Investing in undervalued securities worldwide

Weekly Update 29 January 2024

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The Financial Times last week published an interesting interview with Rob Arnott, the founder of Research Affiliates.
www.ft.com/content/83430b79-5849-4bd1-8fc0-e8331b3fca14

Research Affiliates is a value-oriented asset manager that uses a quantitive approach to choose stocks. They call their approach fundamental indexing. The idea is that stocks are chosen by a computer, and stocks with better fundamentals (earnings, cash flows, sales) are emphasised in the portfolio.

Research Affiliates often publish research papers that are of interest to value investors.
www.researchaffiliates.com/insights/publications

The company’s asset allocation tool can be used to gauge the future returns investors can expect from various asset classes.

interactive.researchaffiliates.com/asset-allocation

So what does Rob Arnott have to say in the Financial Times?

Arnott argues that markets remain inefficient today. That means that share prices sometimes get out of line with fundamentals.

As an example Arnott cites AI stocks. The prevalent market narrative is that AI is going to change everything, which is true, but the change is going to take longer to play out than investors expect, setting the scene for disappointments in the near term.

Arnott is then asked why Value stocks ($VTV) have underperformed Growth stocks ($VUG) for the past 15 years. The reason is that Value stocks became a lot cheaper relative to Growth. This is something we can see quantitatively in the value spread, which is at a high level, indicating a good opportunity In Value stocks today.
www.robeco.com/en-int/insights/2024/01/value-investing-the-reports-of-my-death-have-been-greatly-exaggerated

Arnott believes that in the 2020s, inflation will be more volatile and perhaps higher on average than the market expects. This should benefit Value stocks.

Overall, Arnott’s message is that he believes it’s a good time to invest in Value stocks because they are cheap. It would be dangerous to look at past 10-15 year returns when evaluating Value stocks. The time to buy them is when they have done poorly in the past, and the time to sell may come after a period of good performance.

2024 performance
@triangulacapital +2.0%
$SWDA.L +1.5%

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.