I launched The Great Irish Share Valuation Project in Jan-2012 with all due confidence & bravado. [The ultimate irony in business & government is that people quickly learn (insane) confidence is the best way to get ahead, while ignoring it can also lead to the most spectacular of downfalls!]. It was actually a rather daunting proposition at the time…
Not necessarily because of the number of stocks involved – Ireland’s one of the few developed markets where it’s entirely possible to roll up your sleeves & get to know each stock pretty well. [I count 70 stocks in my latest file]. That may or may not float your boat, but I think it’s another good reason to put the Irish market on your to-do list this year. Picking out 2 or 3 safe & cheap stocks is a real luxury – it’s infinitely more challenging to tag every single stock with a bull or bear call (let alone a price target!), and to then up the stakes with an aggressive weighting on each stock holding.
Fortunately, Q3-to date, the TGISVP Portfolios*** consistently out-performed the ISEQ index! So, what have I got to report for FY 2012..?! Here we go:
For reference, here’s my complete TGISVP file:
TGISVP FY 2012 Performance (xlsx file)
TGISVP FY 2012 Performance (xls file)
I’ll add my usual disclaimer: ISEQ YTD performance is measured from Feb-6th. I previously noted: ‘I think the fairest, and most comparable, benchmark to use is the ISEQ’s performance since Feb-6th. The valuation stage of the Project was stretched out over Jan-March, but on that date I reached the half-way point, so this is a good average starting point for a benchmark comparison. It’s not perfect, but I think it’s the simplest and most obvious solution.‘
[NB: Actual ISEQ FY 2012 performance of 17.1% was, of course, significantly higher (due to strong gains in the first five weeks of 2012). But I think it's quite reasonable to presume we'd have seen similar levels of out-performance if the TGISVP portfolios were assembled/published simultaneously on Dec 31st, 2011, thereby benefiting from cheaper Irish share prices as a starting point.]
I’m delighted to see this level of out-performance across the board!
On average, it amounted to an incremental 6.7% return vs. the index. Which turns out to be quite a bit lower than the average 11.8% incremental return we observed at end-Q3. But that makes perfect sense – the market had turned emphatically ‘risk on‘ as we entered Q4. So much so, many of the hot/junk stocks enjoyed significant rallies. Many of these, not surprisingly, were missing from the Beta Portfolios, or were in fact (possibly aggressive) shorts in the Alpha Portfolios – which led to a strong catch-up from the benchmark.
In the end, on average, the Beta Portfolios won out over the Alpha Portfolios, which is to be expected in a strong market. But it was certainly a close call..! The character & depth of the Irish market really doesn’t permit the creation of a true Alpha Portfolio – as in a market-neutral long/short fund. What I created was far less market-neutral, and far more of a stock pickers portfolio – basically, long value/GARP stocks & short the dross. Perhaps more volatile, but it seemed an eminently sensible & attractive approach to take – so I was delighted to see my 2012 favourite, the Smart Alpha Portfolio, actually clocked the best performance. By far – it managed +17.0%, an 8.8% out-performance!
This is only a year-long live experiment at this point, but it certainly suggests a sensible value-based approach to investing in a particular market (or sector) may well offer attractive excess returns. [I leave it to somebody else to prove up a growth approach]. It’s probably also the best way to side-step and/or resist the lures of some of the usual stock disasters each year. Of course, only time will really tell – we need a much longer time-scale to determine whether 2012′s outcome is truly flagging up a sustainable performance edge.
So, shall we continue with this TGISVP experiment in 2013..?!
*** A quick recap of the four TGISVP Portfolios (NB: 5 stocks were acquired/de-listed in 2012 – they remained in the Portfolios for performance purposes):
Beta Portfolio: We assume an investor goes equally long all 36 stocks with positive Upside Potential (e.g. invests EUR 1 in each stock, for a total of EUR 36). The 39 other stocks, identified as neutral (2) or over-valued (37), are ignored. Gain/Loss% on each stock’s measured from the share price at the time of valuation/publication to end-2012. The portfolio return contribution for each stock’s simply its Gain/Loss%/36.
Smart Beta Portfolio: Stocks chosen on the same basis as the Beta Portfolio, with one key twist: All 36 stocks are divided into quartiles, and it’s assumed EUR 4 is invested in each of the top quartile stocks, 3 EUR in the next quartile, and so on down to EUR 1 in the bottom quartile stocks (for a total of EUR 90). This preserves diversification, but concentrates portfolio bets on the stocks with the most Upside Potential.
Alpha Portfolio: Exactly the same as the Beta Portfolio, on the Long side… But we also assume a Short overlay (yes, rather theoretical I know..!) of all 37 over-valued stocks. We’ll invest EUR (1) in a short position in each of these stocks, so essentially we’re adding a (different) inverse Beta Portfolio.
Smart Alpha Portfolio: Exactly the same as the Smart Beta Portfolio on the Long side. But again we assume a Short overlay of all 37 over-valued stocks. In a similar manner, we’ll divide these into quartiles also, and invest from EUR (1) to EUR (4) (for the most over-valued quartile) in short positions in these stocks.
Filed Under: Value Investing,