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Weekly Update 26 August 2024

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Our portfolio hit a new all-time high last week. It is up +34% for the year to date. I regard the shares in the portfolio as reasonably valued, so continue to hold.

Because I believe interest rates are going down, a large part of the portfolio is invested in European real estate.

Let’s take a look at one European real estate company in the portfolio, $VNA.DE (Vonovia SE), which owns and manages residential properties in Germany.

German residential property was until recently considered a safe asset class to invest in because:

1. Germany has seen strong demand for residential property over the past 10 years owing to population growth and limited supply.
www.realestate.bnpparibas.de/en/market-reports/residential-market/germany-report

2. Germany’s strong finances mean it is a safe place to invest in a crisis. Germany has an AAA credit rating and the lowest bond yields in the eurozone. If the euro area were ever to break up, German properties could be expected to appreciate, due to the new German currency being stronger than the euro.

3. German rents, being regulated, are less volatile than rents in the US or UK.

4. German property prices never declined much in the past 20 years and doubled from 2011 to 2021.
tradingeconomics.com/germany/housing-index

In this favourable environment, it is not surprising that German residential landlords performed well. Vonovia, the biggest publicly listed landlord, saw its share price triple from 2013 to 2021.

Problems only surfaced in 2022 when interest rates started to go up.

The higher interest rates lowered the values of Vonovia’s properties by 15%. The company had a significant amount of debt, which magnified the effect of this drop on shareholders. The value of Vonovia’s shareholder equity dropped 30%.

What made the situation worse is that the drop in the value of its properties led to the company’s balance sheet becoming stressed. The company’s loan-to-value ratio increased from 44% at the end of 2021 to 47% in June 2024. The company had to sell some of its properties to keep the loan-to-value ratio in check.

The good news for Vonovia is that as interest rates have stabilised, it appears that German property values have stabilised, too. Vonovia reported a fall in values of 1.4% in H1 2024, but management was optimistic about the prospects for H2. There are grounds for this optimism: prices started rising in the second quarter.
www.ifw-kiel.de/publications/news/greix-q2-2024-turnaround-on-german-real-estate-market-has-begun/

If the German residential property market has indeed found a bottom, Vonovia shares look attractive. The company’s properties are worth 44 euros per share. The shares can be bought for only 31 euros – a 30% discount.

If we assume that the company has to execute a capital raise to bring its loan-to-value ratio down to the company’s target range of 40-45%, the adjusted book value of Vonovia could be 40 euros. That is my price target, which suggests 30% upside could be available.

2024 performance
@triangulacapital +34.1%
SWDA.L +16.4%

Portfolio changes
BT Group was sold, Tritax Big Box REIT bought.

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 2024 | All rights reserved.

Disclosures

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CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 51% 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.

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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.