August Week 1 - Vivek's Secret

Bank of England & Jobs;

Being baffled;

Updates from #DUKE, #BBOX, #IXI, #LSEG

A fairly quiet week for me - which I was grateful for after last week - I was pretty lazy - have a few companies where I really should have (wanted to) read the results, but didn't!

Fonix was the biggest contributor - Muchas Thanks to Simon Thomson!

Public Service

All things Macro

Far better than my musings on the subject from Karen Karniol-Tamber - Co-CIO for Sustainability at Bridgewater being inteviewed on the Invest like the Best series.

The summary says she has a remarkable ability to distil complex ideas simply and I think that is very accurate.

The idea of levering inflation linked bonds & equity was interesting, not that I am capable of doing it myself. I understand the logic of the allocation in such an environment.

Speaking of environment or stakeholder capitalism or anything else - governments mandating social outcomes is an additional context to investing - maybe ESG (or more accurately ESG effects) need to be taken more seriously.

I am not sure ESG works on a systematic basis - Investors' Chronicle wrote an article that supports my view.

I'd contend ESG lies in the eye of the beholder but I am fairly cynical on made up numbers that can effect remuneration & consultancy fees.

Cursory Market/Macro Observations

Away from the US and closer to home, the Bank of England intrigued us with their decision on monetary policy - literally nothing changed!

I understand the BoE is viewed as one of the more hawkish central banks - remarkable what passes for hawkish these days.

The artist formerly known as QE will be withdrawn at interest rates of 0.5% versus previously 1.5%. This was accompanied by comments along the lines of, if we waited until 1.5%, we would effectively be saying we are never tapering.

At the risk of reading too much into it, is the Old Lady is suggesting that interest rates will top out somewhere between 0.5% and 1.5%, while the inflation target remains 2%.

There was also a comment that they don't use inflation forecasts to drive policy decisions?? 

Across the pond, we had the US monthly jobs report and this was from what I can tell unashamedly positive, at least in the Main Street context.

Before the report & the revisions to previous months were released, Paul Donovan - UBS Global Chief Economist talked about small business creation which is not captured in employment data & Companies talk about not being able to fill vacancies.

If I can make a good living of my artistic skills & doing something I enjoy on Etsy, Shopify & Amazon, do I want to go back to Macys or MaccyDs - assuming I don't enjoy the latter?

In the market context, I think the jobs report is considered good for the reflation rotation - my Gold purchase looking particularly mis-informed.

I can understand the reflation narrative, but I don't think central banks react to growth/reflation - we cannot afford interest rates that will compensate us for 2 - 3% inflation. 

And if that is correct, gold's behavior baffles me.

Goldbug as I am, I consider Gold an alternative to cash, not equities.

Being baffled is a permanent state for me - a number of European companies reported last week - earnings are strong so maybe valuations are justified - there is bid activity - there is a lot of dry powder - I have some myself.

The recovery is with worse balance sheets and/or equity dilution in many instances - on that basis valuations should be lower than before.

What I see in earnings reports / real economy / microeconomics - I see many reasons to be positive, on the macro / fear & greed / IPOs / Private Equity Funds listing / many risks - not least valuation, I struggle.

Then there is the bond market & some sizeable intraday moves in yields. 

In a previous week, I said the bond market was telling us something (some technical) and this week a hedge fund blew up (a low risk consistent macro fund).

I can imagine conversations about how "We have seen 5 moves in a month when we only expect to see one such move in a year" and such conversations can escalate slowly at first, then suddenly.

Being a contrarian (often for the sake of it, getting better), I feel cash is the only contrarian asset.

Alternatively, one way to deal with my cognitive dissonance is to accept that we are (and have been) in a long term structural bear market for cash.

As discount rates tend to zero, multiples tend to infinity?

Portfolio Review

Far less reporting this week but much improved performance - I would love to give myself credit for it, but I think Simon Thomson deserves most of the credit.

Non reporters driving performance seems to be a recurring theme and not one that I like, but guess that's how it goes.

I was actually surprised by the strength during the week - it didn't feel like it - maybe I was good at being detached.

Lessons:

I purchased LSEG day before results (having sold earlier with intention of buying back).

When the results were announced, it was taken positively and I thought:

A company like LSEG - I could have levered up my net worth 10x & bought LSEG and not had a liquidity issue - why didn't I go bigger?

Well done for getting lucky Vivek, but lets not do that!

In the interest of some credit, the repurchase was reflective of planned activity - the last sale was with intention of buying back - stick to this having a plan malarkey!

Transactions

New LSEG 

• I sold recently and when I sold, I said I had no reason for doing so - I didn't want to regret if the results reaction was positive so I bought back in.
• I am certain, the fact that the purchase price was below my sale price was key in my executing this plan, although even with the post result rally, it is not at the price at which I sold - yay me.
• The results themselves were in my view positive but reflective of what may or may not prove to be a cyclical peak - New issues up 150%!!
• Better details than I can provide are available from more capable & better resourced commentators.
• I notice the FX hit again - which is certainly a recurring theme in the UK multinationals 
• While the adjustments themselves might be reasonable, you have to read a very long way to get to the details of the adjustments & the word "Guidance" seemed overused.
• And of the silly things to read in financial reports - just don't admit it guys:
• 22bn Goodwill - partly attributable to "future data & technology yet to be developed"
• I hold this because:
• High quality, unique international asset with some pretty spectacular quality metrics & solid balance sheet (Intangible Heavy) integrated into the financial system (today) & National Champion
• "Discounted" because of cost of integration - GS only bank to actually deal with IT infrastructure way back & took the pain - David Schwimmer ex GS - expect saw the benefits ripping the band-aid
• "Cheap" relative to sale of Borsa Italiana Multiple & Refinitiv vs the MSCI/S&P Capitals of this world
• Tempted as I am to trade with the sharp rally & luck, I view this as a long term sleep easy hold, albeit with a high level of market sensitivity.
• That sensitivity is much reduced with the Refinitiv acquisition.
• Supreme & LSEG purchases mean number of holdings is getting close to maximum and above target. 
• LSEG is not without risk - Brexit/Competition/Technology/Blockchain/Market Beta

Portfolio Risers > 5%

A lot of Xs!!

FNX up 27%

• Simon Thomson - I was aware of the bounce - but oh my word - what a bounce - so glad it was a week after I added - I agree with what he has to say 😀
• Having taken a small amount of profits in the ST bounce, I feel like I have reached another Private Investor milestone.
• I expect liquidity & summer had something to do with the size of the move.
• HOLD, could be Add, even though I reduced (Monday 9 August) - want to see the results - New IPO

QTX up 7.14%, CLX up 6.70% & REAT 6.17%

• Think they are all roughly flat on a two week basis.
• QTX results - I commented last week I thought they were decent but wanted better valuation to add - maybe I should be less stingy!!
• Calnex reduction is looking ill timed but no reason to feel bad - was about risk management.
• HOLD

Portfolio Fallers > 5%

SDI down 7.%, BMY down 5.82%

• Think these have had strong runs and pulling back with moves being accentuated by summer liquidity.
• SDI - already full sized and re-rated considerably but I do like itREAT - I expect it is more noise after the noise last week
• BMY - have said a few times - very tempted to add but already overweight consumer cyclicals & really don't want to sell any of my holdings there at the moment.
• HOLD to ADD

Updates & Results

As I said, this was a quiet week for me & I am glad for it - it certainly was not overwhelming!

In a week like this, I really should take the time to review other companies that are of interest, but this is about fun & freedom.

The reports will still be there tomorrow (or whenever I get to them) - just like all the work that used to stress me out!

LSEG - above

DUKE New Royalty Deal

• 8.3m CAD (4.8m£) royalty financing with CreoTech Industrial Group - acquire engineering, procurement & construction business
• Total commitment of 11.6m£ (20m CAD) at Duke discretion (strange to call it commitment?) - acquire profitable businesses - initial cash yield 13.5% - 30yr secured financing subject to revenue adjustments + 18.75% Equity in CreoTech
• Financing provided in the form of a secured loan & Preference shares - which is odd for royalty financing - some odd positioning in capital structure.
• Seems more cyclical/heavy industry but think it is an interesting time for companies executing buy & build, also CAD risk (which I'd rather not have)
• Increases the income capability of the group - should keep paying decent dividends - pricing is good (for lender) on face of it 
• Which is odd given environment - but 30 year financing - which I don't think is easy to get on an acquisition facility
• Hold - it is doing what it is supposed to - getting riskier?

BBOX Update

• 188p NAV (up 11%). Annual Rent Roll 190m on 5bn Portfolio Value, 30% Debt & 2.17% cost - Gross yield 4% - roughly 20% premium to NAV, 3% dividend
• Record take up for logistics, especially large spaces, record low vacancy 2% (seriously tight) & strong rental growth due to lack of supply response
• More allocation to the sector driving down yields - lots of capital chasing this area - eventually it will cause a problem??
• 100% rent collection, lease term 13.4 yrs (13.8) - 7% valuation uplift net of CAPEX - Cost Ratio of 14%
• 4 years of unsatisfied demand in 2021 in spite of the take up of space - very competitive for new assets - that move into speculative development looking hideously smart - 10% of Gross Assets
• 19m additional rent roll from accelerated development in H2 - add 2-3m SqFt per year 6-8% yield on cost (inflation likely to drive that yield down)
• Acquired 900k SqFt - 5.1% initial yield, ERV incrrease of 3.8% over 12 months - 8.6% rental increase across 25% of portfolio - total rent roll increase 8.5m - 4-5%
• Very Bullish commentary:
• Early stages of long term growth cycle in logistics real estate - Current trading environment extremely strong - 2020 take up double the 15 year average - half yr slightly behind last PY
• Inflation linked 40%, open market 30% 10 & 10 fixed/hybrid - prime yields compressed to 3.5% - upward only/minimum - minimum rent increase across portfolio 1.7% - 0% Vacancy
• Credit given for the development land so some uplift (but would only apply to 10% of portfolio) - effectively a business that is marking itself to market & then market is giving that a 20% premium
• Not sure what that says about Efficient Market Hypothesis or rational market participants - not that I am in a position to judge given I hold
• HOLD - doing what it says on the tin albeit at a far lower dividend when the investment thesis was developed - today it would not meet the investment requirements

IXI Trading Update

• Another one of my more speculative holdings, where the story is incredibly intriguing.
• I do think rather than a pharmaceutical company, the picks and shovels in pharma make more sense, but it is still pretty far from my circle of competence.
• However, I do like holding a small position because it improves my understanding of an important space.
• Pretty short update:
• Revenues of 8.7m for FY, EBITDA of 1.2m (down on 9.5m & 1.3m PY)
• Lost the largest customer - still dealing with issues - order book at 19.5m (30 June) vs 19m (31 March) - healthy & growing so a good sign
• Issues continue to impact next financial year - will be a slow grind and maybe worse before it gets better
• HOLD - "Long term" - And not that speculative in the grand scheme of speculation!

And Finally

A rather famous company was spun off this week from L Brands - I understand spin offs under the right circumstances can prove to be excellent investments.

As I write, I grin to myself like a child - another benefit of not having colleagues!

The company in question, with ticker VSCO is Victoria's Secret & Company.

I would have thought Company & Victoria's Secret don't mix, but I am probably a little too old fashioned!

Adieu