It’s the first of July and that can only mean one thing: it’s time to look at the performance of my portfolio so far. I think 2016 has offered the most challenging environment for investors since I started this blog, although that is more indicative of the lack of market turbulence in the previous years than the seriousness of the crises this year. In the middle of February things were not looking very good with global stock markets and my portfolio down roughly 10%, but both managed to recover. Last week was interesting as well with the unexpected negative result of the brexit vote, but fortunately(?) the market impact (so far) is smaller than I expected.
| Year | Return* | Benchmark** | Difference |
|---|---|---|---|
| 2012 | 18.53% | 14.34% | 4.19% |
| 2013 | 53.04% | 17.49% | 35.55% |
| 2014 | 27.72% | 18.61% | 9.11% |
| 2015 | 20.23% | 8.76% | 11.47% |
| 2016-H1 | 8.52% | -1.02% | 9.54% |
| Cumulative | 202.28% | 71.53% | 130.75% |
| CAGR | 27.87% | 12.74% | 15.13% |
* Return in euro’s after transaction costs, dividend withholding taxes and other expenses
** Benchmark is the MSCI ACWI (All Country World Index) net total return index in euro’s
As you can see the MSCI All Country World Index (measured in euro’s) is down a tiny amount while my portfolio is up in the high single digits. I think this is a fantastic result. In absolute numbers it’s already more than satisfactory and compared to the benchmark it’s really great. I always wrote that I expect that my portfolio would do relatively well in a bear market, and it’s good to see some confirmation of this. I should add that I’m actually under-reporting my performance somewhat since my brokers values CVRs at zero even though I spend money acquiring them (e.g. ALXA). This subtracted approximately 64bps from the results.
I’m pretty happy with the performance of the majority of my positions this year with Conduril being the obvious exception. The stock dropped 45% from a price of €56/share at the start of the year to €31/share now. There are some good fundamental reason why the stock has been getting cheaper, the main reason being the big exposure to Angola that isn’t doing too well since oil prices dropped. At the same time the stock is now trading at just 37% of NCAV (if we include some loans to Portugese companies that are classified as non-current assets). Because of that I decided to increase my position in the stock recently, although I’m at the moment not as willing to bet big on it as a few years ago. At that time it was also very cheap, but with less assets and (way) more earnings power. Now the distribution of possible future outcomes is more binary which makes it sensible to allocate not too much capital. Also nice to see is that Retail Holdings is at the top of the list with regards to performance since I called it my best idea for 2016 on Seeking Alpha.
As you can see my portfolio is currently positioned conservatively with a big allocation to special situations (that usually are less correlated with the overall market) and cash. While my allocation to special situations varies throughout the year I think this is reasonable representative for the first six months of 2016. I think I can be pleased that assets that made up just 25% of my portfolio generated the majority of my overall performance. Unfortunately I cannot simply allocate more capital to this category because there are usually a limited number of attractive deals in a given time period that I can find. Kahala Brands is for example accounting for roughly a third of the special situations portfolio right now which is certainly as big as I want to go. If anything that might be a bit on the too big side already since the spread has already narrowed significantly since I first posted about the idea. But with an expected close in roughly one month time while the spread is still 6% selling just feels wrong.
Disclosure
Long everything in the portfolio overview
Thanks for the update. Its always informative.
Good to hear 🙂
Congrats! A great record in the making.
How do you go about sizing positions for the special situations portfolio and how many special situations investments would you roughly make a year?
I am assuming you don’t post all special situation investments on the blog?
Thanks so much for sharing!
Thanks! Indeed, the majority of the special situations are not posted on my blog. Think I probably participate in something like 50 or 100 different things this year. And sizing is mainly a function between risk and reward, unless I simply can’t size it as big as I would like because of liquidity or other reasons.
Thanks for that info alpha.
You must read a ton! Any tips on sources to find special situations ideas? Do you set alerts for relevant filings or something like that?
Your blog has inspired me to really did into merger arb.
Thanks!
Yes, I basically try to keep track of all mergers and other special situations. You can for example track all SC TO-C filings at the SEC and that already covers a lot.
Here are something.
http://www.mergerinvesting.com/pendingmergers
Hey Alpha
Do you have any books on special situation investing that you would recommend?
Cheers mate, congrats on the 5 years!
Thanks, and “you can be a stock market genius” is one of the few good books on special situation investing that I know of.
Bravo!
Thanks 🙂
Surprised you didn’t make the iREIFs a higher % of your portfolio…
Why? It’s one of my biggest positions with a 6.2% allocation.
Just thought you would have allocated a higher % due to the number of REIFs. Your posts seem to come off as very bullish.
I think I see the basket as a single idea. It’s not like if there would be two times as much different cheap REIFs I would allocate twice as much.
I would like to highlight one thing which is missing here. Your benchmark is not a fair reflection of your actual investments. From what I have seen, a lot of your investments belong to small cap category so using a MSCI World Small Cap Net Return Index would make more sense or at least have some sort of small cap tilt in your benchmark. This is not a critique to your investment methodology but rather an observation. Additionally, you should also try to compare numbers like max drawdown, Sharpe ratio and sortino ratio in order to see how your performance was in comparison on a risk adjusted basis. And to be honest, if you think most of your investment has value tilt then you might even want to have MSCI World Value Index as your benchmark but MSCI might use a different definition of value so there might be a conflict there but still something to look into.
Comparing my performance with a small cap index makes reasonable sense, yet I don’t agree with it. I’m not constrained to invest in small caps, so I think I should be responsible for both to out- or underperformance of small caps versus a general world wide equity index, since that better represents my investable universe.
And I know roughly numbers like sharp ratio, max drawdown, sortino ratio etc. But it’s sort of impossible to calculate it properly for me. I can get those numbers from my IB account (which captures roughly 80% of my portfolio), but getting the data from my other brokers is too complicated. But so far those numbers are way better than the index, although you have to ask if things like stale data for infrequently traded stocks aren’t making those numbers better than they should be.
You have Berkshire Hathaway stock in your portfolio. Do you own Share A or Share B type? When is a good time to sell it or you will continue to hold this sizing position.
Unfortunatly I own B shares… and will probably just hold this position.