Our weighted average return in May was -5.69%. Since 2015, we have generated a net return of +27.73%.

In terms of investment strategy performance, our weighted average net returns for May were (a) -0.33% for conservative strategies, (b) -5.51% for balanced strategies, and (c) -8.21% for aggressive strategies.

May was a difficult month. At the start of the month, US President Donald Trump announced that contrary to all hopes and expectations, the US would in fact be going ahead with their tariffs on Chinese imports. All risk assets sold off on this news. Trump’s decision to go after Chinese technology company Huawei led to a particularly sharp selloff in the technology components and semiconductor space. Then, on the very last day of the month, Trump also threatened Mexican imports with tariffs. Thankfully, these tariffs were cancelled a couple of weeks later and risk assets have been recovering in June. In May, the S&P 500 lost -6.58%, the Dow fell -6.69%, the NASDAQ shed -7.93% and the Russell 2000 closed down -7.90%. International equities also took a hit. Japan was off -4.87% while German markets lost -6.53% and Chinese large caps fell -9.26%.

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Par atšķirībām

Es nesen gāju pirkt jaunu televizoru un nevarēju saprast, kuru izvēlēties. LED vai OLED, Full HD vai UHD, 4K, 5K vai 8K… kāda atšķirība?

Ja kādreiz televizors bija liels pirkums, kas tev kalpotu ilgus gadus, tad mūsdienās cilvēki tos maina tikpat bieži, cik viedtālruņus. Tas, kas kādreiz bija ieguldījums, arvien vairāk sāk līdzināties parastai patēriņa precei. 

Bet, ja par televizoru var teikt “kāda atšķirība?”, tad par finanšu ieguldījumiem tā noteikti nevar. Šeit ir dažas svarīgas lietas, kas ir jāņem vērā, runājot un domājot par investīcijām.

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Our weighted average return in April was -1.59%. Since 2015, we have generated a net return of +35.44%.

In terms of investment strategy performance, our weighted average net returns for April were (a) +0.56% for conservative strategies, (b) +0.13% for balanced strategies, and (c) -4.09% for aggressive strategies.

In April, many of the themes that had been troubling markets over the past several months were provided some temporary reprieve thanks to positive news flow. After a very turbulent end to 2019, analysts had cut their earnings targets for US companies. However, Q1 earnings have delivered positive earnings surprises, which helped restore investor confidence. As such, US stocks performed well, but the gains were mainly attributable to multiple expansions rather than impressive earnings growth.

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Our weighted average return in March was +0.10 %. Since 2015, we have generated a net return of +37.64%.

In terms of investment strategy performance, our weighted average net returns for February were (a) +1.01% for conservative strategies, (b) +0.30% for balanced strategies, and (c) -0.46% for aggressive strategies.

March was another positive month for financial markets. In December, markets sold off strongly on fears that the US Fed would continue to raise rates. The Fed buckled and now markets are pricing in the likelihood of a rate cut rather than a rate hike. Both bonds and stocks continued to gain strength on the back of this sentiment. Last month, the S&P 500 (SPY US) rose +1.81%, the MSCI Emerging Market index (EEM US) gained +1.13%, High Yield US corporate bonds (HYG US) rose +1.29%, Emerging Market bonds (EMB US) gained +1.51% and US investment grade bonds (BND US) returned +1.94%.

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Our weighted average return in February was -0.47%. Since 2015, we have generated a net return of +37.50%.

In terms of investment strategy performance, our weighted average net returns for February were (a) +0.79% for conservative strategies, (b) -0.88% for balanced strategies, and (c) -0.53% for aggressive strategies.

Financial markets continued their positive trend in February, fueled by more encouraging US-China trade talks and heightened confidence that the Fed would not be raising rates in the near future. “Lower rates for longer” translated into higher prices for high yield debt across all markets and equities continued their positive trend. In February, the S&P 500 (SPY US) rose +3.24%, High Yield US corporate bonds (HYG US) rose +1.21%, Emerging Market bonds (EMB US) gained +0.40% and US investment grade bonds (BND US) returned -0.09%.

I am at a loss to report anything of note that actually happened in financial markets or world politics in February. Brexit discussions dragged on. Tariff implementation was extended and trade deal discussions continued without any actual agreements. Softer Chinese economic data was interpreted to mean greater Chinese stimulus going forward, but Chinese industry seems to be more concerned about tariffs. European growth continued to be anemic. European industry is also worried about tariffs. Data revealed that German economic growth was flat in the last quarter of last year.

Only the US showed that, despite the impact of the government shutdown, everything seemed to be going fairly well. Data showed that US GDP grew +2.6% in the fourth quarter. This was slower than the previous 3.4% quarter on quarter annualized growth rate in Q3, but showed that the US economy continues to be on a strong footing.

Looking at our investment performance, we were pleased at the returns for our conservative strategies, but our security selection let us down in our balanced and aggressive mandates. Long-term outperformance can only be achieved by high conviction stock picking, and some of our conviction holdings had a sub-par February. In terms of investment strategy, we continue to look for interesting companies that have not participated in the recent rally, but stand to benefit from continued lower interest rates and moderate economic growth.

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

The History (and Future) of the Stock Market’s Biggest Sectors

Today, half of the top 10 ranking companies by market capitalization are technology and communications companies. While these companies like Apple, Microsoft, Amazon, Alphabet (Google) and Facebook may receive the lion’s share of attention, technology and communication companies as a whole have surged to become the dominant sector in financial markets over the past few decades. And despite the stronger fundamentals of these companies relative to the dot-com boom 20 years ago, there are still questions about the sustainability of the dominance of this sector going forward. So what does the history of the U.S. stock market tell us about sector dominance?

The combined information technology and communications sectors today represent slightly more than 20% of the U.S. stock market, and this sector has largely dominated the market over the last 40 years, excluding the rise of finance and real estate over the years leading into the Great Recession and a short resurgence of energy and materials during the early 1990s. But this dominance hasn’t lasted as long or had as large a share of the market as other sectors in the past.

In the earliest days of the market, the financial sector made up almost 100% of the U.S. stock market. Unlike most banks of the time, U.S. banks were corporations that raised capital through issuing securities, made attractive by the development of active trading markets in the 1790s. Thanks to this, the organization of financial institutions that developed was astounding – the number of state-chartered banks increasing from three in 1790 with total capital of $3.1m dollars to 584 in 1835 with total capital of $308.4m and the U.S. experienced the most rapid spread of banking institutions seen in any country over these decades. These were the growth stocks of their time and enabled the development of the economy as a whole, no different from the dominance of the financial sector in many of the emerging markets of today. These stocks were also increasingly bought by overseas investors enticed by the huge potential gains from investing in the emerging market of the time, and this flow foreign capital would reach huge proportions in the first half of the 19th century and in the railroad age that followed.

Within 50 years, the financial sector’s share fell by more than half as transportation stocks began to boom. And while the exploding railroad system in the U.S. certainly made railroad investments seem like the future of the stock market, its greater value came from the astronomical benefits to the wider economy that would ultimately shrink the relative market share of the transportation sector. These rail networks unlocked the vast wealth the U.S. interior and enabled the velocity of commerce to increase dramatically.

Aside from immediate increase in business for the steel and lumber industries that the developing railroad system created, the movement of goods and people allowed entrepreneurship to flourish further now that companies could scale and distribute goods to a wider market. In addition, the railroad infrastructure spanning across the country enabled the quicker and easier deployment of telegraph infrastructure, which would revolutionize communication. The railroad also facilitated the large-scale transport of coal and oil that would power the growing country.

Despite its importance to the industrialization of the U.S. and its role as the transportation backbone of the economy, by the First World War transportation was no longer the leading sector in the economy and by 1925 had shrunk to less than 10% of the total stock market. There was physically no more room to expand the infrastructure and the sector’s relative importance shrank as a result as capital sought out higher rates of return in emerging sectors. Energy and materials would come to dominate over the next 60 years to meet the insatiable demand for fuel and gasoline, energy to keep the economy running and raw materials that served as inputs to the various industries producing new goods, ranging from household appliances to cars and airplanes, for the U.S. and the world to consume. While brief periods of leadership from the emerging technology sector interspersed the dominance of the energy and materials sector, the relative importance of energy and materials would remain until the surge in communications and information technology during the 1980s.

The breakup of Bell System in 1983, the company that held a near-monopoly over telephone services in most of the U.S., triggered a boom in the deployment of fiber-optics networks in the country by new players in the sector that would lay the backbone for the Internet boom in the 1990s. Much of this fiber-optics network was laid along the same railroads that enabled the spread of the telegraph in the 19th century. Around this same time, the personal computer was making its way first into businesses and then into homes across the country. These developments first led to a surge in investments in the telecommunication networks that were creating the infrastructure necessary for this communication. Afterwards, in the 1990s, capital flowed en masse into the innovations and companies that were born as a result of this networking effect.

With groundbreaking developments such as the initial securitization of financial institutions and the paradigm shifting opportunities that the computer and internet revolutions have created, initially there is a massive wave of excitement, speculation and overvaluation. We’ve seen in it in the past and we’ll see it again in the future. But what does that mean for the information technology sector and its top players going forward? The speed of innovation has never seemed faster, but history has shown that the dominant companies that drove the previous waves of technology remain dominant for a long time. And the reach, earnings power and sheer wealth of information, the currency of our time, which these companies possess is larger than anything we’ve seen in the past.

Today’s technology is enabling new businesses and innovations in every corner of the economy, revolutionizing how companies do business and expanding the realms of possibility. The dominant technology companies understand these opportunities better than anyone else, and we’re already starting to see them make lateral investments into other sectors, deploying their vast capital and using their troves of data to further redefine the way we live. One sector that we have our eye on and that could be the greatest beneficiary of today’s technology revolution is biotechnology. Often overlooked until it’s too late, our health is our most valued commodity. The possibilities for technology to improve and lengthen our time here, whether that’s through devices that monitor our vitals and recognize irregularities before any doctor could, big data analysis that can identify and help prevent disease, etc., could be the most valuable deployment of capital that’s ever occurred. We don’t know how this will play out, but we’re excited to be along for the ride. read more


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!
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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Apple 1Q FY19 Commentary

On Tuesday, Apple reported “disappointing” 1Q FY19 results, as total revenue fell 5% y/y to only $84.3 billion. Net income was $20 billion, essentially flat y/y, while earnings per share were an all-time high of $4.18 (+7.5% y/y), although this growth was helped by a reduced share count due to buybacks. The fall in revenue was mainly attributed to iPhone revenue (61.7% of total revenue) falling 15% y/y, and management explained that this was entirely due to weakness in Greater China. Guidance for the next quarter also wasn’t very remarkable, with gross margins expected to decrease and operating expenses expected to grow. So why did the Apple’s stock price increase by almost 7% the next day?

If we dig a little deeper, there’s plenty for investors, us included, to be happy about when it comes to Apple’s results. The company posted stronger-than-expected results in virtually every region outside of China and Japan, the latter of which was hurt by decreases in iPhone subsidies provided by telecom operators. The Americas segment (44% of total segment revenues) grew 5% y/y, and new sales records were also reached in Western Europe, Central and Eastern Europe and the rest of the Asia-Pacific segment. Even in China, Apple generated record Services revenue and Wearables revenues were up over 50%.

Besides the weakness of the iPhone, the rest of their business grew 19% to an all-time record. The Services segment grew 19%, up in all of the company’s five geographic segments (including China) to an all-time record of $10.9 billion and posted a gross margin of 62.8%. Wearables, Home and Accessories also reached all-time highs, growing 33%, thanks to the amazing popularity of the Apple Watch and AirPods (demand was so high that Apple was having trouble supplying them to consumers towards the end of the quarter). And while phone revenues will likely continue to fall, the meaningful growth in their other products and services will allow for further monetization of the company’s existing user base.

Looking at the services segment, some were concerned that Netflix’s decision earlier this month to drop support for iTunes billing, cutting out Apple as the middle man and their 15-30% cut of subscription costs, would deal a meaningful blow to Apple’s growth in paid subscriptions going forward, one of their engines for growth. However, Apple reported that it has over 30,000 third-party subscription apps available on the App Store, and the largest of them (Netflix) only accounted for 0.3% of total Services revenue. The company also reported a total of 360 million paid subscriptions across their Services portfolio, an increase of 120 million from a year ago, and they expect to surpass 500 million subscriptions during 2020. In other words, it doesn’t seem they’re too concerned by Netflix jumping ship. It’s also important to remember that while Netflix could afford to leave thanks to their pull with consumers, most other third-party subscription apps depend on being a part of the Apple ecosystem for their survival.

It’s also worth noting that Apple’s Wearables and Services segment revenues accounted for $18.2 billion dollars of during the quarter, which is more than Netflix’s revenue for the entire fiscal year ($15.8 billion). Despite this, however, the combined revenue growth of Apple’s Wearables and Services segment during the quarter was comparable to that of Netflix:

The above chart examines quarterly revenue growth of Apple’s Wearables and Services segment, compared to Netflix and some notable S&P 500 companies with similar total quarterly revenues. The only company that is growing its entire business faster than Apple’s Wearables and Services business is Facebook (4Q18 revenues of $16.9 billion +30.4% y/y). The same Facebook that was recently left in disarray after Apple suspended their access to internal iOS apps. At the other end, the consumer staples giant Procter & Gamble (4Q18 revenues of $17.4 billion) has exhibited low or no growth over the past few periods, but is still trading at a higher P/E than Apple (23.5x vs 13.7x). While many market commentators are harping on the slowdown of the iPhone business, it’s the growth of Wearables and Services business that is just as important going forward. And not only is this business growing at an impressive pace, but it is bringing in more revenue than a number of companies do in total.

With strong growth in Apple’s complementary services and products segments, expect Apple to continue to introduce new products in these categories that will not only help them continue to grow, but also broaden future revenue diversification. Maybe the most important vector is health-related services, as Tim Cook himself has stated that Apple’s greatest contribution will come from its work in healthcare. Given the current health-related abilities of the Apple Watch, ranging from heart-rate monitoring and workout tracking to fall detection and emergency SOS, it’s likely that we see more features and other products being added that continue to exude luxury, while also providing indispensable health benefits.

One way that Apple is making sure that these benefits are known is through its partnerships with two of America’s largest health care providers, Aetna and UnitedHealthCare, which collectively provide insurance to more than 70 million customers. Both have recently announced promotions in which eligible customers can earn a free Apple Watch (paid for by the healthcare companies) by wearing it and reaching specific activity goals. On a business level, this is certain to boost Apple Watch adoption, introduce some non-Apple users into the Apple ecosystem and further cement Apple’s lead in the wearables category. And with this boost in users, Apple will receive far more biometric data that could be used for predictive analytics in some innovative health application somewhere in the not too distant future.

Because of these future growth possibilities, in the health vector and elsewhere, demonstrated growth in their non-iPhone categories, and the continued strength and value of the Apple ecosystem, the course ahead looks as strong as ever. And while these other segments have picked up the slack while iPhone sales have weakened, we can’t discount the strong positive effect that the release of a brand new iPhone (as opposed to an incremental update like the latest models) could have on demand, particularly in China. Once there’s more clarity on the next generation of this must-have product, expect sales growth to return to the iPhone vertical, and with it, further upside to Apple’s stock price. read more

Veeva Systems – Taking Pharmaceuticals to the Cloud(s)

Those familiar with cloud services companies usually think of the high-flying salesforce.com (CRM US) as the standard-bearer for success. Salesforce is the largest provider of cloud-based customer relationship management (CRM) software services in the world, and its expansive and well-integrated ecosystem covers e-commerce, marketing services, analytics and more, helping it best serve customers across diverse industries. In the life sciences industry, however, there’s another player – Veeva Systems (VEEV US) – that’s established itself as the top player, and it’s done so in an interesting way.

Unlike Salesforce, Veeva Systems has built a cloud services platform tailored specifically to the needs of the life sciences industry, which has been slow to transition to the digital-first model. Given the unique issues faced by life sciences companies, from the long time to market from R&D to commercialization to the stringent regulatory requirements for the production and sale of these products, the company’s founders bet that an industry-specific approach could best address these challenges. Their products address a broad range of needs within the industry, such as CRM, data management, application development tools, and quality control and regulatory solutions.

With this focused approach and first-mover advantage, the company has already won over many major pharmaceutical companies, including AstraZeneca, Bayer and Novartis. Also impressive has been Veeva’s ability to expand relationships with existing clients as they grow. For the fiscal years ended January 31, 2018, 2017, and 2016, its subscription services revenue retention rate was 121%, 127%, and 125%, respectively. Even as prices for their services have grown, existing clients have added more products from Veeva’s ecosystem. And this product ecosystem is expanding as well – the company recently launched a new system to manage all aspects of clinical trial data, allowing them to expand their potential client base to biotechnology start-ups as well. As a result, Veeva Systems strong and growing relationships across the pharmaceuticals space, where it sees a total addressable market of over $9 billion dollars for software services. And this approach has certainly paid off:

Veeva Systems Revenue and Operating Income 2011-2018

Source: Veeva Systems

The company has continued its outstanding financial performance as of late, reporting 37% growth in revenues over its last 9 months (ended 31.10.2018) and topping $800 million over the last trailing 12 months (ended 31.10.2018), and the company expects to bring in between $1.0 and $1.1 billion in FY19. This would make them only the 5th software services company to ever reach this milestone. Also impressive has been Veeva’s profitability during time, reached all-time highs on a trailing 12 month basis in gross margin (70.6%), operating margin (23.9%) and net margin (23.6%). As the company grows, additional customers are costing the company very little to serve and its operating expenses are growing at a slower pace than revenues, positive signs that margins can be maintained, if not improved further in the future.

What might be most impressive about all of this, however, is the fact that Veeva’s platform is essentially built on top of Salesforce’s architecture. Salesforce’s AppExchange platform allows third-party developers to create applications and distribute through the platform, akin to Apple’s App Store or Google Play. Not only has Veeva Systems outdone Salesforce and established itself as the top software vendor by sales in the life sciences industry, resulting in almost $1 billion in annual revenues and a market valuation of $15 billion, it has done so using tools given to them by Salesforce. But Salesforce certainly isn’t hurting financially (the company earned $9.7 billion in revenues over the first 9 months of its current fiscal year), and the company’s founder and CEO, Mar Benioff, might even feel a hint of pride at the success of Veeva Systems.

Prior to founding Veeva Systems, CEO Peter Gassner, previously served as Senior Vice President of Technology for Salesforce from 2003 to 2005. Similarly, Salesforce’s Benioff served as a Vice President at Oracle prior to founding Salesforce and creating the cloud services platform model, so it’s only fitting that Gassner built upon the Salesforce model to create a successful platform in the life sciences vertical.

Total Return Analysis

Source: Bloomberg

Forward P/E Comparison

Source: Bloomberg

So how has Veeva Systems done for investors who have held the stock? Over the last 5 years, it has had an annualized return of almost 27%, compared to 20% for Salesforce and 10% for the S&P 500. Obviously investing in such high growth companies comes at a price – current forward P/E (price to next year’s expected earnings) estimates for Veeva Systems and Salesforce are 60.5x and 58.5x, respectively, compared to 15.6x for the S&P 500. Given that the cloud services market is still growing at a blistering pace and that these two companies are market leaders in their respective categories, these valuations are justified. But with Veeva Systems, the upside potential is two-fold: not only could they continue to deliver strong growth on their own and continue to be a leader in the software services business in pharmaceuticals, an industry that itself has significant upside potential, but Salesforce may one day come knocking and make a lucrative offer for Veeva. What could be better medicine than that? read more