Investing in undervalued securities worldwide

Weekly Update 9 May 2022

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Stocks fell last week as higher interest rates weighed on valuations. Stocks have now fallen for five weeks in a row.

For the past decade, the markets were supported by a “Fed put”. This refers to the fact that whenever markets fell, the Fed lowered interest rates and (re)started Quantitative Easing, which quickly stabilised markets.

The Fed could do this because inflation was contained.

The inflation picture has now changed and, as a result, the Fed put has morphed into a “Fed call”. This means that if the market rallies too much, the Fed will increase interest rates more than expected, thus arresting any market rally.

The Fed is doing this because higher equity prices, which support consumer confidence, would make restraining demand and prices more difficult.

“Don’t fight the Fed” is an old investing rule that advises investors to align their portfolios with what the US central bank is doing. At the moment, the rule calls for caution. Long-term interest rates have already increased, but it may well be that they need to increase further to bring inflation back under control.

If the Fed becomes serious about inflation, we would not be surprised to see rates in the 4-5% range in the US next year. Rates at these levels would probably bring about a typical recession bear market, when stocks fall 30-40%.

Stocks have already fallen 14% this year, but we do not believe this decline fully discounts the risk of a Fed-driven recession. We therefore continue to position the portfolio more defensively than usual. Technology stocks ($XLK), and Growth stocks more generally ($VUG), are particularly vulnerable to higher rates, in our view, and we thus continue to prefer Value stocks ($VTV).

Value stocks look cheap: bank ($XLF) and Energy ($XLE) stocks, for example, trade at distressed valuations. At the same time, it has to be acknowledged that the risk of a significant sell-off affecting all parts of the market is higher than usual, and will remain so as long as the Fed is behind the curve. We will try to outperform the index while trying to get to the turning point in the markets (which we expect to occur in about 12 months) without excessive damage to the portfolio.

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@triangulacapital -2.4%
$SWDA.L -13.9%

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$HR (Healthcare Realty Trust Inc), $RNR (RenaissanceRe Holdings Ltd) and $VICI (VICI Properties Inc) were replaced by $SAN.MC (Banco Santander SA), $SAN.PA (Sanofi) and $KB (KB Financial Group Inc) .

Copy Trading does not amount to investment advice. The value of your investments may go up or down. Your capital is at risk.

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Pietari Laurila is not a registered investment advisor and does not offer investment advisory, fund management or wealth management services.

Triangula Capital is a brand name, not an incorporated entity.

This page is provided for information purposes only. It is not a recommendation to copy the Triangula Capital strategy or to invest in any fund or security.

2009-2020 performance figures are from Pietari’s personal Interactive Brokers account. They are time-weighted returns calculated in accordance with the Global Investment Performance Standards (GIPS).

From 2021, performance is calculated by eToro.

Past performance is not indicative of future results.

Track Record

It is often said that past performance is not a guarantee of future performance.

That is true. But there is also some evidence indicating that portfolios that performed better in the past, do perform better in the future.

“[…] top-decile prior-alpha funds produce annual future alphas of about 150 bps, net of fees” Source

Risk warning: That is only one study. In general, past performance is not indicative of future results.

Aligned Incentives

Pietari invests the majority of his net worth in the strategy. This ensures that his interests are aligned with investors who copy the strategy.

“Funds with high-incentive contracts deliver higher risk-adjusted return, and the superior performance remains persistent. The top incentive quintile of funds outperforms the bottom quintile by 2.70% per year” Source

Risk warning: Pietari holds accounts with multiple brokers and may therefore have a conflict of interest when deciding which accounts he should trade in first.

Unconstrained Investments

The strategy has fewer constraints on its investments than traditional mutual funds.

The strategy portfolio can be invested in stocks, bonds or cash and these allocations can vary over time.

Compared to traditional mutual funds, the strategy also:

  • holds fewer securities
  • trades more
  • avoids following the index

Each of these points has been shown to be an important predictor of portfolio performance.

“We […] find that portfolio concentration is directly related to risk-adjusted returns for institutional investors worldwide” Source

“A one-standard-deviation increase in turnover is associated with a 0.65% per year increase in performance for the typical fund” Source

“We find that truly active funds significantly outperform closet indexers. Further, we find that the truly active funds are able to outperform their benchmarks on average by 1.04% per year” Source

Risk warning: Concentrated portfolios with few positions can suffer large losses if bad news arrives about any of the companies in the portfolio.

Cheap Stocks in Cheap Sectors

The strategy invests in geographies and sectors where values have collapsed due to macroeconomic problems.

Within these geographies and sectors, the strategy overweights stocks that trade at low valuations on measures such as price-to-earnings or price-to-net asset value.

Every stock in the strategy portfolio must also be a good company, with no obvious red flags or long-term threats to its business model.

The aim of the strategy is to maximize returns, even if this means taking more risks than usual.

Risk warning: The strategy portfolio tends to be concentrated in risky stocks, which means that its losses in any market downturn will likely exceed those of the market index.