Investing in undervalued securities worldwide

Weekly Update 26 June 2023

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Our strategy has performed poorly since the end of January, with a -7% return.

Banks, our main focus, have underperformed this year. A few banks failed in the US in March and April, leading to higher costs for all US banks. The US bank index $KBE is down 20% for the year.

European banks have done better, up 10%. Due to stricter regulations, they have avoided the liquidity problems that hit US banks. But they, too, have failed to outperform.

Behind this underperformance are changes in economic expectations. Expectations rose from October 2022 to February 2023, helping banks, but since February, expectations have again declined. Banks are extremely sensitive to the state of the economy, so when economic expectations worsen, banks tend to underperform.
tradingeconomics.com/euro-area/zew-economic-sentiment-index

A good time to buy banks is usually when economic expectations are low, because then they have plenty of scope to improve. Conversely, a good time to sell is usually when economic expectations are high.

At the moment, expectations are below average, though not extremely low. However, bank shares have in some cases returned to their last October levels, when economic expectations hit rock bottom. This is true of for example the UK domestic banks Lloyds and NatWest, Deutsche Bank, Bankinter and Societe Generale.

Given their poor performance this year, we view bank shares as discounting plenty of bad news already. This is not to say they can’t decline further. If higher interest rates lead to a financial crisis, further declines will be inevitable.

A crisis would most likely be caused by inflation staying high and interest rates having to go even higher than at present. It seems, however, that the worst of the inflation problem is now behind us. This is especially clear in the US, but European price indicators also point to a slowdown.
tradingeconomics.com/united-states/ism-manufacturing-prices
tradingeconomics.com/united-states/ism-non-manufacturing-prices
www.newyorkfed.org/research/policy/underlying-inflation-gauge

It is likely that banks will start outperforming again when central banks have enough evidence in front of them that their war against inflation has had its intended effect.

2023 performance YTD
@triangulacapital +8.4%
$SWDA.L +12.6%

Portfolio changes
Allianz was sold, Amundi bought.

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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. 76% 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” 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.