2020 Portfolio Review:

For calendar year 2020 I lost 1% in AUD, when compared to the MSCI ACWI PMI, which gained 9%. On a constant currency basis, I was up 11%.

The strength of the AUD over the year detracted from returns, but is setting up attractive opportunities going forward, so I welcome its rise. Since I began formally tracking my portfolio in Aug 2018, I have gained a cumulative 8.5%, underperforming the MSCI which has returned 19% (both in AUD).

The biggest contributors for the year were Aimia, Barrick Gold, ABS CBN and Lloyds Bank, while the biggest detractors were Yatra, Landsec and Greenlight Re. Micro Focus and Liberty Latin America were down savagely from my original buys, but broke even for the year through aggressive averaging down. Antero Resources saw a strong percentage gain for the year, but this has merely reduced it from a 96% loss to a 75% (around 1% of the portfolio), although I am very bullish on energy and expect it to surpass my purchase price of $19 over the next cycle. The portfolio had 14 positions at year end.

It certainly isn’t ideal to trail the index by 10% after countless hours of work over a couple of years, but I’m not unhappy with the result. The environment has continued to be extremely treacherous for value investors (global deep value in particular) and I have seen numerous managers I greatly admire having a much rougher time of it. The index is top heavy with US tech, which I have none of, as opposed to my heavy anti-bubble exposure.

I am maintaining an absolute return mindset, however I would note that my 10% performance lag could reverse itself in an instant and I believe the portfolio is a coiled spring, based around extremely cheap stocks in my three main themes of EM, Energy and the UK. When considered against the major indexes at nosebleed levels, I am very comfortable with my holdings, all of which trade at deep discounts to either NAVs, normalised free cash flow, book value or EV/EBITDA (depending on the relevant situation).

While the growth mania is still raging, I will continue with a defensive mindset and consider myself fortunate if I can see it out relatively unscathed. This may seem a little negative, but it is hard to understand just how rough the March bear market and ensuing recovery has been, unless you have been watching a portfolio full of global (mostly EM) value stocks getting pummelled on your screen every day for the last year.

I have no career risk, so I can be brutally honest. I entered the year with around 37% cash and yet through the end of March I had underperformed the index- including the cash. This shouldn’t be possible, but such was the washout in deep value that no price appeared to be low enough. My stock-picking should shoulder plenty of the blame, but brutal results were observed across value stocks in most non-US markets and I was paddling upstream.

Two things saved my year. Firstly, the 6% position I bought in Barrick Gold two years ago, which I ended up trimming at nearly 20% of the portfolio. It proved to be a much needed cushion and although I bought it as a long on its own, it was pleasing to see it hedge against the red ink elsewhere.

Secondly, I can unequivocally say that holding cash in an expensive market showed its worth. I have heard many smart arguments for being fully invested at all times, but having that dry powder allowed me to claw back to near even by the end of the year. If I had been fully invested in February, I would have found myself in an even deeper hole, with nothing to lower my cost basis and take advantage of the bargain prices.

By the end of the worst in March, I had bought my way down to 28% cash. It would have been perfect had I spent the lot in the week of March 23, but investing doesn’t work like that. I added to LILAK and Micro Focus drastically lowering my cost basis and purchased Aimia after it had fallen into net-net territory.

There is always a lot of posturing when egos and money are involved. Many investors had hedges on and never monetised them, while conversely, many were already fully invested and screamed that it was a buying opportunity all the way down, when all they could do was sell cheap to buy cheaper.  But for all of it, I only know of one investor on the planet who had a decent hedge of some sort, only to turn around and launch it all long in late March- Bill Ackman.

Perfection is simply not a reasonable or practical goal in investing, when we deal with an unknowable future, and often attaining it will have been as much luck, as skill. I will have to be happy to have been directionally right and bought what I did.

The market began to rocket through late March and April on the back of Central Bank measures, but I was fortunate to have a wide watchlist I had already done a lot of work on.

Through-out the rest of the year, I was able to pick off opportunities that remained depressed for various reasons. I purchased Jardine Strategic, Lloyds and Lukoil, as well as averaging down on Micro Focus again, ABS CBN and participating in the LILAK rights offering. Many of these were cheaper for me than they had been in March, due to the AUD appreciating.

Just when it seemed that value would stay depressed permanently, it ripped around the US election and has continued strongly since. Once again, with hindsight I would have reached fully invested by November instead of around 17% cash, but such is life.

I have always maintained that I have no analytical edge in managing my portfolio. If I have any edge at all over the market, it is behavioural. I can truly act without any career-risk and when I say that I have a 10-year outlook, I mean it and have mostly acted accordingly. Thus far, I have managed to maintain this time-horizon arbitrage versus the market and it has allowed me to buy some investments with shocking outlooks hanging over them, such as Brexit, a broadcaster that lost its broadcasting franchise or Covid chaos in Latam and Russia.

I remain extremely confident that my approach of averaging in and picking my spots will lead to a fully invested portfolio, in the near future. My watchlist still has numerous possibilities and I am confident with a mid-teens cash weight given the bubble in the headline market. Warren Buffett maintains a healthy cash pile, after all.

Top positions

The top five positions as of Dec 31, 2020 were-

Aimia (12%)-

Aimia was a business focused on airline loyalty programs, however during the year, leadership was cleaned out and replaced with an activist investor I admire greatly (Mittleman Brothers). They are transforming the company into perpetual investment vehicle and have already started making deep value stakes around the world with spare capital. I bought Aimia (AIMFF) when it traded below net cash, at $1.25, in March and it has appreciated nicely to $3.34 today.

I have resisted the urge to trim thus far, as summing together the investment positions and cash still gives a NAV comfortably higher than today’s price. I tend to buy things when they are dropping like a stone, so when something gains momentum behind it, I want to make the most of it while it is still quite cheap. Selling too early is a perennial value investing mistake.

ABS CBN (11%)-

I wrote up ABS CBN in detail here. The company is a major media broadcaster and service provider in the Philippines and has had an awful recent history, due to a stoush with the president, Rodrigo Duterte. It has recovered very well since a blocktime deal was struck in October, with a rival broadcaster to get it back on the air. I believe it is worth 3x today’s price and should be another liquidity/momentum beneficiary, as it puts its franchise crisis behind it and slowly becomes investable again for institutions.

Micro Focus (10%)-

I wrote up MF here. People are probably sick of me going on about Micro Focus, but it remains extremely cheap and the story appears to be getting better. I first bought MFGP in late 2019 at $14.09/share and added this year at $4.90, then $3.70. My cost basis is now roughly equal to the current price of $5.70.

The company trades on under 4x my conservative estimate of normalised Free Cash Flow and paid out $1.10 in regular dividends in 2019. I believe the underlying cash flows are sustainable and the company will return to headline growth in the next couple of years. Although, even at steady state, it seems likely to do well.

Liberty Latin America (8%)-

I wrote a short piece at the time of LILAK’s Rights Offering here. The company is the forgotten horse in the Malone stable, despite having many of the same characteristics as market-darling Charter, but in a much faster growing market. The company has acquired wisely this year and has expanded its bundle offerings in its key markets of Costa Rica and Puerto Rico. Balan Nair could turn the free cash flow spigot on at his will, but I believe he is planning more growth and debt paydown before this point and, for this reason, the company will possibly remain misunderstood and undervalued for some time yet.

Mobile Teleysytems (7%)-

MBT is one of three Russian holdings which together make up 18% of my portfolio. It is also one of three EM Telcos I own, which account for 21%. The company is well capitalised, cheap and revenues were consistent throughout 2020. Management has proven themselves adept capital allocators, with special dividends and a share buyback taking place again this year. Since buying the company for $7.60 in 2018, it has paid out $2.20 in dividends and continues to have a sustainable shareholder yield in the high-teens.

Summary

I will refrain from any market speculation in closing. I was quite convinced markets would go lower in March and clearly have no ability to make any predictions going forward. US and growth indexes look increasingly frothy on a valuation basis, but valuation is not a timing tool. My portfolio also has zero cross-over with the large indices and will hopefully be able to forge its own path going forward, despite the broader low return environment.

Thanks to those who read throughout the year and shared their insights and research. 2021 is already looking like another hectic year, so back to the trenches.

Guy

I own positions in Aimia, ABS CBN, Micro Focus, LILAK, MBT, Lukoil, Jardine Strategic, Lloyds, Greenlight Re and Antero Resources.

PS. As always (and especially when I’m mentioning so many stocks), this isn’t investment advice. Please do your own due diligence and seek professional advice if you’re unsure about your finances.