Category Archives: Investments

Nekustamā īpašuma kā ieguldījuma turēšanas izmaksas

Latvijā tāpat kā daudzviet citur pasaulē ir izveidojies uzskats, ka nekustamais īpašums ir viens no labākajiem ieguldījumiem. “Tautā runā”, ka nekustamajam īpašumam nekrīt vērtība un citi līdzīgi pieņēmumi.

Šajā brīdi vēlos piedāvāt ASV piemēru.

Ja aplūkojam S&P/Case-Shiller U.S. National Home Price Index vērtības izmaiņas laikā no 1987.gada līdz šī gada jūlijam, redzam, ka indeksa vērtība ir pieaugusi no 100 līdz 332.1.

32 gadu laikā mājokļu cenas ir pieaugušas par 232.1% jeb par 3.8% gadā. 3.8% vērtības pieaugums gadā nav slikti. Taču ir viens liels BET. Indekss atspoguļo cenas izmaiņas, taču netiek ņemta vērā inflācija.

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“Markets in Turmoil”

2 months ago we saw a tweet from Charlie Bilello. It was 27th December. The tweet stated that CNBC will be airing “Markets in Turmoil” episode that night. Episodes of this particular show are aired when markets have been falling hard and everyone is scared.

The tweet also included a look back at past occasions when the show was aired and the performance of the S&P 500 index following the episodes.

We’ve updated the table to include the most recent data:

Markets in Turmoil S&P 500 close 1-week 1-month 3-month 6-month 9-month 12-month Up to 2/25/2019
2/5/2018 2649 0.30% 3.70% 2.40% 8.90% 4.30% 5.41% 7.85%
2/8/2018 2581 5.90% 7.40% 6.30% 10.40% 10.60% 7.04% 10.66%
10/11/2018 2728 1.50% 0.10% -4.35% 3.29%
10/24/2018 2656 2.10% 0.90% 0% 6.06%
12/27/2018 2489 -1.59% 7.21% 12.74%

Going back to 2010 the airing of Markets in Turmoil basically has worked as a buy signal. Every single time after the show was aired 6 months later markets were higher, the same can be said regarding periods of 9 months and 12 months.

1-week after the airing of Markets in Turmoil more than 70% of time markets are higher, more than 60% of time markets are higher 1 month later and more than 90% of time markets are higher 3 months later. Since the last episode aired on December 27th S&P 500 Index returned 12.74%.

Any individual episode of Markets in Turmoil shouldn’t be taken as a buy or signal. Next time the episode could air when the markets are just starting to fall or vice versa starting to go up. Using the data and table above, we want to point out that history shows patience pays off. The longer your investment time horizon the less sense it makes to try and time every single market move. read more

OUR JANUARY RESULTS

Our weighted average return in January was +8.22%. Since 2015, we have generated a net return of +38.15%.

In terms of investment strategy performance, our weighted average net returns for January were (a) +2.36% for conservative strategies, (b) +7.64% for balanced strategies, and (c) +11.17% for aggressive strategies.

January was a considerably better month than December. As mentioned in last month’s commentary, US Fed Chairman Powell’s statement that the Fed was “listening closely to markets” on January 4th proved to be just what the market needed to stop panicking about the prospect of rising rates. The partial resolution of the US government shutdown added to positive sentiment, as did more positive dialogue regarding trade tariff negotiations between the US and China. As such, the S&P 500 (SPY US) rose +8.01%, Emerging Market equities surged +10.34% (EEM US) and Emerging Market bonds gained +4.78% (EMB US).

Emerging Market securities had a dreadful 2018, but we found it very interesting that they refused to put in new lows as US markets were crashing in December. We interpreted this price action to be a very positive divergence from the nonsense going on in US markets, as Emerging Markets tend to be more volatile than US securities. Put simply, the fact that EM securities were actually rising as US securities were falling implied that perhaps not all hope was lost. Thus far, catching this positive signal and not ‘selling everything’ during December’s panic has proven to be a wise course of action.

Despite correctly analyzing this US –vs- EM price dynamic, experience dictates that such important price movements must be confirmed by subsequent data and anecdotal evidence. This is why we also mentioned is last month’s commentary that we would “be trying to determine whether the Q4 selloff and market panic matched the actual performance of companies across all sectors of the US economy.” We took strong positive signals from the major US banks, who – despite mostly missing revenue targets due to poor trading revenues – commented that the US consumer was in good health. These statements we subsequently confirmed across most sectors as earnings season progressed.

In terms of trading activity, we added Canada Goose Holdings (GOOS US), which had sold off heavily due to a diplomatic dispute between Canada and China. Pictures of a six-block line-up to get into the new Canada Goose store in Beijing at the end of December confirmed our suspicions that the Chinese consumer might not hold a grudge. We anticipate that Canada Goose will soon release a set of impressive earnings from last quarter.

We have stated in previous commentaries that volatility creates opportunities, but this is hard to appreciate when markets are crashing, and we are very thankful to our clients for sticking with us after such a traumatic December. January’s returns were more substantial than we could have realistically hoped for at the end of last year. That being said, we are by no means satisfied and continue to seek out new opportunities that will drive even better returns going forward.

On behalf of our Client Portfolio Management team, I thank you for your continued trust and support!
Pauls
FULL DISCLOSURE: Please note that the opinions expressed in this blog should in no way be considered as investment advice or a solicitation to buy or sell securities.
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Emerging Markets Bonds performance when US rates rise

2018 was a tough year for bond investors. US Total Bond Market (represented by BND US ETF) returned -0.1% and Emerging Markets Bonds (represented by EMB US ETF) returned -5.5%.

Looking at last year’s returns, a logical question arose: what should we do with our exposure to Emerging Markets (EM) Bonds? Should we keep our allocation unchanged, reduce or eliminate it and replace it with US Treasuries?

The logical chain of thought dictates that investors require higher rates of return for higher levels of risk. If the FED is increasing rates, increased rates provide an option to have investments in safe government bonds with higher yields than before. It raises the required rate of return for taking higher risks, thus investors require higher yields on riskier assets for example EM bonds. It should also lead to a higher spread between EM Bonds and US Treasuries.

Let us look at the historical data.

Invesco has identified 9 periods with rising US rates since 1994 to 2016. The average change in the 10-yr US Treasury yield was 162 basis points. The average return for the US Treasury Index during those periods was -4.65%. Further, we look at how EM Bonds returns have compared to US Treasuries.

The above graph shows the difference between EM Bonds returns and US Treasury returns during previously identified periods. In 7 out of 9 periods, EM Bonds have outperformed or delivered higher returns in periods when US rates were rising.

EM Bonds are more volatile than US Treasuries, though investing in emerging markets debt over the long term has rewarded investors historically. Let us look at the example where an investor would enter the market at the “worst” possible time (at the beginning of 2007 before financial crisis).

J.P. Morgan EMBI Global Total Return Index (White), S&P 500 Total Return Index (Yellow), Bloomberg Barclays US Treasury Total Return Index (Pink)

J.P. Morgan EMBI Global Total Return Index (JPEIGLBL), S&P 500 Total Return Index (SPXT), Bloomberg Barclays US Treasury Total Return Index (LUATTRUU)

Over the chosen period of 01/01/2007-01/18/2019 the best performance was delivered by investments in the large cap stocks (represented by S&P 500 Total Return Index), in total returning 143% or 7.66% annualized. That’s after the recent fluctuations in global markets. EM Bonds returned 104.96% or 6.13% annualized while US Treasuries returned 51.27% or 3.49% annualized.

Further, we look at investments in EM Bonds from a mid-term investment perspective.

Source: Bloomberg, J.P. Morgan EMBI Global Total Return Index

The above graph shows annualized 3-year return for investments in EM Bonds. Since 1996, there has been only one 3-year period with a negative return for EM Bonds, with a total return -0.21%, or -0.07% annualized. The average total return for 3-year investment in EM Bonds since 1996 was 32.9% or 9.9% per annum.

We can conclude that rising US rates does not result in worse performance delivered by EM Bonds investments.  Historically, EM Bonds on average have outperformed US treasuries in periods when US rates were rising. Over the long-term, EM Bonds have significantly outperformed US Treasuries. Furthermore, the average 3-year return per annum has been 9.9% since 1996. Increased allocation to US Treasuries could provide lower overall portfolio volatility in the short term, yet may position the portfolio to miss the potential higher performance of EM Bonds over a longer period.

 

FULL DISCLOSURE: Please note that the opinions expressed in this blog should in no way be considered as investment advice or a solicitation to buy or sell securities. read more

Apple – The Staple of Luxury

Hello! Here’s a piece by our new analyst Pēteris Celms. Many more to come!

Apple’s Business Model

Apple has every right to the outsized profits it makes on the iPhone. Consumers could buy cheaper Android devices, but they don’t. Why? Because they value Apple’s hardware, or iOS software, or most likely, the ubiquity of the brand and the status that it has come to represent.

If you want the Apple experience, you buy Apple hardware, and in turn, use Apple software. And in order to access the digital content market install any other applications, you also have to go through Apple’s App Store. Apple does nothing to increase the value of Netflix or Spotify subscriptions, among many other digital services from app providers purchased through the App Store, but they charge a percentage for every one of these transactions (e.g. 30% in the first year, 15% every year after that for recurring subscription payments) just because they can, and will continue to be able to do so while ~45% of U.S. consumers, the world’s largest market, carry Apple devices.

In fact, Apple’s services segment has been thriving as of late, seeing 24% year over year growth during fiscal 2018 to 14% of total revenue and new revenue records for the App Store, Cloud Services, AppleCare, Apple Music and Apple Pay. Another positive signal is the growth in the number of subscription customers are paying for, which is the cornerstone of recurring revenues in the segment. During their latest fiscal year Apple sold roughly 330 million subscriptions, up 57% year over year, mostly through third-party applications on the App Store, but also growing the number of subscriptions for Apple Music and other services.

But what makes us confident that Apple can continue to have this rent-seeking and hold sway over US consumers? Look no further than Apple’s ability to keep increasing the prices of its products, which has helped the company achieve growth even as unit sales have been slowing down. Apple deserves enormous credit for building up the sort of customer loyalty that it can extract ever more revenue from its user base (its current flagship products were the first smartphones to surpass the symbolic $1,000 per unit product cost). If you then factor in the hassle of switching thanks to the ecosystem they’ve developed across their devices (how many people do you think know how to access iCloud on a non-Apple device? Do you think Apple has made it easy?), it’s likely that a good portion of this user base will continue to pony up to get the latest and greatest from Apple.

Where it’s not taking advantage of a natural monopoly, Apple is also still innovating and creating new products, the most promising of which are in its wearables category. The Apple Watch, for example, has over 40% of US market share in a segment where Fitbit once reigned supreme and Android is all but an afterthought, and AirPods have been widely hailed for both their quality and style (how quickly have complaints about iPhone’s lack of headphone jack disappeared?). Although the value might be questionable for some, there’s no denying that Apple makes the most desired smartphones, laptops, tablets, smartwatches, and wireless headphones. As a result, Apple is making more money today than it ever has before.

Apple has an unimaginable amount of cash on hand and is making more of it (i.e. you can expect more stock buybacks), excellent and very profitable established products, new growth products (Apple Watch and AirPods), services growing at a high pace, and an ecosystem that’s nearly impossible to walk away from, giving them advantages that no other hardware manufacturer can even come close to claiming. In fact, Apple has achieved something most companies can only dream of – the company’s products that are both as symbols of luxury and near necessities.

Comparison to Consumer Staples

The market turbulence over the past few months has resulted in declines across growth stocks, especially in the technology sector, and Apple has been the most affected. Apple has seen its shares decline by 30% since reaching its highs at the start of October, in part due to the overall market volatility, but also in part due to the “law of large numbers” – as the first company to hit 1 trillion dollars in market capitalization, its shares quite predictably sold off from highs. And while Apple has taken the biggest hit, some companies actually fared better, particularly those in the business of consumer staples.

In theory, investors rotate into high-quality defensive names in consumer staples because they offer relative stability during periods of market volatility (demand for food and toilet paper tends to be fairly stable) and generally pay nice dividends to stockholders. Does it really make sense to offload Apple, the biggest and most profitable company in the world, and replace it with consumer staples players? And with Apple’s stock now trading lower than at the end of 2017, couldn’t it be that the stock has been oversold?


P/E Ratios of Apple (Blue), Proctor & Gamble (Brown), Walmart (Red), Coca-Cola (Purple), Estee Lauder (Yellow) over 5 years (Source: Bloomberg)

While Apple’s price/earnings (P/E) ratio, showing how much investors are willing to pay per dollar of earnings at any given time, has consistently been lower than those of Proctor & Gamble, Walmart and Coca-Cola over the last 5 years, the recent price declines have widened the gap and increased the relative discount at which Apple shares are trading to its greatest point since the first half of 2016, when its shares traded at an average discount of 43% against these three companies between February and June and bottoming out at 48% on 13.05.2016. Currently, Apple is trading at 13x earnings (or an average discount of 37%), while Proctor & Gamble, Walmart and Coca-Cola are trading higher, at 22x, 19x and 23x, respectively.

For some context, in 2016 Apple had reported 2Q 2016 results where it saw revenues decline year-over-year for the first time since 2003 and the company sold 10 million less iPhones (51.2 million vs 61.2 million) than it did in the previous year. But this year, when Apple reported 4Q 2018 results on November 1st, its earnings beat Wall Street estimates on both top and bottom lines, saw average selling price of the iPhone increase and grew its Services segment revenue by nearly 30%. But, because the company missed shipment estimates on iPhones, offered weak, but positive guidance and announced that it would no longer report individual unit sales, sentiment turned negative. While it can be good to be cautious, does today’s situation really warrant the same level of concern that some were expressing in 2016? I don’t think so.

While some may argue that investors are willing to pay a premium for less volatility and steady dividends, high dividend yields come at the cost of growth potential, which is evident if you’re comparing the growth figures of Apple, Proctor & Gamble, Walmart and Coca-Cola. Over the trailing 12 months, Apple has seen double-digit top- and bottom-line growth (revenue growth +16% y/y, net income growth +24%), while the growth of the Consumer Staples leaders has been almost non-existent, or in the case of Coca-Cola, negative. These growth figures are useful for calculating another valuation multiple, the price/earnings to growth (PEG) ratio, which determines a stock’s value while taking the company’s earnings growth into account. Comparing using this metric, Apple looks even more undervalued as its PEG ratio is around ½ that of these Consumer Staples players (currently ~1.2x vs +3x for all three).

Among the top Consumer Staples stocks in the US, the only company with comparable growth figures over the past 12 months has been Estee Lauder (revenue growth +14% y/y, net income growth +20%). This looks like a good find and a potentially safe consumer staples pick to move into, right? Like Apple, Estee Lauder, has oriented itself more as a luxury play thanks to its prestige skincare, makeup, fragrance and hair care products. While someone buying Head & Shoulders shampoo (a Proctor & Gamble brand) may switch to a cheaper or generic product if money becomes tighter, it’s likely that Estee Lauder clients won’t be making these choices as often or as readily. So how large of a premium should that warrant?

Once we look at the same P/E and PEG ratios, the case for Estee Lauder quickly falls apart. Its current valuation multiples (P/E of 29x, PEG of 2.4x) are more than double that of Apple and it has traded at a significant premium to Apple over the past 5 years, but it’s clear that Estee Lauder has little competitive advantage if you’re comparing these two companies outright. Sure, both companies sell products that play on people’s insecurities and wants – desirability, status, acceptance, etc. – but there’s only one who’s products allow you check your emails, consume media, and arrange for a car that can be outside to pick you up by the time you’re done reading this.


Comparative 5-year stock returns of Apple, Proctor & Gamble, Walmart, Coca-Cola and Estee Lauder (Source: Bloomberg)

It’s astounding that Apple and has created products and ecosystem that is indispensable to almost a majority of American consumers, yet its price to earnings has consistently been discounted to other companies with lower real growth and weaker return to shareholders. Even taking into account the significant drawdown since October, Apple’s stock has outperformed Proctor & Gamble and Walmart by more than 80% over the last 5 years and Coca-Cola by 79% over the same period. As for the other “luxury staple” player Estee Lauder, while returns have been admirable, the company’s stock has still underperformed Apple by nearly 34% over the same 5 year period. Perhaps more impressive, however, is the performance of Apple’s stock since 13.05.2016, the point at which Apple shares traded at the largest relative discount to these other names during the past 5 years. In the roughly two and a half years since, Apple shareholders have experienced a total return of 81% – 63% better than Proctor & Gamble, 37% better than Walmart, 69% better than Coca-Cola and 42% better than Estee Lauder. And this is including the recent 30% decline.

Is it really rational to believe that the company’s value has dropped by a third? After Apple posted 41% year-over-year growth in earnings per share in the 4th quarter and double-digit sales growth in all of its geographic segments. After Apple increased the installed base of all its major product categories to an all-time high and saw its services revenue earned on those installed devices grow 27% year-over-year. Maybe the concerns over China and growing negative sentiment are warranted. Or maybe it’s time to buy Apple shares.

Pēteris Celms
Analyst – BlueOrange Bank
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OUR NOVEMBER RESULTS

Our weighted average return in November was -0.96%. Since 2015, we have generated a net return of +38.73%.

In terms of investment strategy performance, our weighted average net returns for November were (a) +0.15% for conservative strategies, (b) -0.09% for balanced strategies, and (c) -2.11% for aggressive strategies.

Markets continued to be extremely volatile in November. The S&P 500 index traded all over the place, giving up -3.83% in the third week of the month, before jumping +4.71% the very next week. By month end, the S&P 500 had gained +2%. Emerging market stocks (+5.07%) finally managed to rally on the back of lower US bond yields, and US investment grade bonds ended the month +0.64%.

Politically speaking, the US mid-term elections played out as expected with the Republicans gaining seats in the Senate, and the Democrats claiming a majority in the House of Representatives. A Democrat majority in the House will now be able to curtail Republican attempts to expand fiscal stimulus to ingratiate themselves to voters before the Presidential elections in 2020. Party politics aside, the overwhelming political issue in the world today remains US-China trade tensions and the continued uncertainty as to whether a deal will be able to be reached or not. Uncertainty abounds in Europe as well due to Italy’s budget issues and Brexit.

As such, we are in an environment where companies are recording record earnings, but their future ability to generate profits are being heavily discounted due to political uncertainty. This is evident in the price action that we are seeing in certain sectors of the market.

For old school portfolio managers with an equity mandate, volatile markets mean moving assets into defensive sectors such as consumer staples and utilities. As a result, these sectors have performed very well since the summer, whereas growth sectors such as information technology and biotech have sold off heavily. Conceptually, this makes a lot of sense, but in actuality, this is purest form of trying to ‘time markets’ and intuitively speaks to why most portfolio managers fail to beat their benchmark indices in the long-run. How so? Because most often this means chasing returns and ignoring fundamental valuation principles that are the foundation of long term outperformance.

For example, let us take a look at a classic consumer staple stock: Proctor & Gamble. P&G has a number of different brands that households use every day, from skin care (‘Olay’), to laundry detergent (‘Tide’), to diapers (‘Pampers’), to dish soap (‘Fairy’). The ‘every day’ use of these products is the critical component of why P&G is considered consumer staple company. P&G is great company, but it faces massive challenges on a daily basis to stay relevant to its consumers who are constantly tempted by new, upstart brands with product descriptions that say things like “small batch” or “artisanal”. P&G’s sales have been flat to negative over the past four years and they pay high multiples to acquire new brands (their last acquisition was done on a 5x price to sales valuation…). All of this would be fine if not for the fact that P&G shares trade at a steep 23 times next year’s earnings, with no intrinsic growth in sight.

Now, let us take a look at Apple. Apple makes the most successful and possibly most technologically advanced consumer product in history: the iPhone. With the exception of infants wearing ‘Pampers’, anyone with an iPhone spends considerably more time on this device on a daily basis than they do with every single possible combination of P&G products, and, from anecdotal evidence, even infants would rather use an iPhone than a diaper. However, since Apple became the first company to exceed 1 trillion in market capitalization this summer, Apple shares have lost around 30% from their highs – or 365 billion USD in valuation. This equates to 1.5x the current market capitalization of P&G. A practically unfathomable amount.

Although Apple’s sales have also slowed in the past couple of years, they remain astoundingly high. From a valuation perspective, after removing the net cash component from their market capitalization, Apple currently trades at a 10.72 next year’s earnings – which means that the market values every dollar in earnings that P&G generates as twice as valuable as a dollar earned by Apple. Yes, I understand that we are comparing apples to ‘tide pods’, but I welcome any and all arguments that attempt to justify this dynamic above and beyond short term price movement.
We have not owned Apple shares for quite some time. This was due to the fact that we saw more compelling growth opportunities or relative value elsewhere in the market. However, at these valuations, Apple is once again a screaming buy and we have initiated large positions in Apple over the past couple of weeks. By the way, the last two times Apple shares traded at a P/E multiple this low, they rallied over 130%… Overall, this sell off – although fraught with much near term negative price action and flat out stress – has given us the chance to buy back shares of companies that we deem to be the consumer staples of the future at significant discounts to where they had been trading for a long period of time. It is hard to be thankful when you are in the second month of negative returns, but this is a battle won with sound rationale and patience.

A year from now we will be talking with prospective clients that ‘knew’ that they should have been buying Apple shares ‘at the end of 2018’ but found some reason not to. They will say something to the effect of ‘yes, Apple @ 170, that was easy money’. We will smile and agree. Not because it was easy, but because we actually did it.

On behalf of our Client Portfolio Management team, I thank you for your continued trust and support!
Pauls
FULL DISCLOSURE: Please note that the opinions expressed in this blog should in no way be considered as investment advice or a solicitation to buy or sell securities.
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OUR OCTOBER RESULTS

Our weighted average return in October was -3.88%. Since 2015, we have generated a net return of +40.48%.

In terms of investment strategy performance, our weighted average net returns for September were (a) -1.36% for conservative strategies, (b) -6% for balanced strategies, and (c) -2.97% for aggressive strategies.

October was a brutal month. In all of 2017, the S&P 500 index had 12 trading days where the daily change in price exceeded 1%. October had 10 such trading days. The monthly performance for key equity index ETFs were as follows: S&P 500 index -6.91% (SPY US), Euro Stoxx 50 index -8.18% (FEZ US), and MSCI Emerging Markets index -8.76% (EEM). Bonds outperformed equities, but there was nowhere to hide in the fixed income space as well. The Vanguard Total Bond Market ETF was -0.86% (BND US), the iBoxx $ High Yield Corporate Bond index (HYG US) was -1.98% and the JPMorgan Emerging Market Bond index (EMB US) was -2.42%. Ugly numbers. The only safe haven was the US dollar, which increased 2.59% versus the euro.

So what happened?! Put simply, the market went from being enthusiastic to very worried in an extremely short time period. Why? As always, there is a multitude of factors. Economist Scott Grannis (http://scottgrannis.blogspot.com/) has designated the current market panic attack as ‘global angst’. He writes “a weakening Chinese economy, budding tariff wars, concerns about Feb tightening, a fragile Eurozone, weakening emerging market economies, rising oil prices, and all coupled with the fact that we are entering the 10th year of an economic expansion (which by itself makes investors quite nervous – how much longer can the good times last?). None of these factors have appeared out of the blue however; they’ve all been headwinds for a while, but it seems they have rather suddenly combined into something like a perfect storm.” We agree. We also firmly believe that none of these challenges are insurmountable, nor need threaten global prosperity in the mid to long term.

On a positive note, everyone that had been insisting that a sell off was imminent was finally proven right for the first time since September of 2011 – the last time the S&P 500 experienced such a large drawdown. For those who are interested in historical market data, we would like to point out that over the very next month – October of 2011 – the S&P staged a staggering rally of +10.77%. Moreover, from September 30th, 2011 to October 31st, 2018, the S&P 500 has managed a total return of +137.10%. Yes, there are evidently times that history has shown it to be wise to sit on the sidelines, but historical evidence weighs heavily on the side of those who continue to be invested, and, if possible, take advantage of market selloffs.

If you have been “waiting for a correction”, we would love to hear from you. Why wait another seven years?

On behalf of our Client Portfolio Management team, I thank you for your continued trust and support!
Pauls
FULL DISCLOSURE: Please note that the opinions expressed in this blog should in no way be considered as investment advice or a solicitation to buy or sell securities.

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OUR AUGUST RESULTS

Our weighted average return in August was +2.67%. Since 2015, we have generated a net return of +39.53%.

In terms of investment strategy performance, our weighted average net returns for August were (a) -0.33% for conservative strategies, (b) -0.71% for balanced strategies, and (c) +7.18% for aggressive strategies.

August was a difficult month for almost all asset classes other than US stocks, as it remains quite clear that international trade tensions have done little to dim US business confidence.

Emerging market securities were hit particularly hard by the economic crisis in Turkey, and traders chose to extend the selling to European banks due to their exposure to the Turkish banking sector. What’s more, Emerging Market currencies sold off (for example Argentine Peso -25.63%, Turkish Lira -24.86%, South African Rand -9.62%) and industrial metals were also hit hard (Copper -6.45%, Zinc -6.52%, Nickel -8.84%).

During times like these, it is hard not to be swept up in the mania of crowds. However, months like this past August provide tremendous opportunity in the long run. How can this be? Well, if you are a confident US capitalist armed with dollars and a surging share price, there will be a point where you will be enticed to buy up foreign assets on the cheap by using your strong currency and cheap access to capital. This proposition is especially enticing if these foreign assets are in markets that have a higher rate of growth than your domestic market – which is the case in most Emerging Markets. Consensus projections for GDP growth for the largest Emerging Markets are still around +6%, and, with the exception of China, are expected to grow even more in 2019. That being said, what is most important is not the rate of growth, but rate of change or ‘surprise’ in terms of perceived growth. Put simply, if economic growth in emerging markets (other than Turkey and Argentina) continue to match or exceed economic growth projections, or are just not as horrendously bad as markets are currently pricing them, there stands to be an impressive rally in Emerging Market securities and currencies. Timing markets is hard and inadvisable, but long-term investors can use situations such as these to buy oversold assets and patiently wait for them to recover.

Last month we highlighted our top equity holding Largo Resources. We are very pleased to report that Largo shares delivered a staggering +44% return in August. Our bullish thesis continues to be confirmed by higher vanadium prices. We have also started to buy back some of the technology holdings that we sold in July. Our colleague portfolio manager Kaspars has done a great job following the developments of the E-gaming business and his chosen company – Activision – has performed very well since we began buying it back last month.

In other news, in August, I was surprised and humbled to be named one of the “Top 30 Creative People in Business” in Latvia by “Kapitals” magazine – Latvia’s foremost business publication. An honour such as is this is only possible if you are challenged on a daily basis by talented and hard-working people, and I am very thankful to our BlueOrange team for their encouragement and support. I am also very thankful to our leadership team and shareholders at BlueOrange for trusting us to build an asset management business from the ground up that puts clients first, encourages new ideas and innovation, and has the patience to invest in ideas that generate superior growth. We are only getting started!

Speaking of our team here at BlueOrange, last month we said good-bye to our analyst Krista. Krista started with us as a summer intern two years ago and grew to become a very important member of our team, even though she was studying full time and was winning World Aquabike championships in her ‘free time’. We wish her the very best in her new chosen field!

Thankfully, our new team member Polina has attacked our very steep and demanding learning curve with determination and persistence, and we are very happy that she has chosen to join our team!

On behalf of our Client Portfolio Management team, I thank you for your continued trust and support!
Pauls

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OUR MARCH RESULTS

OUR MARCH RESULTS

Our weighted average return in March was -1.94%. Since 2015, we have generated a net return of +33.05%.

In terms of investment strategy performance, our weighted average net returns for March were (a) -0.61% for conservative strategies, (b) -1.60% for balanced strategies, and (c)-3.37% for aggressive strategies.

Financial markets continued to experience significant volatility in March and no sector was spared.

The prospect of global trade war, coupled with heightened tensions in Syria meant waking up every morning to new headlines that sent markets into tailspin or euphoria. By the end of the month, ‘tailspin’ had gotten the upper hand.

We cannot control world political events or censure the tweets of powerful individuals.

However, what we do offer is a steady hand and a sense of perspective when irrationality is running rampant.

Last month we wrote that “The primary instigator for February’s sell-off was higher inflation, which was signaled by a better than expected average hourly earnings data on February 2nd.”

Well guess what? In March, this same data point came in lower than expected and showed that US wages were only growing at 2.6% year-on-year as opposed to the 2.9% that was reported in February. No matter. The market had found its reason to panic and data to the contrary was no reason to stop acting hysterically. Thankfully, chaos generated from news headlines plays into the hands of experienced portfolio managers, and even though volatility is tiresome, it does create opportunities that lead to superior performance in the long-term.

One positive of note is that the rise in interest rates since the start of the year means that yields on high quality USD bonds have become interesting once again, which serves to benefit conservative investors.

In spite of all the market volatility, our sales staff had their best ever months in February and March, which means that we were able to invest new client funds at attractive price levels. Congratulations to Andrejs and his team. You are doing a brilliant job!

In April, we have seen very strong earnings fueled by an expanding global economy and the Trump corporate tax cut. US sanctions on Russian industrial titans has made the world take deeper consideration of commodities and their availability and has sent base metals prices higher. We have been patiently waiting for this sector to attract more attention and have been pleased how our chosen investments have performed. As I write this commentary, we have already more than made up for March’s negative performance results.

On behalf of our Client Portfolio Management team, I thank you for your continued trust and support!
Pauls
FULL DISCLOSURE: Please note that the opinions expressed in this blog should in no way be considered as investment advice or a solicitation to buy or sell securities.

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OUR FEBRUARY RESULTS

Our weighted average return in February was -3.18%. Since 2015, we have generated a net return of +35.68% with a Sharpe ratio of 1.24.

In terms of investment strategy performance, our weighted average net returns for February were (a) -0.36% for conservative strategies, (b) -3.25% for balanced strategies, and (c)-4.37% for aggressive strategies.

February was a difficult month. January’s euphoria gave way to massive selling across all asset classes and served as a reminder that investing in capital markets is not easy.

Selloffs like the one that we witnessed in February trigger fear and doubt in investors. There is no way of being completely certain how much asset prices may fall on a short-term basis or how quickly they will recover. Although we invest client assets based on what we believe will transpire in the long-term, we are always aware of the psychological strain that such sell-offs can induce.

In our January commentary, we wrote:
Unfortunately, since the start of February we have witnessed a brutal sell-off that has reclaimed many of our January gains. We see this sell-off as temporary and do not see reason to panic. Our theses remain intact and we will be looking to add to discounted positions.

Thus far, our reaction has been correct. Although we are not always able to convince all of our clients to weather the storm, we try to take advantage of price weakness to set up future profits for others.

The primary instigator for February’s sell-off was higher inflation, which was signaled by a better than expected average hourly earnings data on February 2nd. If you have been reading our monthly reports, you will know that we have been keenly aware of inflationary forces and have shifted our investment strategy to accommodate the impact of inflation on our portfolios – namely by overweighting commodity producers. Unfortunately, commodities and commodity stocks were caught in the downdraft as well last month, but our thesis remains intact.

In February, Jerome Powell replaced Janet Yellen as Chair of the US Federal Reserve. We do not foresee that his policy will differ significantly from Yellen’s and anticipate that rates will continue to rise at a gradual pace. Unlike his predecessors for the past forty years, Powell has a background in investment banking and is not an economist.

We would be remiss not to mention that Trump’s corporate tax cut has elevated the issue of twin deficits (fiscal and trade) in the US. We find this to be the most appropriate explanation for the recent weakness of the US dollar. However, we believe this rationale to be overdone. Capital flows to where it is treated best, and Trump’s corporate tax cut has been the strongest encouragement to date for enterprise to flourish in America. That being said, Trump’s decision to implement tariffs on imported steel and aluminum sent tremors through financial markets at the start of March and led to the resignation of Gary Cohn from his post as Director of the White House’s National Economic Council. Tariff wars are terrible economic policy, but it has since become clear that the tariffs will not be imposed on all trading partners. It is rumored that Larry Kudlow will replace Cohn. Kudlow is an outspoken supporter of a strong dollar policy.

On behalf of our Client Portfolio Management team, I thank you for your continued trust and support!
Pauls

FULL DISCLOSURE: Please note that the opinions expressed in this blog should in no way be considered as investment advice or a solicitation to buy or sell securities.

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