is booming & once more the quickest rising within the EU)! As an alternative, this efficiency – as alarming as it could appear – displays the general European market, European banks, disappointment with Irish property REITs’ efficiency, and different lingering (massive) company-specific points. Fortuitously, I prevented the index malaise – as I all the time argue, Eire’s a stock-pickers’ market – and was typically delighted with my very own Irish portfolio publicity final yr.

And I’m sanguine for the Irish market: I believe such a bear market decline virtually ensures a optimistic return this yr…and whereas Brexit could ratchet up market volatility, we’re at some extent the place fudges/grandfathering/transition clauses proliferate out of necessity, or else the entire sorry enterprise goes proper again to the drafting board. And looking out down the street, does it actually matter ultimately…I agree with Leavers the UK can forge its personal means on the planet, with an financial system & buying and selling relationships not a lot completely different than immediately, or most different international locations. However that’s the tragedy right here: The UK’s buying and selling one thing for nothing, i.e. no discernible future/aggressive benefit – other than some deluded dream of previous glories – noting its already distinctive EU standing, the place it enjoys all of the inherent advantages AND its personal impartial foreign money & financial coverage.

However let me cease there…

As a result of I used to be planning on sticking to a fundamental autopsy of 2018 right here, and avoiding the chance of tainting my outlook for the approaching yr. [I hope/plan to focus on prospects for both my portfolio & individual holdings later this month instead]. So let’s transfer on – however first, let me present a well timed replace on some portfolio gross sales (as of year-end), all of that are portfolio selections moderately than any elementary change in my underlying funding theses, i.e. I’m re-sizing current holdings & liberating up money for brand spanking new purchases:

Portfolio Gross sales

Alphabet (GOOGL:US):  Scale back portfolio allocation from 11.5% to 10.8%.

Applegreen (APGN:ID):  Scale back portfolio allocation from 8.4% to 6.0%.

Tetragon Financial Group (TFG:NA):  Scale back allocation from 4.7% to 4.0%.

Plus I’ve two de-listings to report, which I’ll deal with as portfolio exits as of year-end – studying my farewell commentaries beneath, it’s ironic to notice each truly delivered (marginal) positive factors final yr!

Portfolio Exits

Rasmala (RMA:LN):  Principally inevitable at this level, however nonetheless a disappointing exit. In November, administration proposed a cancellation vote (ignoring the potential Dubai-listing different they’d beforehand floated to shareholders), citing the dearth of liquidity & the prices of being a listed AIM firm. This was authorized in December, with zero significant shareholder dissent, setting in movement a young provide (that closes later this month) to mop up minority/personal traders. This was priced at 150p per share, a mere 5% premium to the closing share worth…which appears all of the extra cynical, if you notice it’s a huge 62% low cost to Rasmala’s 396p NAV per share! To not point out, the tender’s just for 20% of the excellent shares!? However presuming the principle stakeholders select NOT to take part, apparently it ought to be ample to accommodate all traders in search of an exit.

And if it’s not, I’ll be very happy to share the CEO’s particulars & encourage shareholders to contact him commonly to debate additional…

That is the third & ultimate Rasmala tender I’ll take part in* (at 250p, 150p & 150p) – referencing this letter, for instance, I’ll actually take some credit score for 2 of these tenders, Rasmala relinquishing its banking licence, together with another operational/governance modifications. However investor activism received’t essentially change the underlying economics of a enterprise…as I identified in the identical letter (& ought to have heeded), administration couldn’t ship a good return on fairness, even when it achieved its $3 billion AUM goal. [Which never happened…] Whereas I did break-even on Rasmala (& my portfolio allocation steadily declined) – see my preliminary write-up here & here (notice a subsequent 1-for-50 consolidation) – it’s a painful reminder activism (& poor investments) are typically about extracting worth, not compounding worth. Which makes time your enemy – one which relentlessly seeks to dilute your returns & improve your alternative price…

[*Any issue with the tender, I can still rely on the 150p tender price (a 62% discount to NAV per share!) as an appropriate year-end mark-to-market.]

Zamano (ZMNO:ID):  This unhappy & sorry journey additionally involves an finish, with the corporate lastly in liquidation. Alas, it comes a minimum of a yr after most shareholders would have initially anticipated it…in all probability higher to not dwell on the incremental prices of that! Not solely did the administrators miss a variety of self-imposed deadlines, they caught the same old Irish fever – sure, property – focusing completely on chasing a reverse-takeover deal (with Menolly Homes, as per the press) all the best way to the top of the rainbow. I say ‘completely’, as a result of I particularly launched what would possibly in any other case have proved a really appropriate & viable different RTO candidate firm. [And questioned the likely reception to another Irish property IPO…we all know what happened to the Irish REITs since]. After all, there’s nothing on the finish of the rainbow – in August, the administrators announced ‘the Goal has notified Zamano that it not needs to finish the Potential Transaction’.

At that time, there was inadequate time to judge another deal to re-activate/exploit Zamano’s listings (inventory was suspended since March) – however nonetheless it took one other 3 months for a liquidator to be appointed, in November. The corporate’s estimated web asset worth of EUR 4.55 million (approx. 4.6 cents per share) seems conservative (see p. 6), with a distribution deliberate for later this month. [Accordingly, I’m relying on Zamano’s NAV per share as an appropriate year-end mark-to-market].

Almost 5 years later, I’ve suffered a 46% loss on my unique Zamano investment. Most unwelcome…however realistically, such losses are (sometimes) inevitable in any portfolio (even these uncommon portfolios blessed with no unforced errors). I did monitor/consider the chance of regulatory fines (which had been surprisingly small & uncommon), however by no means anticipated the enterprise to be destroyed virtually in a single day. Nor did I actually count on the possible 20 cent offer to fail (or entice no different bidders) again in 2015, noting Zamano’s web money/money technology on the time. Which is the killer for me – by way of alternative price – I may have bought out & doubled my cash! However that’s hindsight for you – in a price/event-driven state of affairs, it will probably show extremely troublesome to  promote out at a big low cost to (perceived) truthful worth (whether or not it’s NAV per share, a doable bid provide, or an intrinsic worth estimate). As I said here:

‘The true blame lies squarely with Zamano’s govt administration – they did not ship a single acquisition, they did not ship on any new enterprise/development initiatives (like direct provider billing), they’d zero pores and skin within the sport to make sure a takeover provide truly made it over the end line, they presided over the implosion of the corporate’s enterprise, after which they ended up truly getting paid to stroll away with the dregs!?’

Ultimately, the lesson to be (re-) realized right here is the abiding want to judge, monitor, problem, or just keep away from administration…particularly, administration groups with no significant pores and skin within the sport, as a result of all too typically their monetary motivation & incentives can diverge radically from shareholders.

Now, time to zoom again out to my general portfolio…

Portfolio Efficiency:

Right here’s the Wexboy FY-2018 Portfolio Efficiency, by way of particular person winners & losers:

[**Exits: RMA:LN at 150p per share tender offer price, ZMNO:ID at 4.58 ct NAV per share*Redemption: DQ7A:ID year-end price of €8.75 adjusted to reflect redemption of 53.7% of o/s shares at €9.25 per share in May (position subsequently rebuilt, essentially at break-even). Otherwise: Gains are based on average stake size & year-end prices.]

[NB: ALL dividends & FX gains/losses are excluded.]

And ranked by measurement of particular person portfolio holdings:

And once more, merging the 2 collectively – by way of particular person portfolio return:

Yup, behold the harm…

Seems, truly matching my benchmark return – all the way down to the decimal level – is not any comfort when it means a (13.5)% portfolio loss in a horrible yr, and my worst absolute return during the last seven years of the weblog.

However luckily, there’s a little bit of a silver lining…

In 2017, I loved an actual barnstormer, by way of each my relative & absolute return – i.e. my +26.3% portfolio acquire was two & half occasions my +10.7% benchmark return. However I did admit I’d been blessed with a little crypto pixie mud – my KR1 (KR1:PZ) holding rocketed virtually 150% within the final 3 months of the yr (the truth is, greater than doubled within the wake of my unique Sep-2017 write-up). My ex-KR1 efficiency would have been a +15.0% acquire…a a lot decrease absolute return, however nonetheless spectacular vs. my benchmark.

This yr – in a ghastly instance of mean-reversion – just about the other is true. My FY-2018 ex-KR1 efficiency would have been a (5.2)% loss…a powerful +8.3% out-performance vs. my benchmark, however nonetheless a loss in absolute phrases. I ought to have titled this put up:

‘FY-2018: What The Crypto Gods Giveth, They Additionally Taketh Away…’

Perhaps I shouldn’t complain: Whereas my crypto-related losses in 2018 are nonetheless (painfully) actual – although notably exaggerated, as KR1’s successfully a a lot bigger 19% place by way of my precise disclosed portfolio – they’re principally a wash by way of FY-2017/2018 (& my relative FY-2017/2018 efficiency is sweet). I assume it sums up final yr’s crypto-lunacy…to by some means really feel disillusioned with KR1 for delivering, ultimately, a mere 27% acquire during the last 15 months!?

Once more, the killer’s the coulda/woulda/shoulda lament in my head – I’m positive it too – why on earth didn’t I trim/sell-out of KR1 when crypto went loopy ’spherical the beginning of final yr?! However that’s the insidious nature of bubbles…on the time, I may truly persuade myself to consider KR1 was under-valued, regardless of its hovering share worth! In any case, if crypto trading sardines traded at ridiculous multiples of ebook, shouldn’t KR1 too? However as I said upfront, I had no want to commerce or actually have a particular view on precise Bitcoin/crypto costs – I used to be centered on making a long-term blockchain guess. So whereas avoiding a dealer’s mentality saved me from indulging in bubble insanity* – merchants love to use the greater fool, who begins madly shopping for proper on the high – clearly, it additionally blunted my skill to flee from mentioned bubble.

[*Fortunately, with no fundamental support, I saw no reason to participate in the recent former cannabis bubble!]

Ultimately, I’m nonetheless proud of my elementary funding thesis: Globally, KR1 stays a very distinctive listed funding car…one that provides traders a diversified early-stage crypto/blockchain portfolio. Simply so as to add worthwhile perspective, right here’s my unique core crypto/blockchain sector desk, now up to date to 31-Dec-2018:

Yup, regardless of some fairly grim losses, KR1 can truly boast it was nonetheless the best-performing crypto-asset on the planet final yr! Ultimately, let’s hope that proves a great omen for the following crypto rally…

Joyful New Yr!

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