Investing in undervalued securities worldwide

Weekly Update 2 January 2024

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2023 was a good year for the stock market. The MSCI World index returned +24%.

Our portfolio beat the market by 8 percentage points, returning +32%. The outperformance of the portfolio over the index can be attributed to stock selections, a geographical overweight in Europe, and some timing ability (avoiding part of the March bank crash).

I’m satisfied with the 2023 performance because the Financials sector, in which most of the portfolio is concentrated, did not do particularly well last year. It was easy to post a strong 2023 if you invested in Technology, not so easy if you invested in Financials.
www.sectorspdr.com/sectorspdr/tools/sector-tracker

Behind the good performance of the stock market in 2023 was a change in expectations about inflation and the economy. A year ago, inflation was running too high, and the worry was that central banks would have to increase interest rates to levels that would bring about a recession.

These fears have so far proven unfounded. Inflation has come down, and the global economy has been able to digest higher interest rates while experiencing only a mild slowdown.

As a result, investors have become more optimistic, and they have bid up the prices of stocks. In the near term, the rally may well continue, because liquidity conditions remain supportive.
stenoresearch.com/steno-signals-80-stealth-qe-arriving-in-size-in-q1/

Looking further out, my hunch is that inflation will make a comeback. The labour market is still tight, and the US Federal Reserve is adding fuel to the economic fire for political reasons (it tries to maintain a strong economy for the US November Presidential elections).

If inflation returns, another round of monetary tightening will be necessary, and a recession should finally follow.

It is, however, too early to position for recession, in my view. Underlying inflation is still falling and the economy is strengthening.
www.newyorkfed.org/research/policy/mct#–:mct-inflation:trend-inflation
data.oecd.org/leadind/composite-leading-indicator-cli.htm

If and when these trends change, it may be time to turn more cautious.

Overall, I am neither extremely bullish nor bearish for 2024. I don’t see a bubble in the market, but neither is the market dramatically undervalued. A repeat of 2023’s strong performance for the overall market is unlikely, but I do believe a worthwhile positive return is available from stocks, especially the non-US, value parts of the market.

As far as my portfolio is concerned, the thesis I have about Financials – that they are undervalued and should outperform in the new post-pandemic economic environment – has not yet played out. In a positive scenario, a full normalisation of bank valuations could lead to another strong year.

While we wait for that, the companies in the portfolio pay close to 10% a year to shareholders via dividends and buybacks. This beats investing in cash, even with the higher interest rates now available. So I’m happy to hold the stocks in the portfolio, while keeping an eye on the evolution of inflation and the economy. A reversal in current benign trends in these macro variables may call for a reduced risk approach at some point during the year.

2023 performance
@triangulacapital +31.8%
$SWDA.L +23.9%

Portfolio changes
None

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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.