Investing in undervalued securities worldwide

Weekly Update 24 April 2023

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Following a string of decent bank earnings last week, the risk level of the portfolio was increased. We are now back into a heavy Financials sector overweight.

The reason is that we feel that the banking situation has stabilised, while most bank shares have not recovered the losses they suffered in March after the Silicon Valley and Signature Bank collapses. If bank earnings continue to come in strong, we believe bank shares could bounce.

US banks tend to report earnings before European banks. There are four big banks in the US – JPMorgan, Bank of America, Citigroup and Wells Fargo. Two of them – JP and Citi – have already recovered their March losses because they positioned themselves successfully for a rising interest rate environment and have few unrealised losses on their balance sheets.

The other two big banks, Bank of America and Wells Fargo, also posted decent Q1 earnings, but since they have more unrealised losses on their balance sheets than JP and Citi, their shares are down around 10% since March.

Smaller (“regional”) banks in the US have suffered more. One regional bank, $USB (US Bancorp), made a brief appearance in the portfolio last week after its earning release. However, this position was quickly liquidated following unexplained losses over the next few days. On the weekend, we learned that $USB was subject to a report alleging the bank had a capital shortfall. The stock is now too risky to be included in the portfolio.

In Europe, $BKT.MC (Bankinter) started the European bank earnings season strongly. The shares fell, but we continue to hold them because we think the reaction was too harsh. Bankinter is one of the most profitable banks in Europe and the valuation at 7x 2024E earnings appears too low given the quality of the company.

$DBK.DE (Deutsche Bank Aktiengesellschaft), a new portfolio position, will report Q1 earnings this week. Deutsche shares fell sharply in March after doubts were raised about the bank’s stability. The situation seems to have improved since and the shares trade at an extremely depressed valuation of 5x 2024E earnings.

Overall, the portfolio now has a heavy tilt to Financials, which we believe trade at valuations that are too low.

This is a risky allocation in line with our strategy of “higher risks for higher returns”.

2023 performance YTD
@triangulacapital +16.4%
$SWDA.L +9.1%

Portfolio changes
Pan American Silver, Suncor, Roche and the JPMorgan Emerging Market Bond ETF were sold. NN Group, Deutsche Bank, NatWest and Equitable Holdings were bought.

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.