Investing in undervalued securities worldwide

Weekly Update 18 December 2022

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After a good year, many investors will be wondering if the market can go higher from here or if it might be a good time to sell.

At such times, it is useful to take a step back and consider what the stock market will do over longer time periods.

JPMorgan earlier this month released their outlook for the next 10-15 years.

The bank predicts that, in inflation-adjusted terms, $1 will be worth $1.04 a decade from now if invested in cash. But the same $1 will be worth $1.54 if invested in a mix of stocks and bonds.

Next consider the asset allocation model of Research Affiliates (RA).

RA predicts that, again in inflation-adjusted terms, $1 will be worth $1.08 a decade from now if invested in cash. But it will be worth $1.97 if invested in stock markets outside the United States.

Whichever model you look at, the message is clear. Despite higher interest rates, investors will be better off in stocks in the long run, compared to cash.

If there is debate about something, it is about the long-term prospects of the US stock market. JPMorgan is relatively optimistic, predicting 4.5% annual returns (after inflation). Research Affiliates believes returns will be lower, only 2% a year. The difference comes down to how much each house believes valuation will drive returns, and to what extent the higher valuation of the US market is justified due to the US’s leading position in artificial intelligence.

For my part, I’m in the Research Affiliates camp. I believe the US market will struggle to make progress this decade.

Be it as it may, a key message from both publications is that non-US markets should outperform US markets. The starting valuation of non-US markets is lower, and non-US markets contain more companies that benefit from higher interest rates. The US outperformed massively in the 2010s; in the 2020s this will probably reverse.

The overall message from the two publications is positive. Investing in non-US stock markets should return about 7% a year after inflation, leading to a doubling of the purchasing power of capital invested today over the next 10 years. That is a good return that far beats investing in cash.

2023 performance YTD
@triangulacapital +31.0%
$SWDA.L +22.1%

Portfolio changes
Credicorp was sold following a strong run.

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.