Performance & Valuation Update (Q1'24)
Good quarter, but same dogs persist
I am currently on vacation in India1, so I will post a brief performance update this weekend. Previous performance write-ups here. For reference, here is my Coffee Can Portfolio.
Cumulative Portfolio Return (XIRR basis): 9.26%
Cumulative Benchmark Returns (XIRR basis): 14.22%
Alpha (over benchmark): -4.95%
Inflation (XIRR basis): 5.08%
Real returns (net of Inflation): 4.19%
Improvements in Base Returns ❤️
The continuing good news is that the 9.26% return, on a cumulative basis (i.e. from inception), is the best portfolio returns I have presented so far. This is obviously good news. This is well in the range of the long term returns I hope to achieve - between 8%-10%.
Improvements in Real Returns ❤️❤️
Another continuing good news is that the portfolio is clearing the inflation hurdle handsomely. On a cumulative basis (i.e. from inception), inflation stands at just over ~5%, meaning that the portfolio has now generated real returns of about 4.2%. This is the best ever real returns figure I am presenting since the inception of the Coffee Can Portfolio. I hope that over long term, real returns will inch up to about 6% and then stabilise. That will take some time, and I am happy to wait.
Negative alpha v benchmark 😥
There is no denying the fact that the portfolio has continued to underperform the benchmark, which is the Vanguard FTSE Global All Cap Index Fund, significantly, now by close to 5% on an IRR basis, since inception. This is a very big gap and is not a great sign.
No need to call in Sherlock - the reasons are well known. I am underweight the US (e.g. S&P 500 index) and overweight China. In the past 18 months or so, my portfolio and the market have pulled along the opposite directions on these two sections of the portfolio - the US has ripped up about 30% and China has been roughly flat. That’s enough to cause this underperformance.
Its not just that, the gap is widening. In the past quarter alone, while the benchmark went up 8.6%, the portfolio only went up by 6.8%. So, the underperformance has not only happened in the past - it is continuing to filter through! 😥 😥
Having reported the bad news, time to review what I wrote this last quarter which I stand by now too:
I can afford to diverge4 from the index performance if needed. The only question is - would it be better or worse to do so. The focus of my investment thesis is to build an anti-fragile, performant portfolio for the long term and from that perspective, it is more important to focus on what I own and why I own it rather than chase the benchmark on a quarter to quarter basis. Given that the portfolio is holding itself well in other quarters, it is reasonable to argue that the doggedness is short-term and not structural. At the moment, I intend to stay the course.
Valuations 😥
A slightly worrying sign, though, is that valuations have markedly gone up for the first time since I started tracking this. On a mark-to-market basis, the portfolio now trades at 1.10x sales, 19.66x earnings, and a dividend yield of 2.07%2 - for context, the costliest this was in the past was about 1.02x sales, 17.33x earnings.
Despite the dog that my portfolio is, it is more expensive than ever in the past year or so, and that’s troubling. Rich valuations typically portend lower returns in the future.
At a market level, US, Europe & Canada all are now trading at > 20x earnings while unsurprisingly, China is the cheapest, at ~11x earnings.
Summary
✔️ Returns, since inception, up at 9.26% p.a. (8.31% at end of previous quarter)
✔️ Returns now beating inflation; Real returns at 4.2% p.a. (2.6% at end of previous quarter)
❌ Returns over benchmark is -4.9% p.a. (previously -1.5%)
❌ Valuations are getting rich - portfolio now trades at ~20x earnings (previously 17.33x)
As always, Happy Investing!
I have been observing some interesting trends in Indian economy that I will hopefully get to write about soon.
Caveat: I have not gone through all annual reports and it is likely that the companies that I have not reviewed have reported good enough earnings that the portfolio actually trades closer to past valuations. Possible, but not very probable. Almost everyone I read/listen to seems to be lamenting that the markets have gotten costlier.