Investing in undervalued securities worldwide

Weekly Update 19 December 2022

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Stocks fell 2% last week after the US Federal Reserve and the European Central Bank sent hawkish messages to the markets.
www.ft.com/content/b39672fc-a60d-4cb2-bb3b-f659ea7d8ad1

The ECB said that interest rates need to increase โ€œsignificantlyโ€ next year. โ€œAnybody who thinks that this is a pivot for the ECB is wrong,” noted ECB chief Lagarde, referencing the slowdown in the pace of rate hikes. This was a very hawkish message.
themacrocompass.substack.com/p/iconic-ecb-meeting

In principle, increases in interest rates are beneficial for our bank-heavy portfolio because banks can earn more interest income when interest rates are high.

But if rates are taken too high, they will tip the economy into recession. The benefit from rates for banks then disappears, as they lose more money from people defaulting on their loans compared to what they make in extra interest.

At the moment, we consider that the tipping point has not been reached. Energy prices have fallen, helping the consumer,
tradingeconomics.com/commodity/eu-natural-gas

while copper prices, a good indicator of global economic activity, have increased.
tradingeconomics.com/commodity/copper

Despite current economic resilience, investors are fairly pessimistic about next year. Most investment banks expect markets to drop or go nowhere in 2023. The typical bank expects stocks to fall in H1 before recovering in H2, with little overall change for the year.

This is important because the best times to buy tend to occur when expectations are low. If we had to hazard a guess, it would be that the markets will confound expectations by rising in H1 but falling in H2, as it is only in H2 that consumers run out of their pandemic excess savings and a recession ensues.

Our portfolio is therefore positioned for a better-than-expected economy. The risk is that the economy deteriorates quickly in H1 23, especially if this is accompanied by rapidly increasing interest rates that would raise doubts about Italyโ€™s debt sustainability. We take this risk because if the economy does not deteriorate, 50% upside is available from many of the banks in the portfolio.

We wish you a Merry Christmas! Weekly Update will return in the new year.

๐Ÿฎ๐Ÿฌ๐Ÿฎ๐Ÿฎ ๐—ฝ๐—ฒ๐—ฟ๐—ณ๐—ผ๐—ฟ๐—บ๐—ฎ๐—ป๐—ฐ๐—ฒ ๐—ฌ๐—ง๐——
@triangulacapital -1.9%
$SWDA.L -18.0%

๐—ฃ๐—ผ๐—ฟ๐˜๐—ณ๐—ผ๐—น๐—ถ๐—ผ ๐—ฐ๐—ต๐—ฎ๐—ป๐—ด๐—ฒ๐˜€
A position was opened in $BAC (Bank of America Corp) .

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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. 81% 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.

eToro (Europe) Ltd., a Financial Services Company authorised and regulated by the Cyprus Securities Exchange Commission (CySEC) under the license # 109/10.

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, visit 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.