cybrain
2023 Portfolio Performance
This is our sixth annual review of our portfolio, which we gladly share with the SA community. We have been assessing our portfolio’s performance since 2008.
The only reason we do these reviews is to judge whether we have produced alpha and if we can learn anything from past events.
In 2022, we did produce an alpha of 36.8% above our benchmark. This year was not as good.
Market gurus and respectable economists try to predict what is going to happen in the economy. Anything from where share prices and interest rates will go. This we do not pay much attention to because they are mostly wrong. We try to focus on having a balanced investment portfolio that will last through the various cycles.
Let us go through the performance.
Capital allocation
In our recent article on BlackRock’s iShares Hong Kong ETF (EWH), we shared some thoughts around GMO’s Ben Inker quarterly letters stressing the importance of quality assets.
Simply put, their 3 main criteria for this are companies with the following:
- Sustainable competitive advantage, which is often referred to as a moat.
- High, and stable profitability over long periods.
- Low leverage.
These are also important to us in our selection of companies that go into our portfolio. We also like to use other criteria, including a ratio of dividend yield divided by its price/net tangible book value. The higher the ratio, the better it is.
The company with the highest such ratio is Sun Hung Kai & Co. (OTCPK:SHGKY) with a ratio of 47.6 and the lowest is Alibaba (BABA) with a ratio of only 1.4
The five largest allocations by valuation are largely unchanged from last year. They are:
Tudor Invest’s five largest positions – 2023 (Tudor Invest)
In terms of diversification, it is important to be invested in different sectors. Our portfolio is heavily tilted towards real estate and financials. These are the two segments we like the most.
Tudor Invest equity sector allocation 2023 (Tudor Invest)
Our geographical allocation has not changed much over the years. As of the 31st December 2023, 33% were in companies that are listed in Europe, 29% were listed in Singapore, 26% were listed in Hong Kong, and the balance 12% are listed in the U.S.
We find more value propositions in Asia and Europe than we find in the U.S.
Nevertheless, that does not mean we want to exclude investing in the U.S. stock market. Many great American companies are worthy of asset allocations. Over the last decade, the stock market of the U.S. has also outperformed the rest of the world pretty much each year. Much of this is the result of the great performance of the FAANG stocks.
Changes to portfolio
We did not dispose of any shares in 2023. To the contrary, we kept adding to our positions in companies, such as British American Tobacco (BTI), Legal & General (OTCPK:LGGNY), Star Bulk Carriers (SBLK), and Hong Kong Land (OTCPK:HKHGF).
New to the portfolio for the year was DHT Holdings (DHT). You can read here, where we explained in an article why we initiated a position in the company.
We are still bullish on both dry and wet bulk shipping companies for the next two to three years. The reason for it being favorable supply dynamics with few new ships coming combined with lower utilization rates as a result of changing trade patterns. The reduction of vessels passing through the Suez Canal seems to be lasting longer than what we earlier anticipated. It may go on through the whole of 2024. There are also elevated risks of more trade disruptions between the 3 big blocks of EU, USA, and China which might increase longer voyages and lower utilization rate further.
Benchmarking
We have been assessing our portfolio’s performance since 2008. As such, we have 16 years of consecutive performance numbers.
This is something we highly recommend all investors to do. Small or big, does not matter. After all, don’t you want to know if it is worth managing your portfolio, or simply buying an index and leaving it at that?
Since our portfolio is geographically spread globally, we decided from the beginning that we would use the MSCI World Index as a benchmark. For consistency, we try not to make too many changes to how we measure the performance. Hence, we have stuck with this index.
Tudor Invest performance versus MSCI World Equity Index (Data from Tudor Invest and MSCI. )
Our actual return of 15% is quite acceptable to us, although it falls short of the 27.8% rise in the MSCI World Index.
When we look at the performance over these 16 years, it is clear that it is very hard, indeed, to beat the market.
Dividends
In last year’s performance review, where we did manage to achieve alpha, we explained our thoughts about the importance of dividends.
It should never be the most important factor in deciding whether to invest in a company or not. We bought Alibaba in 2022 not expecting a cent in dividend. The reason we bought it was a combination of its growth and value proposition. More on this later. When Alibaba towards the end of last year announced that they would pay a dividend, it caught us, and probably many others, in surprise.
Passive income, such as dividends, is a great way to supplement our income. This is especially important when we retire. Inflation is a bigger problem for retirees, which has no bargaining power for a pay rise. They increasingly need to rely on private investments. Dividends can be a good stream of income. There are never any guarantees that each of our companies will be paying a dividend, let alone a growing one. However, we do expect management to treat us minority shareholders well and focus on returning some money to us.
The total yield in 2023, defined as net payment to our bank account based on the cost of our investment, was a respectable 7%.
We received 58 payments throughout the year and the dividend increased by 16.7% from 2022. This was partly as a result of re-investing most of the dividend selectively where we wanted to increase our exposure.
In addition to dividends, we also need to take into account share buybacks.
Out of the 22 companies in our portfolio, 10 companies bought back some of their shares in 2023. SBLK was the most aggressive with a huge buyback that wiped out nearly 20% of their ordinary shares.
Reflections and Plan for 2024
To continue on the topic of dividends, we hope that it will grow marginally this year too.
HSBC will most likely pay a special dividend in 2024 from the proceeds coming from the sale of their Canadian retail banking business. This will be welcomed.
We believe that earnings for our bank shares, like HSBC, DBS (OTCPK:DBSDY) and Swedbank (OTCPK:SWDBY) will not grow much from here, as their net interest rate margin has most likely peaked.
We are cautiously optimistic that interest rates have peaked and that some of our REITs will be able to reduce their cost of financing over this year. This might translate into a small improvement in the reduced DPU they delivered in 2023. We expect that the share prices in 2024 in our REITs also will reverse the negative trend, as a result of a potential slight uptick in DPUs.
Alibaba is the only counter in our portfolio where we are unsure about whether we want to keep or sell it.
It is still, in our opinion “good value”. However, it does not matter what we think. What matters is what the rest of the investment community thinks. And at this point, the share price tells us a story of little “love” for this company. We are unable to see what will be the catalyst that propels the share price towards a higher level. If we look at the 30 analysts who have estimated their earnings for this and next year, they do see a growth in earnings of 16% and 7% in 2025. With that, it comes out to a P/E of just below 8. That is ten times lower than that of Amazon (AMZN). Let that thought sink in. Is Amazon worth ten times more than Alibaba? We think not.
In the short term, the stock market behaves like a voting machine, but in the long term, it has been described as acting like a weighing machine. Perhaps we need to be more patient with our position in Alibaba, and not make the same mistake we did when we lost patience and sold Microsoft (MSFT) in 2013. If we had kept it – it would have been a ten-bagger.
Oh well, life goes on. You win some, and you lose some. Charles Dickens once summed it up by stating:
Reflect upon your present blessings, of which every man has many, not on your past misfortunes, of which all men have some.”
Good luck to all investors for 2024
