In case you haven’t read my previous posts on performance, here are the quick links to jog your memory (don’t worry, they are not necessary pre-reqs to consume this post):
Inflation has been the big talk of the town for the past year or so. For investors, the key connection to inflation is thus - our purpose of investing is to retain, if not grow, our purchasing power over time. If inflation is 0%, then the hurdle we have to cross to achieve that objective would be just to hold on to our dollars. However, in the real world, where inflation is greater than 0, our objective is to extract investment returns that at least match inflation, and in an ideal case generate returns in excess of inflation. Any returns over inflation is what is considered as real returns.
Here is the inflation for UK over the past 33 years:
As you can see, inflation that was largely between 1% and 4% for close to 3 decades has gone off to achieve new highs. This has notably increased the barriers to achieve any real returns.
The reason I am bringing this up in this post is that I have incorporated inflation into my calculation of returns. This, I presume, would be an useful addition to understanding how the portfolio stands.
Portfolio Performance
As it stands, here are the headline numbers for returns of my Coffee Can Portfolio:
Portfolio Return (XIRR basis): 6.12%
Benchmark Returns (XIRR basis): 5.74%
Alpha: 0.38%
This is obviously great - alpha over the benchmark is always affirmative. It is also good news that returns have inched up to 6.12%, marginally above the 5.45% reported in the past quarter. Just to remind, these returns are over the lifetime of the portfolio, not just for this quarter. So, a 0.67% increment is good news indeed, as it applies to the life time of the holdings.
However, compared to inflation, we are still lagging. Here are some comparisons:
Portfolio Return (XIRR basis): 6.12%
Inflation (XIRR basis): 6.34%
Alpha: -0.20%
This reveals the real problem with recent inflation. It has made it extremely difficult to generate any returns at all. We have not been able to retain purchasing power over time with these investments. The only consolation is that at the end of Q3, this gap stands at a mere -0.20%, whereas in Q2’23 and Q1’23 it was -2.70% and -6.64% (Yikes!!).
"With a good perspective on history, we can have a better understanding of the past and present, and thus a clear vision of the future." — Carlos Slim Helu
I am happy that we are heading in the right direction - that inflation adjusted returns are getting closer to positive than before. However, we must admit that this is less due to great portfolio construction and more due to moderating inflation. With that confession out of the way, I will take it.
Valuations
As it stands today, the portfolio valuation is pegged at 1.04x sales, 16.19x earnings, and a dividend yield of 2.34% (all metrics on purchase price basis). For all practical matters, nothing much has changed and that’s a good thing. Valuations stand healthy.
Let’s hope that in a few quarters time I can come back and give more positive news.
As always happy investing!
(Disclaimer: Nothing written here is a solicitation to buy the stocks mentioned. I hold position in all the stocks mentioned in this post)