Investing in undervalued securities worldwide

Weekly Update 22 January 2024

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2024 has started like 2023 ended, with Technology shares leading and other sectors lagging. European banks, for example, are down 2% for the year to date. www.sectorspdrs.com/sectortracker qontigo.com/index/SX7R/

I think this is unlikely to continue. Like eToro Market Strategist Ben Laidler, I believe 2024 will be a year when Value stocks make a comeback, as the economy stays strong and interest rates remain stable or go up.
www.etoro.com/wp-content/uploads/2024/01/Analyst-Weekly-220124-Getting-your-style-right-for-2024.pdf

Whether Growth or Value stocks outperform is closely tied to the question of which geography outperforms – US or the rest of the world.

Value stocks tends to outperform Growth when non-US stocks outperform. This is logical because non-US stock indices contain more Value stocks.

Conversely, the US stock index $SPX500 contains lots of Growth stocks, so it tends to outperform the rest of the world when Growth outperforms.

So what can we say about the prospects of the US vs the rest of the world over the coming years?
www.ft.com/content/251cedd1-3887-43b8-9cdc-8a95cefe0fda

Investment bank Goldman Sachs argues that the US has the best financial markets in the world, favourable demographics, and extensive human and natural resources. It may be more expensive than other countries, but for good reasons.
www.ayco.com/insights/articles/2024-outlook.html

By contrast, asset manager AQR argues that US stocks will probably not be able to repeat the performance of the recent past.
www.aqr.com/Insights/Research/White-Papers/Driving-with-the-Rear-View-Mirror

As a value investor, I’m naturally more inclined to support the AQR position, but I also see merit in Goldman Sachs’s case. The valuation difference of US vs non-US stocks is not as big as it at first appears, after adjusting for different sector compositions of US and non-US indices, the resiliency and diversification of the US economy, and the high shareholder friendliness of US corporations.

Nevertheless, in the banking sector specifically, the valuation differential between US and non-US stocks is so significant that in this particular sector, I believe there are good reasons to prefer non-US banks over US ones.

2024 performance
@triangulacapital -0.7%
$SWDA.L +0.2%

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.