Global Quarterly Portfolio Update

Global Quarterly Portfolio Update

We are pleased with the first quarter return. However, we remain far from being satisfied and are working harder than ever to maintain our momentum, while also protecting ourselves from the irrational exuberance currently seen in markets. Net of fees and expenses the average performance of our portfolios equated to 5.7% (performance dependent on the individual’s time in the market and reporting currency). Our benchmark, the S&P 500 returned 5.8% in quarter 1 of 2021. This return is pleasing considering our cautious approach taking less risk than the benchmark.

We see three prominent risks to current market performance.

  • President Biden’s proposed corporate tax hike.
  • Rising and unexpected inflation.
  • Massive inflows seen in global equity funds.

President Biden’s proposed corporate tax hike:

According to Goldman Sachs strategists’ earnings per share (EPS) for the S&P 500 companies would rise 12% in 2022 if the corporate tax rate does not go up, which is unlikely. If the President’s full proposal is approved, that would take a bite out of EPS. If the rate rises as proposed from 21% to 28%, and government sets a minimum of 21% on global profits, that would create gains of just 5%.

Rising and unexpected inflation:

The FED wants higher, but reasonable inflation, and we are constantly reminded not to “Fight the Fed”. With that in mind we have positioned our portfolios to attempt to hedge this risk by buying into companies with strong pricing power and large operating margins that can easily absorb rises in inflation.

The below graph is the market’s expectation of inflation: (Breakeven rate)

Massive inflows seen in global equity funds:

Investors have put more money into stocks in the last 5 months than the previous 12 years combined. Let’s look at an example of Coca Cola, Coke has always been a good business (duopoly, strong brand, high margins, addictive product etc.) but had you bought it in June 1998 at 32 times earnings it wasn’t until December 2010 that the share price rose above your entry point. At one point in 2003 the share was down 50% from the entry point in 1998. The interesting thing to note is that earnings did not drop. Earnings for Coke almost tripled. The thing is the stock had risen nearly 50-fold since 1983 so it’s logical to assume that everyone loved it and owned it. The issue is when there are massive inflows and everyone already owns it, who are the buyers left to take the price higher. The lesson to take from this example is that price matters and we are structuring our portfolios to ensure we do not overpay especially in the current market conditions.

Top contributor to quarterly performance: Daimler (32%)

Daimler prices rose significantly albeit from a low base. The positive development was due to the Daimler management team’s rapid response to the crisis in the form of immediate measures taken to safeguard liquidity, optimize costs, adjust production operations, and ensure a stronger focus on cash flows. Investors were also encouraged by the positive developments on the Chinese automotive market. The momentum was reinforced by various other strategic initiatives in addition to the announcement that Daimler Truck AG and Volvo Group would be establishing a joint venture for a series productions of fuel cells, in part to support the European Green Deal.

Top detractor to quarterly performance: ARK Innovation ETF (-8.1%)

This ETF has seen extreme volatility in the last quarter as market momentum shifted toward value from growth stocks. Rising interest rates and inflation concerns increased the discount rate of the future value of high-flying stocks. The pullback is mostly due to sharp drops in stocks like Tesla, Roku and Square. We, however, expect this high volatility for this holding as it has a highly aggressive approach and holds high beta stocks.

Sales made this quarter:

New additions to the portfolio:

The changes made in the portfolios was focused on hedging our risks against the three most prominent risks we have identified.

As a team we would like to thank you for your support and trusting us with your affairs. As always, feel free to contact me if you have any questions.

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