Looking for the winners in the ongoing economic cycle

I. What is important for fund investors

• In late April, the net stock ratio was at 71%. At the end of March, it had still been at 0 %.
• As of today (May 9, 2018), the stock ratio is at around 95 %, with no relevant hedging.
• The weighting of the investment topics was shifted significantly toward late-cycle areas.
• The risk management system is currently no longer YELLOW as it still was in late March but is back to GREEN for the stock exchange markets. This doesn`t mean that stocks will immediately be rising, but the risk of a grave crash has clearly decreased.

II. Technology and consumption

The technology sector used to be perceived as a risky investment field, similar to venture capital. That is definitely no longer true at the stock exchange. Warren Buffet is one of the worldwide leading investors in the area of consumption. Whether it`s Coca Cola, Procter & Gamble, or Fruit of the Loom—he knows a thing or two about them. Even Berkshire itself was a clothing factory before Warren Buffet restructured the company into a investment holding. Buffet has included Apple into this collection and significantly ramped up this position. For him, Apple isn`t a technology company but a manufacturer of consumer goods. And manufacturers of consumer goods are part of the “bread-and-butter business” at the stock exchange.

Warren Buffet and his colleague Charlie Munger clearly distinguish themselves from Elon Musk who likes to claim that Tesla is a technology company, not a car manufacturer. This seemingly small semantic difference is the object of a debate between Buffet and Musk that has now gone public through various media. We have discussed our view on Tesla extensively in an article “On Stocks” last year. We are clearly siding with the arguments of Buffet and Munger—really actually more with Munger. It was he who claims to have convinced Warren Buffet that there are no investments based on a value approach but that there are “mega corporations” that one simply has to own. Companies with outstanding positions in interesting markets, convincing owners, and good management. The fact that many of these companies operate within stable oligopolists will probably not surprise you.

We have bumped up our consumer stocks considerably in April. Moncler and Swatch, both operating in the area of higher priced consumer products, are two examples.

In the technology sector, we focus on the areas of vacuum, semiconductors, and robotics due to our background and experience. The companies that we favor based on our private equity approach are suppliers for the well-known manufacturers. We believe that they hold market positions that are in part at least as attractive as those of Apple or Amazon.

In examining our technology positions in our portfolio in April, we have focused on determining which companies are valued high and which can be classified as having a rather low valuation. Among the medium-sized U.S. technology suppliers (i.e., large caps such as Lam Research but not mega caps such as Apple), a number of companies are currently showing very low valuation and a high dividend yield. In contrast, the valuation of some European publicly listed technology companies is significantly higher. (For example, long-term PER for Lam Research (USA) approximately 10, Comet and Inficon (both Swiss) clearly over 15.)

Due to these considerable differences in valuation, we have shifted our focus in the technology sector to assets that can be labeled “value tech.” We have completely removed stocks such as Comet and Inficon in April, which are, in addition, not as focused on the topics vacuum and semiconductors.

The price development over the past six months attests that it wasn`t very exciting to have a lot of Lam stock in the portfolio. Apple has been developing much better, especially in the past weeks and so has the DAX. We had significantly reduced our Lam position. With the buyback of Lam stocks in February we had more Fortune than we did in the first half of April when we further ramped up our inventory with prices over $200. In the second half of April, technology stocks such as Lam didn`t exactly contribute positively to the monthly performance of the fund.

But in looking back on the past three years, for long-term investors it’s clearly more important to choose the right investment area and, within the area, the right companies than is the timing of the purchase. And well-positioned suppliers profit from mega trends much more than the widely known household names. After the extensive correction from December 2015 to February 2016, it was the technology stocks that got the stock exchange train going again. Lam Research has been among the top 10 positions of the fund between May 2016 and today, with the exception of March 2018. Apple stocks have never been in our portfolio.

III. Energy and materials

We thoroughly enjoy the area of energy. Not only our largest portfolio position Uniper (split-off Eon; profiteer of rising electricity and CO2 prices) but also Royal Dutch Shell, the supplier of U.S. drilling company Schoeller-Bleckmann and Tullow Oil are part of our energy portfolio. We expect further rising oil prices, at least until the IPO of Saudi Aramco. The prospect for the electricity and CO2 prices in Europe are even better.

The fund continues to hold large positions—but not among the top 10—in Glencore and Teck. Both stocks are focused on non-ferrous metals and complement each other very well based on country-risk-aspects due to their completely different geographic locations . With Barrick Gold we have, for the first time, included a gold mine stock in our portfolio. K+S, our currently biggest engagement in the area of late-cycle soft commodities, is among the top 10 as well.



IV. Risk

The risk situation has changed in April. At the moment, a crash is no longer to be expected based on our systems. The risk light has switched to GREEN. That doesn`t mean that prices will be rising immediately. But volatility is decreasing, the long-term capital is in the process of building new positions, and both of this is positive for the market medium-term.

© Shutterstock / AlexandreNunes

In the first half of April, we significantly hedged our portfolio. As mentioned, the hedging is now not occurring exclusively through the DAX but through a basket of index futures whose range is managed analogously to the country share in our stock portfolio. As a positive effect of this adjustment the fund price has not dropped in the first half of April with rising indexes and despite a still existent hedging but has rather gone laterally as was intended.

V. Outlook

In the short term, even minor news can be enough for the market to move in the direction of the low in February. But there will certainly be purchasing opportunities on this level. The “buy the dip,” which was repeated like a mantra on all channels, hasn`t been heard for a while. Sell in May might bring short-term success should the stock exchange correct again, but you shouldn’t hold off on buying until after the summer break. The markets may come close the annual high, as determined at the end of the year, as early as in the second quarter.

Georg Oehm

Entrepreneur with a faible for braces & shorts (as clothes and investments) who believes in personal development of people & proper and hard work to solve problems & organise projects. Focus on negotiations and investing – always with the end in mind.

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