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Weekly Update 27 June 2022

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Another bear market rally started last week and stocks gained 6%.

The rally started for a few reasons:

1. The markets were oversold and investors pessimistic.

2. Quarter-end rebalancing flows by US pension funds.

3. Good news about inflation. The University of Michiganโ€™s gauge of inflation expectations dropped to 3.1%, and commodity prices fell.

The third reason is particularly important because high inflation has been a principal reason for the poor performance of the markets this year. If inflation falls, central banks can become less aggressive, bond yields can fall, and stocks can rise.

We would ignore this rally if it was simply based on flows, sentiment and technicals. Since it has the fundamental story about falling inflation behind it, though, it could run a little longer. As a result, we decided to increase the allocation of the portfolio to stocks last week.

This increased allocation is only a tactical position. Macro momentum remains negative whether you look at retail sales, the housing market, consumer confidence, or durable goods orders. The Conference Board LEI, which aggregates a number of these leading indicators into one score, has turned negative on a 6-month rate of change basis. This has frequently preceded recessions in the past.

Due to the negative macro momentum, our base case is that the current rally will end in July, the bear market will resume in August, and the market will only be able to bottom durably in Q1-Q2 2023. No opinion should be held too strongly, however, so investors should remain alert for further good news about inflation, which would lower bond yields, improve the housing market and consumer confidence, and perhaps even allow the economy to avoid recession (though that is a long shot).
๐Ÿฎ๐Ÿฌ๐Ÿฎ๐Ÿฎ ๐—ฝ๐—ฒ๐—ฟ๐—ณ๐—ผ๐—ฟ๐—บ๐—ฎ๐—ป๐—ฐ๐—ฒ ๐—ฌ๐—ง๐——
@triangulacapital -4.0%
$SWDA.L -18.1%

๐—ฃ๐—ผ๐—ฟ๐˜๐—ณ๐—ผ๐—น๐—ถ๐—ผ ๐—ฐ๐—ต๐—ฎ๐—ป๐—ด๐—ฒ๐˜€
To try to benefit from the rally, new positions have been opened in the Utilities $XLU sector. $SRE (Sempra Energy), $D (Dominion Energy Inc), $FE (FirstEnergy Corp), $EVRG (Evergy Inc) and $VST (Vistra Corp) are from the US and $NG.L (National Grid) is from the UK. The portfolio also contains one new Financial, $ALLY (Ally Financial Inc) . We are cautious on the Financials sector in general because of the negative macro momentum, but $ALLY is oversold and according to the Fedโ€™s recent stress test would survive a severe recession without issues.

Overall, the portfolio has a non-cyclical, defensive bias, which we expect to maintain until we see evidence that the economy has turned a corner.

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”ย 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.

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  • holds fewer securities
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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.