Category Archives: Portfolio

2021 end-of-year review, 10 years of compounding at 30%

With 2021 behind us the blog hit a big milestone: the 10 year track record. Since I started the blog the portfolio has managed to grow annually at a >30% rate while beating the benchmark every single year. Truly amazing results, especially since I think it was achieved without taking excessive risks. The portfolio is usually pretty diversified with more than 50 positions at a time, has a low beta compared to the market and has more often than not a net cash position.

Sadly, I don’t think these results will continue. Some reversion to the mean is inevitable, and with a growing portfolio it is increasingly harder to allocate money to high alpha ideas. It is probably already telling that the returns of the first five years were higher than those of the last five years. If I would be smart I would now finish the blog and forever market myself als the “10 years of 30% guy” or something like that (maybe it would need something a bit more catchy), but I won’t. I want to continue to chronicle my journey as an investor on this blog, and when (not if) the inevitable bad year(s) arrive you will be able to read all the ugly details. But hopefully those are still far away!

Year Return* Benchmark** Difference
2012 18.44% 15.01% 3.43%
2013 53.38% 18.11% 35.26%
2014 30.11% 19.23% 10.88%
2015 24.23% 9.34% 14.89%
2016 64.97% 11.73% 53.24%
2017 29.04% 9.47% 19.57%
2018 13.07% -4.34% 17.41%
2019 32.34% 28.93% 2.70%
2020 19.31% 7.18% 12.13%
2021 31.31% 28.08% 3.23%
Cumulative 1365.14% 268.74% 1096.41%
CAGR 30.79% 13.94% 16.86%

* Return in euro’s after transaction costs, net dividend withholding taxes and other expenses
** Benchmark is the MSCI ACWI (All Country World Index) gross total return index in euro’s

In the past 10 years I have made several small changes in how I track my performance. One that I made several years ago is to take into account the tax credits that I receive when dividend withholding taxes are deducted from my brokerage accounts. Given that I can use most of the dividend withholding taxes as a tax credit I think the gross return index is a better benchmark than the net return index that I was using until this point in time. Obviously, this makes beating the benchmark a bit tougher since the gross return index is consistently a half percentage point higher than the net return index.

As usual, I made a performance attribution graph that shows how various positions contributed to the overal result of the year. Interesting for the curious readers, but also a helpful exercise for myself. With assets scattered around multiple brokerage accounts you never know how things exactly went until you put it all together in a spreadsheet. As you can see, the basket of special situations was, once again, a driving force behind the performance of the portfolio. Foreign currency exposure provided a big tailwind this year as well, as did my position in United Development Funding IV. The stock is being market at $1.40 by Interactive Brokers, but on the last traded price is $6.26/share and I’m using that for my internal valuation.

If we would look inside the special situations bucket we would find a couple of big winners, a lot of small winners, but also some losers. My position in the Luby’s liquidation has gone better than expected, and is responsible for 339bps of performance in 2021. I bought the stock in 2020 for $1.70/share, they paid a $2.00/share liquidation distribution in 2021, and the remaining net asset value stands at $2.89 (and is presumably still a bit understated).

The second biggest winner in the basket with a 317bps contribution are the Garrett Motion preferred shares that got issued in the chapter 11 reorganization. The “easy” money in this stock has been made, but I think the preferred shares are still undervalued compared to the common shares. With a mandatory conversion very probable in less than two years time I’m happy to hold on to see how the story plays out. The biggest losers in the special situations basket are two liquidations that are not yet playing out as planned, SandRidge Mississippian Trust I (SDTTU) and SHL Holdings (SYCRF). I have had good results with liquidations in the past years, but as illustrated by this pair, they are certainly not sure bets. But for one performer like Luby’s you can have many duds and still come out comfortably ahead. 

I hope my readers had a great 2021 as well, and I would like to wish everybody a happy, healthy and prosperous 2022.


Author is long most of the stuff in the performance attribution graph

EXFO shareholders approve going private transaction

Two days ago I wrote about the EXFO (NASDAQ:EXFO) going private transaction that had as biggest risk the potential that minority shareholders could block the transaction. I thought that it was more or less a done deal after the chairman bumped the price by a token amount, and got support from ISS and some of the biggest minority shareholders. Nevertheless, I would have expected a decent amount of grumpy shareholders to vote against the deal. But apparently even I was too pessimistic about that. In the end just 66.8% of the outstanding subordinate shares voted at the meeting, and the deal was overwhelmingly approved with 91% of the votes cast in favor. I would never call investing easy, but sometimes it can certainly look like that!


Author is long EXFO

EXFO Inc. merger arbitrage

An interesting special situation is reaching its conclusion in EXFO (NASDAQ:EXFO). The chairman is trying to take the company private. Initially he was bidding $6.00/share, but Viavi (NASDAQ:VIAV) threw a wrench in the works with an unsolicited $7.50/share binding proposal that was upped to $8.00/share a month later. The chairman is not interested in these alternative proposals, and with an ownership of 61.5% of the shares and 93.5% of all votes he can block any alternative transaction with ease. Nevertheless, it put a bit of pressure on him to improve his bid, and he increased it by a token amount to $6.25/share.

The going private transaction is expected to be completed this month, but the stock is currently trading at $6.05/share for a 3.3% spread. Obviously, the market is a bit skeptical that the transaction will be completed, and the main hurdle is minority shareholder approval at the upcoming shareholding meeting on Friday, August 13. To get approval 50%+1 votes cast need to be in favor of the merger, and the shares of the chairman are excluded from voting. After the price bump to $6.25 the company locked in the support of some of the biggest minority shareholders owning 14.75% of the minority shares.

I think this should be enough to bring the deal over the finish line. There are always some people who will not vote at all, effectively increasing the weight of the locked in votes. While I’m sure everybody would have preferred $8/share above $6.25/share it is clear that that deal cannot happen without support of the chairman, and the $6.25/share deal is not a terrible one if you look at where the stock was trading before the going private transaction was announced. The $6.25 offer represents a 68% premium, and presumably plenty of shareholders will be okay with that. Additionally, the deal is supported by ISS while Glass Lewis advices to reject it (but 86% of robovoting investors use ISS). So I think this is not a deal that will get overwhelmingly rejected, and that’s all that is needed to get it approved. The 14.75% votes that the company managed to lock in are not an insurmountable lead, but it is a tough hurdle. If you assume that approximately 90% of people will vote you will need 60% of the remaining votes to be against the deal to block it. That sounds like a lot to me.

And even if the deal fails, how terrible is that? If people just massively voted that the stock is worth more than $6.25/share and you bought it for less? I surely expect the stock to drop when the deal breaks, but at the same time, it is hard to see the logic in that. So all in all, I think this is a decent spot to try to pick up some pennies in front of the famous steamroller.


Author is long EXFO

New Frontier Health merger arbitrage

A corner of the special situations market that has had my attention almost since starting this blog are going private transactions with Chinese companies. A decade ago investors got a strong reminder that investing in China isn’t without risks after a massive wave of fraud was discovered. And more recently, the for-profit education sector showed how businesses can be wiped out at the whim of the Chinese government. But where there is risk, there is also opportunity. And because of that I do think that Chinese going private transactions offer in general a fertile hunting ground for special situation investors. Spreads are usually a lot bigger than for similar transactions in the US or Europe, and since insiders are usually taking the company private at a cheap price they are plenty motivated to complete the transaction. Once a definitive agreement is signed almost all deals get completed.

New Frontier Health (NYSE:NFH), an operator of hospitals in China, became public at the end of 2019 through a combination with a SPAC. Now, less than two years later, insiders are trying to take the company private again for $12/share. Not the worst possible outcome for shareholders, given that most should expect to lose money if you don’t redeem your SPAC shares for trust value. At the same time, it does not make this transaction an obvious great deal for insiders. You take the company public at $10/share (effectively less since a bunch of warrants are given away as well) and then you buy it back less than two years later for $12/share. I have no doubt that insiders are getting a good deal. It is just not as obvious as IPO’ing your company for $10/share and buying it back for half price. New Frontier Health seems like a reasonable decent business and in their latest investor presentation they estimate a SOTP valuation of $15/share and a growth scenario that could get to $45/share.

New Frontier – Potential transaction value creation slide

Insiders own 39.3% of the company and the definitive merger agreement was signed less than a week ago. So we don’t have to worry that for example recent changes in the Chinese/US regulatory landscape have given insiders second thoughts about completing this deal. At the moment the stock is trading at $11.19, offering a 7.2% spread to the merger consideration. With an expected deal closing in the fourth quarter of this year I think this is a pretty decent opportunity. There are Chinese going private transactions with bigger spreads, but for a Chinese deal without any visible hair on it, I’ll take it.


Author is long New Frontier Health

Merger arbitrage in the Coherent bidding war

On the 19th of January Coherent Inc. (NASDAQ:COHR) announced that it would be acquired by Lumentum Holdings Inc. (NASDAQ:LITE) for $100/share in cash and 1.1851 shares of Lumentum for a total consideration of $5.7 billion. A few weeks later MKS Instruments (NASDAQ:MKSI) kickstarted a bidding war with an unsolicited proposal only to be joined a few days later by II-VI Incorporated (NASDAQ:IIVI). Since then a multitude of improved proposals have been launched, all increasing the purchase price step-by-step while increasing the cash consideration and decreasing the equity consideration.

MKS Instruments dropped out of the bidding war some time ago. Yesterday Lumentum made its latest bid, valuing the company at $6.9 billion with a $220/share cash consideration and 0.61 shares of LITE for a total consideration of $274/share (using yesterday’s closing price). This morning II-VI upped the stakes with a bid of $220/share in cash and 0.91 shares of IIVI for a total consideration of $285/share (using the pre-market IIVI price). Coherent already declared the latest bid of II-VI a superior proposal and while this bidding war is probably reaching its final stages, there is certainly a decent chance we will see a couple more small price jumps.

So now that we have had a quick recap of the story so far, what would you expect the current price of Coherent to be? Surprisingly enough, the stock is in the pre-market trading at $265/share, at a decent discount to both the latest Lumentum bid (~3% spread) and the latest II-VI bid (~7.5% spread). During most bidding wars you see the target consistently trading above the latest bid price because people (almost) always expect that higher bids are a possibility.

In this case it is clear that a deal will be reached to sell the company above the current stock price, and it is certainly possible that both parties have some room left to bid more. So, apparently the market is pretty skeptical about the ability of the eventual acquirer to close the deal. Perhaps regulatory approval could be an issue, since it certainly will be a combination of two sizable companies in the same industry. But at the same time, as an outsider, it does not look too hard to me for this deal to get approved. MKS Instruments will remain as a very sizable competitor, and there multiple other sizable competitors such as IPG Photonics as well.

Perhaps I’m missing something crucial here, but to me it looks like that a bet on Coherent has pretty good odds. If there are no more bumps to the purchase price: fine. If there are more bumps: great.


Author is long Coherent