Since then, that’s really been my key focus and the past 7mths’ journey has been nothing short of volatile. This post would be basically the 1st report (generated by InteractiveBrokers) about the fund performance.
Over time, I think this new fund and concentrated approach will be my key focus, and likely form the bulk of my portfolio in future.
Having been cautious about this recovery, I’ve had a substantial part of my capital undeployed whilst the indices made new highs. The capital ain’t exactly doing nothing though, as I needed them to back up option positions so in a way, they are generating yield for me.
We now see 2nd waves of Covid happening in most places around the globe, yet the markets continue churning upwards (save for the past 2 days last week). It’s like the world’s gotten tired of combating this virus, and am just literally, letting nature take it’s course.
In my research, I found that the best explanation to make any sense out of this disconnect between the real economy and the stock market, comes from Bill Miller’s Q2 fund market letter:
Bill Miller 2Q 2020 Market Letter
“Let’s go back to this idea that stocks at current levels are “disconnected” from the real economy and that presents a problem that stands in need of correcting.
In order to say stocks are “disconnected,” one needs to have some idea of what the connection is between the market and the economy. The belief appears to be that stocks go up when earnings and the economy are going up and they go down when the economy is doing the same.
So, in short, stocks and the economy are positively correlated. The problem with that view is that there is no evidence at all to support it, as a few minutes research demonstrates.
The correlation coefficient of stocks to annual economic growth from 1930 through 2019 is .09, that is, no meaningful correlation at all. For rolling 10-year periods over the same time span, it is slightly negative.
I am reminded of the quote of the now mostly forgotten British poet and classicist A.E. Housman, who likewise was confronted with a belief that had no basis. Housman said, “Three minutes’ thought would suffice to find this out; but thought is irksome and three minutes is a long time.””
IMO though, we are surely due for some sort of correction anytime now, and whilst I’ve no visibility regarding the exact depth or severity of the correction, the timing of which certainly can’t be too far away.
But then again, 3 mths ago, I didn’t think the markets would make new highs this year either.
As stated in Feb, I started building the portfolio in just 5 names:
“Without further ado… here’s my 1st team that’s going to play against SPY:
- Visa (V)
- Broadcom (AVGO)
- Bausch Health (BHC)
- Tencent (0700)
- Agilent Techologies (A)”
The timing couldn’t have been worse.
I entered positions for this new fund in early – mid Feb, exactly 1-2 weeks before the carnage of Covid lockdowns and stock market plunges occurred.
As seen above, the cumulative return plunged literally right after the fund started, and at it’s worst in March, I was literally faced with a -50% return within less than a month!
Talk about a nightmare start!
I’ve never even had a -50% within a year before, so a -50% within a mth was really a gut wrenching blow then.
Still, fortunately, this was really a small fund then, and the fall may be drastic, but quantum wise, it wasn’t really devastating.
Having already deployed into my top 5 positions right before the plunge, the fund had little funds to deploy further. Still, I did continue to add to the positions as much as I could, mainly utilizing premiums from writing puts.
The subsequent recovery was just as pronounced and sharp: 6 months on, the YTD fund performance now sits pretty at +15.46%.
Total capital injected into the fund: USD 160,599.40
Current fund NAV: USD 176,899.05
Evidently… Feb/Mar was not so fun for me.
I did consider “cutting losses” early on, but the fall was so dramatic that just delaying for a couple of days meant that the portfolio was already down double digit percentages.
As I’ve said, it did help a lot that the quantum wasn’t huge, so it didn’t bother me that much. By the end of March, TT Fund was way way way under performing the other indices by a mile, even the <gasp!> perennially lethargic STI.
IB allows me to set 3 indices as benchmarks, so I’ve chosen SPY, VT and STI as competitors, as they reflect the US markets, World markets and SG market respectively.
I’m pretty pleased with a +15.46% return YTD, having stuck to my guns with the core positions.
I’m also reminded of Howard Marks’ saying: “You can’t have outperformance without taking on the risk of underperformance”.
I like these reports that IB generates for me, largely because they allow me to reflect on past activities and review to find out what works and what doesn’t, and whether I’ve stuck to what I said I’d stick to when the shit hits the fan.
This chart is particularly instructive, as it shows the relatively large proportion of portfolio in equities and small cash holdings in March 2020. Bear in mind that this large position size in equities in March 2020 was in the context of falling share prices across the board. In other words, just by doing nothing, the proportion of the equities (Blue bar) with regard to portfolio size, drops every day, and accordingly, the proportion of cash holdings (Green bar) with regard to overall portfolio size, increases.
So it’s been 1 helluva crazy ride. From the hells of March, it was really only in June 2020 that the 1st green shoots appeared.
What a reversal.
I’ve previously already briefly written about the performance of the top 5 generals (post-March carnage):
“Never Let A Good Crisis Go To Waste”
Out of the top 5 generals, I currently only hold direct equity stakes in Broadcom (AVGO) and Bausch Health Companies (BHC)
I’ve taken profit in Visa (V), Tencent (700) and Agilent (A), although I am still long in the form of having written puts on all 3 companies.
Have I taken profit too early? Most probably. Certainly so for Tencent. But that’s ok. I’m just kinda relieved to be taking profits off the table after March’s mother of all drop.
Tough times indeed don’t last, but oh boy, they can be soooo painful when you’re in it.
Currently, the top 5 generals portfolio really only holds direct equity stakes in 3 companies:
Bausch Health Companies
Frontage Holdings (HK listed)
Frontage Holdings is a HK listed contract research organization (CRO), operating Frontage Laboratories. I’ve started accumulating it’s shares directly and intend to hold for the forseeable future.
Last earnings release showed that their Chinese operations were impacted by the Covid lockdowns, impacting on the bottomline.
They still managed to eek out a 2% topline growth though, and future contracted revenue is extremely promising, growing over 60% yoy. My investing thesis here is pretty straightforward: The company has made several acquisitions to expand their overall capabilities. Their US clients are mostly institutions and big pharma that do not switch CROs easily after accreditation. This is a long term secular growth trend as all the big pharma companies continue to cut their clinical teams, and outsource actual data gathering and research functions to specialized CROs.
With their acquisitions, Frontage is poised to capture more and more business. I’ve taken small profits in Frontage last week, but that was really more for portfolio adjustments. I’d continue building up this position over the next 6 months, prior to the next earnings release.
With the spike in volatility last week, I’ve also re-started shorting volatility by selling far OTM naked calls on VXX.
I’ve also started DD on a new company, and will look to add to that in the coming weeks if things pan out. Although having started with 5 names, I’m happy to hold only these 3 currently and am not in a rush to add more.
Anyway, with a fund size of just under USD 180k, it doesn’t make sense to diversify too much.
I’d add a little footnote here regarding property. As mentioned in earlier posts, I’ve also bought another property just earlier this year, in Jan.
Again, the timing COULDN’T HAVE BEEN WORSE.
Like serious, wth is wrong with lady luck?!
She needs to be a tad more fair. Just throw something my way once in a while can?
Having said that, thus far at least, SG property prices have held up rather well. Transaction volumes have gone UP instead, in fact.
The Covid effect on the rental market is a lot more obvious though. This is definitely a renter’s market right now, and they have been driving a hard bargain.
I’m somewhat glad to have finally tied down a 2 yr contract to rent out my previous unit, although rent has been knocked down substantially. I consider myself fortunate though, as I’ve managed to get tenants in a relatively short time frame, without much of a break in between shifting out and renting out.
I’d add that in such a market, landlords can give themselves a competitive edge by offering stuff other than cutting rent: sprucing up the property with a new coat of paint for example, or providing new gear like a new fridge or dryer or TV etc. These don’t really cost that much when amortized over the duration of the lease, and there’s usually some residual value left anyway.
Although I consider it bad timing to have committed to a property purchase right before Covid struck, in reality, thus far at least, property prices did not budge much. At least in SG.
There has been other inconveniences and related disruptions though, as the renovations took much longer than expected (due to the lockdown), and the subsequent shifting too was a hassle. I did get some very good movers though, who were not only professional; their prices were also reasonable and they were errr “chin-chye”, helping to move additional small items that were not in the initial quote.
Their reviews online were also very good, so it’s not just me who’s impressed.
(This is not a sponsored post ok, I’m just giving good service some milege)
In the long run, from a macro perspective, I consider property a vital portion of my overall portfolio, as a hedge against inflation and the constant money printing by the Fed. They can print to high heavens, and they will… but they can’t print a single property into existence.
I’d end this 1st TT fund report here.
Good luck for the rest of 2020.
Actually they can print property into existence and by Jov, they are.
What they cannot do — and where you are right — is that they cannot force the cost of the materials (or the cost of construction worker’s labour) required to replace your property to not rise accordingly with the level of money slushing out here.
LikeLiked by 1 person
Just curious, why Frontage rather than other CRO companies in the world. Further, at the current TTM PE multiple, isn’t it a tad expensive even after factoring in the future contract revenues?
I’d just answer by throwing up some points for consideration:
– Investing thesis basically revolves around mispricing due to rapid growth from M&A. I think the markets are not factoring in synergies between Frontage’s various units, post integration. It’s always hard to price things with lotsa M&A cos a lot depends on integration and synergy.
– Bioanalytics (which is their largest division), Bioequivalence, CMC and Safety and toxicology divisions will all stand to benefit from expected vaccine rush. Even if they don’t benefit directly, they’d benefit indirectly via the fact that other labs could be preoccupied and Frontage gets spillover business.
– Last HY results was a set back because of Covid restrictions in China, but China’s CROs are now all humming along just fine.
– You can’t exactly consider TTM PE for rapidly growing companies. It’s a futile metric here, esp if there has been significant M&A in the TTM. They just bought a chunk of earnings with cash off their BS, so how do you use TTM PE?
– And before you then guesstimate forward earnings and still conclude that it’s ex, consider that Frontage’s parent company and majority shareholder, Tigermed, just did secondary listing on HKEx and trades at a ttm PE that’s almost twice that of Frontage currently.
The largest full range CRO in the world, IQVIA, trades at a triple digit PE.
Expensive or cheap, is always relative.
– Big Pharma are all shutting down their own in house research, keeping only a lean clinical services team to do study design etc, and instead, outsourcing to CROs. It just makes more financial sense instead of having to maintain a facility and staff. This trend has been going on since the 2018/2019 precovid, and won’t reverse.
– Having their physical presence in the US and China, with a chinese parent company, has advantages over other CROs only in the west. For eg. They can run studies which require recruiting Asian volunteers.
– Finally, some numbers. Generally, I like FCF generative companies. Despite a tough HY impacted by Covid, Frontage is still FCF positive. The business may be asset heavy, but a lot of it is sunk capital. Subsequently, it’s mostly services. So high initial costs, and subsequently it’s mostly FCF generative.
– Rock solid balance sheet. Company has a lot of leeway to do more M&A or to grow organically. Equity of USD 272mil, of which USD 214mil is in cash.