Investing in undervalued securities worldwide

Weekly Update 14 November 2022

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Stocks soared last week after inflation in the US came in lower than expected.

We decided to buy back into stocks – specifically, European banks and Energy companies – because of three major developments last week:

1. The US inflation surprise on Thursday reduced the risk of US interest rates going up too high, too fast.

2. On Friday, China indicated it is taking steps towards living with COVID.

3. Also on Friday, Russia withdrew from Kherson without incident. Use of unconventional weapons by the Russians has been a constant tail risk hanging over the market, but that risk now seems to have reduced.

As a result of these developments, we view the world as stable enough again that we are now happy to hold risky stocks, at least for the time being.

European banks are prime beneficiaries of improved geopolitical stability. Despite all the bad news out this year, the sector is only down 3% for the year to date. That shows great resilience and can be explained by the huge increase in interest rates, which banks benefit from.

European banks are still cheap. A good example is $BNP.PA (BNP Paribas SA), which trades at 7x forward earnings. Historically, the company has traded at 9x forward earnings, and we would argue that a 10x multiple would be justified given the improved interest rate environment. This indicates the shares have 30-40% upside. It is a similar story with the rest of the European banks in the portfolio.

These are risky companies. At the slightest hint of economic trouble, they lose 20%; a typical recession sees their values drop 50%. However, the price action of the banks this year suggests that a recession may already be in the price.

We have held an overweight in European banks for several years. It has done nothing for overall portfolio performance, which has been more driven by choosing superior banks within the sector. We continue to have a strong conviction that the banks will perform well over the coming years, as the interest rate environment has changed, and have to be worried about missing the future upside, too. A portfolio full of banks is not comfortable to hold given the upcoming 2023 European recession, but our general approach is to accept risks when the economy feels stable enough.

We have also opened positions in a few oil companies, which we believe are undervalued like the banks. We expect the oil price to hold up well next year due to low inventories, tight supply and the Chinese reopening.

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@triangulacapital -2.9%
$SWDA.L -16.0%

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The portfolio is now almost 100% invested in European banks and Energy companies.

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.