Portfolio Update – 2016 Year-End

Introduction

With the year now over, I thought I would do a quick re-cap of my performance in 2016 and how my portfolio is now positioned going into the new year. Firstly, let me give you the end-year return.

2016 year-end performance: 39.52%

The year 2016 was a roller-coaster to say the least. In Q2, Brexit saw my portfolio sustaining an eye-watering one day decline as financials across the board were dumped by nervous investors. Q3 provided some relief, before the sector took off like a rocket in the aftermath of the election of Donald Trump and fall in long-term treasury yields. Throughout the tumultuous period, I stuck to my conviction that financials were under-priced and bought more Barclays after prices collapsed in the aftermath of Brexit. Wanting to get more diversification in the portfolio, I then opportunistically took advantage of weakness in the share price of both Vienna Insurance Group and Wells Fargo (not covered on here, but covered extensively elsewhere).

Current Portfolio Weighting

  • Barclays PLC: 74.5%
  • Vienna Insurance Group: 11.9%
  • Wells Fargo: 13.6%

2016 Position Performance

  • Barclays PLC: 45.52%
  • Vienna Insurance Group: 26.56%
  • Wells Fargo: 22.76%

Activity

During 2016, I made 4 separate purchases of shares, the first two were for Barclays (pre and post-Brexit decision) and the other two were for positions in Vienna Insurance Group and Wells Fargo. No positions were sold at any point during the 2016 period.

Going Forward

Barclays: For my small portfolio this is an over-sized position. Having said that, when I compare it to competitors in the sector, it’s still cheap. It trades at about 75% of tangible book value, owns some very valuable businesses that are offset by other money losing, non-core operations that are being sold, and has what I regard as good management who are trying to take the correct long-term decisions for the business. I think that given the progress made that it’s worth at very least tangible book value, implying a 20-25% gain from the current price.

Vienna Insurance Group: My original conviction in buying this company was that it was a decent business that had operational/macro difficulties, but traded at considerably below fair value. Since then a new CEO has been appointed, we’ve seen some kitchen sinking of the bad news, and subsequent write-downs on both earnings and the balance sheet. Thankfully, things have settled with forward guidance suggesting that this is currently available at less than 10x earnings. With that said, having my portfolio engaged in an insurance company that has operations in Bucharest and Belgrade doesn’t comfort me. If I get anything close to fair value, I am more than happy to take advantage of liquidity on the way out of this one.

Wells Fargo: If there was ever proof that sometimes good things come to people who wait, it was Wells Fargo in Q3 of 2016. Seeing this company trade at as little as 11x earnings when the overall PE for the S&P was over twice that number was something that beat me over the head and until I sat up and bought some shares. The Trump rally has resulted in a re-rating of these shares. However, in comparison to the market, Wells Fargo still trades at a considerable discount, so for now I am content to hold these in my portfolio.

Conclusion

2016 offered me one fantastic company where to put money to work and two other decent opportunities to invest in. As of the start of 2017, I do not see the same opportunities present themselves. While I don’t like playing the macro game, or market timing, I do feel that certain equity markets are overpriced (US for example). I have no pre-cognition towards the future direction of equities, but I will always want to fish in a market where value is more readily available. With that said, the UK and Europe is the place where I would be expecting to make further purchases going into 2017.

5 thoughts on “Portfolio Update – 2016 Year-End

  1. Philip Hutchinson

    Hi Tabhair,

    Very impressive performance (though also quite high stock specific risk, being in only three stocks, all of which are financials…!).

    My performance for 2016 was considerably less good, I’m not one for precise measurement but I’m looking at a total return of c28%. I am still happy with this, obviously, as it’s quite a way ahead of UK market returns, but not close to your spectacular performance!

    My strategy – basically to buy high quality, reliable, cash generative companies at sensible prices and hold them until they’re either stupidly overvalued or show themselves not to be as high quality as I thought – isn’t capable of regularly generating returns higher than this, though, as I’m mainly relying on the companies’ internal generation of value, which over the long term will be limited by both their returns on capital and the amount of their profits they can reinvest. I own high returning companies but even the highest returners don’t earn much more than 28% on capital.

    Also I am significantly more diversified than you – currently owning 30 shares – obviously this reduces stock specific risk but does mean that spectacular returns like yours are unlikely to be attainable….

    Interested in your thoughts on 2017 though. I think one of the most positive things I’ve done over the last six months re investing is really starting to look wider than just the UK, where I don’t actually find an abundance of high quality companies. There are some great companies in Europe and North America and we’re lucky to live in an era where investing abroad is relatively cheap and easy, by historical standards, so it would be foolish not to take advantage. Sounds like you agree given you clearly are prepared to hold non-UK shares, one of which is quite obscure!

    Rgds
    Phil

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    1. tabhair Post author

      Thanks for the response!

      2016 was a crazy year for me and while luck had a little to do with it, I don’t think it was an accident that I was in the right place at the right time. By mid-2016, banks and insurance companies were by far the cheapest companies that could be bought in any stock exchange around the world. The amazing thing was that investors just didn’t want to know about them either. Barclays for example was selling at 60% of tangible book value and just 5x of normalised earnings. Even in the US, one of the most high quality banks in the world (Wells Fargo) reach a multiple of just 10x earnings. I know you can never 100% understand what happens in a bank, when something is that cheap, it’s very hard to go wrong at those multiples. I think the luck part of the year was Brexit and Trump. When bank share prices collapsed after Brexit, it was perhaps a once in a year gift to pick up already cheap shares at an even greater discount. The second bit of luck was Trump winning the election, all of a sudden, inflation was back in vogue and the shackles of regulation would be off banks. All financials just shot up then. I think financials are still cheap, but not so much to generate a 40% return for 2017.

      I think if you want the returns you are talking about, I don’t think just buying quality companies is enough. The three companies I owned in 2016 were all purchased at times when the majority of investors thought that they problems that could never be recovered from. Barclays for example has a great core business whose results were hidden by other loss-making non-core businesses that were being wound down and sold. In 2016, either people didn’t see this, or they didn’t believe that management could sort out the problems. Wells Fargo was bought when the people thought the business would be damaged by the phony account scandal. Vienna Insurance Group was bought after slipping operationally, despite having an otherwise good 10 year record and actually guiding that the share priced was trading at just 7.5x the coming years earnings. Finding companies that have hit trouble is obviously very easy, the trick is to find the ones where the setback is temporary. I think I have been lucky enough to do so in all three companies I picked last year.

      Going into 2017, if I was to repeat the same tactic of 2016 at trying to find a hated, despised, reviled stock, then one place to look would be in the retail sector. Right now, this is where most of my attention is focused. I think that while Amazon will continue to crush many retailers, I think there is room for certain businesses in this sector to survive. If the entire retail sector is getting hammered, the trick is to find the one company that is beaten down, but has some sort of moat or competitive advantage that can enable it to rebound. Perhaps no such company in retail exists, but looking at the broad market, it feels like this is the place to look for a bargain.

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  2. tabhair Post author

    Oh, and just one small point. While this blog does 100% reflect my actual stock portfolio, the portfolio is only a small fraction of my net-worth (house, pension, savings, etc). It is the beginnings of an ISA that I will be adding to and increasing diversification over time. I do not recommend anyone to put 75% of one’s net worth into one company!

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  3. Philip

    Hi,

    Thanks for the response. I do like your blog, it’s one of the better ones out there IMO, and I’ll try to comment a bit more frequently, even though I don’t think there is likely to be much overlap between our holdings.

    In no particular order, to respond to some of your points:

    Understood re diversification. What you say makes a lot of sense. I run a more diversified portfolio for a few reasons. Firstly, a substantial part of my portfolio is in small and mid cap stocks with little to no internal diversification. The number of stocks you should hold increases as you go lower down the market cap spectrum IMO, as those businesses tend to be less diversified than a lot of the large caps (both by activity and geography). Secondly, I find that at under 20 companies it is harder to react in a detached manner when inevitable bad news hits one of my stocks, whereas at 20+ positions the individual effect of a profit warning or bad trading statement is low enough at portfolio level that I can be more sanguine. That’s a very personal question of psychology though…!

    Wells Fargo. Certainly a company I could see myself owning. I missed out not investing at the lows, which was careless really, as it’s a company I’ve known of, and known of its quality, for years. I actually do have a (smallish) position in a bank, but it’s nothing like Wells, it’s a growth stock priced on a very very punchy multiple of book, Metro Bank. Certainly not a value stock! But I think there is a realistic possibility that this company compounds intrinsic value for the next 10+ years. I wouldn’t make it a big position, and I could very well end up looking very very silly (clearly that is what a number of the analysts think given the number of sell recommendations on the stock), after all what could be more contrarian than investing in an expensive, start-up, branch focussed high street UK bank in this era of bank hating and speculating about fintech and the end of branch based banking? But there are a number of reasons to like the stock. I won’t detail them here, but perhaps a post on Stocko or the Lemon Fool is in order. Another bank on my watch list, not cheap at the moment but not stratospherically expensive, unlike Metro, is Svenska Handelsbanken. Coincidentally also rolling out in the UK. I love the conservative, long term culture, and will be looking more closely at it this year (no position currently).

    Retail stocks – yeah, an interesting area to go exploring in. Problematic, as it’s such a tough sector at the best of times, and now with the rise of the monster that is Amazon, plus the various niche online retailers, even more so. But yes I reckon there may well be some gems. I would maybe try to find a retailer that isn’t just a pure retailer but also has some control over product, as that is harder to displace. Just a thought.

    Oh, one other area I’m looking at at the moment is Canadian oil sands companies (the likes of Suncor and Imperial Oil). These are very large, very well run, shareholder friendly companies, with great histories. Although they are well off their lows they are still not expensive and very substantially below where they were when oil was a lot higher (in 2008 for example) but, in Suncor’s case at least, they have very significantly increased their production base since then. Any serious increase in the oil price would see them trading at much much higher prices (though I am not expecting oil to go back to $150 any time soon!). There is a lot to like about these companies, they are well run, operate in a very stable and low risk jurisdiction, and have huge, long life resource bases with very very low geological risk (much lower risk than conventional E&P companies’ assets) – there is no doubt that the hydrocarbons are there, and in large quantity too. However, extracting oil from the oil sands is energy intensive and not low cost, plus it is viewed as environmentally damaging (probably correctly). So what I am trying to work out is what the likely future of the oil sands is. Are they going to be an important and economically viable resource? If yes, I think these companies are very solid bets at current prices and likely to do very well over the medium to long term, as they have huge unexploited assets. Providing the economics stack up, they will be able to invest into their resource bases for years to come and potentially at attractive rates. So they could be exactly the kind of opportunity I like – good, well run companies, with years of attractive, low risk reinvestment ahead of them. But it is quite a big “if” as to whether the oil sands really will be economic over this time scale and I’ve not done enough research on this yet.

    Regards
    Phil

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    1. tabhair Post author

      Apologies for the slow response, I haven’t set alerts for when I get mails.

      I am with you on the diversification. As I build up my portfolio, I do want to end up with something in the region of 10-14 positions. As I have a full-time job, I feel that is about all I can realistically manage to keep track off. Of course, my portfolio is currently a lot small than that, some of it due to the fact I am only starting off, some of it due to a lack of ideas, some of it due to the conviction I have in the positions I have. As the portfolio grows, I will eventually get more diversified.

      As for the banks, last year they were just amazingly cheap. Now as we’re going into 2017 and interest rates are starting to rise, they have been on a tear. I don’t think we are at fair value yet, but I think we are certainly getting there (US banks like Wells are more closer to fair value than those in Europe). Despite that, I think regardless of whether you look at the European or American banks – the good ones I believe will out-perform the general market in the next few years. As for Metro Bank, and other alternative/challenger lenders, I have looked at these, but I am uncertain about their prospects. There are quite a lot of lenders who are operating below the traditional lenders like Lloyds, Barclays, RBS, typically they are providing more risky types of semi-secured/unsecured loans. I have read the annual reports of many of these companies and seen how they’ve consistently grown profits, generated fat NIM’s and grown like weeds. In ordinary businesses, this is the type of growth you want to see. In banking however, rapid growth and fat margins usually means disaster eventually. Slow, secured, and steady growth from the established banks seems a safer bet to me.

      On oil, it is a sector I have only looked at a little, but failed to see the attraction. Right now, there are so many investors out there who are focused only on the dividend and who are not looking at free cash flow at all. Literally all the major oil producers are free cash flow negative and are currently paying dividends out of borrowing money, cutting capex, and selling assets. The expectation seems to be that higher oil prices are only a matter of time away. The question I would ask is, what if this is not the case? If you look at the inflation adjusted oil price for the last 100 years, depending on the time frames used, the average price is between $42 and $63. The current oil price of about $53 is at the mid-point of that. If we were to stay in that sort of range for the next 5 years even, then we are going to see absolute carnage in the market with bankruptcies for some of the high cost and most leveraged players. Given that the market has already priced in the oil price recovery without it actually taking place, this isn’t an area I want to speculate in.

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