Investing in undervalued securities worldwide

Weekly Update 4 March 2024

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Our portfolio is invested in banks, insurance companies and energy companies.

Banks typically outperform the market when interest rates go up. This is logical because banks make more interest revenue when rates are high.

In 2024, I think banks can outperform even if central banks cut interest rates.

Recently, the relationship between bank shares and interest rates has not been the traditional one.

A couple of years ago, the market became (rightly) worried that high rates would cause banks’ loan book quality to deteriorate. With high interest rates, more people would have difficulty paying back their loans, and banks would have to write them off.

That has not happened. Unemployment has stayed low, so loans to individuals have experienced low default rates.

More recently, investors have expressed concern about the exposure of banks to commercial property. Loans on office buildings, in particular, have become problematic because of the trend towards home working.

The good news is that European banks have only 5% of their loan books exposed to commercial property. A bigger concern is US regional banks, which have 20% of their loan books in commercial property. This is one reason I have no US regional banks in the portfolio.

European banks are trading at cheap valuations. In the portfolio, Santander is on a 5.3x P/E (price-to-earnings, 2025E), Intesa on 6.5x, ING on 6.3x, BNP on 5.7x. Normally banks like these trade closer to 9x P/E.

I continue to hold the banks because of their low valuation and because I believe the economy will do well in 2024.

2024 performance
@triangulacapital +6.8%
$SWDA.L +6.3%

Portfolio changes
ASR Nederland was sold following a tepid Q4 earnings report. It was replaced by Eni.

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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.

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.