Investing in undervalued securities worldwide

Weekly Update 25 July 2022

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Stocks rose last week despite weak economic data which indicate the global economy may already be in a recession. โ€œExcluding pandemic lockdown months, output is falling at a rate not seen since 2009,โ€ says S&P.
www.pmi.spglobal.com/Public/Home/PressRelease/52db97a5557c433d855b74a46c5ecff6

The surprising resilience of the market may be due to the bad data being expected. Investors are currently the most pessimistic about the economy since 2008 and have positioned defensively accordingly.
www.sentix.de/index.php/en/sentix-Economic-News/crash-the-second.html www.zerohedge.com/markets/biggest-wall-street-bear-turns-bullish-after-record-pessimism-full-investor-capitulation

Fund managers are holding the most cash since 2001, and within equities, they are overweight defensive sectors, such as Healthcare ($XLV) and Staples ($XLP), and underweight riskier sectors, such as Consumer Discretionary ($XLY).

These levels of pessimism have historically led to rallies. The catalyst this time has been speculation about lower inflation readings, and a possible โ€œFed pivotโ€ coming later this year.
ca.finance.yahoo.com/news/morgan-stanley-jpmorgan-disagree-fed-083714487.html

Our portfolio held a lot of cash last week, but after the latest investor positioning data was released, we decided our pessimistic view had become too consensus. We don’t want to be doing the same thing as everybody else.

Thus, we decided to buy back into Bank shares, whose valuations have fallen to February 2016, July 2016 and December 2018 levels. These occasions coincided with economic slowdown fears and were all followed by strong rallies.

The current economic situation is far worse than 2016 or 2018, so holding banks is far from a slam dunk, and the position is more tactical than strategic in nature. If bad news hits about Nord Stream 1, for example, we would not be surprised to see banks drop 30% in a few days, and it will be difficult to get out.

On the other hand, banks appear substantially undervalued. A Credit Suisse model based on interest rates, PMIs and EURUSD, for example, indicates that bank shares have 50% upside even in a severe economic slowdown scenario.

We feel the current equity rally may have a little more room to run, and thus hold the banks, but stops are tight and we expect to dial risk exposure back down in the coming weeks.

๐Ÿฎ๐Ÿฌ๐Ÿฎ๐Ÿฎ ๐—ฝ๐—ฒ๐—ฟ๐—ณ๐—ผ๐—ฟ๐—บ๐—ฎ๐—ป๐—ฐ๐—ฒ ๐—ฌ๐—ง๐——
@triangulacapital -4.4%
$SWDA.L -17.1%

๐—ฃ๐—ผ๐—ฟ๐˜๐—ณ๐—ผ๐—น๐—ถ๐—ผ ๐—ฐ๐—ต๐—ฎ๐—ป๐—ด๐—ฒ๐˜€
The majority of the portfolio is invested in a mixture of US and European Financials. We have emphasised quality, and are avoiding Financials with low levels of profitability or those with the highest exposure to a potential Nord Stream 1 shutdown.
blogs.imf.org/2022/07/19/how-a-russian-natural-gas-cutoff-could-weigh-on-europes-economies

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Disclosures

eToro is a multi-asset platform which offers both investing in stocks and cryptoassets, as well as trading CFD assets.

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage.ย 67% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work, and whether you can afford to take the high risk of losing your money.

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eToro (UK) Ltd. is authorised and regulated by the Financial Conduct Authority (FCA) under the license FRN 583263.

Your capital is at risk. Other fees may apply. For more information, visitย etoro.com/trading/fees.

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.

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.

Higher Risks for Higher Returns

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

The strategy invests in countries 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.

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.