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The garage sale we've been waiting for

By Simon Angelo

When I was growing up, garage sales were a great way to find a bargain.  The best sort of garage sale was when the owners were moving - ideally leaving town or going overseas to live.  They had to clear their goods and were happy to sell items for whatever they could get.  I suspect my best garage sale buy was a small stamp collection which turned out to have a few rare stamps and covers worth a bundle.  Of course, there was always competition - with garage sale trawlers who were often up at the crack of dawn to be the first up the driveway to have their pick of potential bargains.


With stock markets suffering the heaviest falls this year since the GFC in 2008, we're starting to see some garage sale opportunities with shares.  So how heavily have the markets fallen?  How has Vistafolio's model portfolio performed?  And what's our strategy going forward?

Garage sale in Northern California, 2005.  Looks much like those I attended in New Zealand in the early 1990s.
Bargains beyond the garage

Another way way to bag a bargain is arbitrage.  I've used this twice when purchasing cars and several times this year with shares across world markets.  Simply arbitrage is where items are priced differently according to their location.  Earlier this year I found the same Italian sports car priced thousands of dollars lower in a city 3 hours drive away.  Similarly, profitable mining giant Rio Tinto has been cheaper on the London Stock Exchange (probably due to Brexit and Pound concerns) than it has on the Australian Exchange.  Same car.  Some company.  Both represent opportunities to work the markets.

Market crash 2018

The index we benchmark against, the MSCI World index containing a basket of global stocks fell 11.21% in 2018.  The FTSE in the UK, where we hold substantial positions tumbled 12.5%.  The Shanghai Composite is down 25%.  These are the biggest slides since the Global Financial Crisis (GFC) in 2018.  

Despite the volatility, Vistafolio's model portfolio (applied to our investor accounts) is actually up nearly 2.2% (gross) in 2018.  Please see an explanation on how we've achieved this in our performance update below.

As with previous market avalanches, there are causes for the instability.  In 2008 the loose ground was the sub-prime mortgage crisis and the bursting of the US housing bubble.

In 2018 the ground started to shake with the Korean nuclear threat in the early part of the year, then the China v. US trade war in the latter part, coupled with worries over a no deal Brexit in the UK and the new Italian Government looking to ride across EU budget rules.  At the same time Central Banks are rolling back the quantitative easing that sped recovery out of the GFC and debt levels are once again at record highs.

So what's going to happen in 2019?

Good businesses with solid assets and defensible customer bases bought at sensible prices are going to remain stable and will present opportunity.  It's going to be a good time to enter the market and take some new positions.

Inflated assets are going to tumble.  I don't think the balloons are going to burst since there remain hungry buyers, but they're going to deflate quickly and in some cases with a nasty shrieking noise.

Which assets have been inflated?

Property prices in major cities in Australia have fallen much faster and deeper than the ASX and I would think Auckland is due for a similar correction.  Simply yields from property (as an investment) and prices of property as a multiple of income have become completely out of whack.  While average dividends on shares are sitting around 5%, yields on rental property when the true costs are factored in can be below 2%.  Similarly, Price to Earning (PE) multiples of listed companies on both the ASX and NZX are in many cases still reasonable in the sectors we've been targeting - as opposed to property in Auckland which has a median price to median income ratio of around 10 (severely unaffordable and at risk of market crash with the removal of foreign buyers).

In terms of stocks, those that have really pulled down the markets have been in the tech and online space (where PEs have been very high) and focused on riskier sectors of the property market in Australia and Brexit Britain.

Performance update & strategy
Despite global market volatility in December we held our ground, with the model portfolio down just a touch at -0.15%.  From start to end of 2018 we delivered a gross return of 2.17%.  Our annualized net return now sits at a net average rate of 16.88% p.a. from inception in 2014.*  You can view the full performance chart here.

Although nobody is immune from steep market tumbles, we've protected our positions and are ready to buy and gain again over time.  Against a fall in our benchmark MSCI Index of -11.21% (gross) in 2018, we've held on to a gross gain of 2.17%, outperforming the market by some 9%!

How has outperformance been achieved in 2018?

Our Model Portfolio buys seek a number of conditions, but principally these factors have assisted performance in 2018:

1. Running yield
A primary objective of the share portfolios we create is to work the money and generate financial independence.  This means seeking strong dividend yield.  Despite the volatility in the markets through 2018, we delivered income of around 6.5% p.a. to account holders.

2. Value focus
We undertake in-depth study of the companies we invest in.  This enables us to have a clear view of their value and potential.  When the stock price sits well below the actual value, we know it's time to invest.

3. Contrarian spirit
When the sign at the park says "don't feed the ducks" - that makes us want to feed the ducks steroids.  Well maybe we don't go that far - but to invest well you have to oftentimes go against the herd and break the rules others are following.  That's a mental position, a way of thinking and way of approaching the market.

4. Sector convictions
We have some controversial sector convictions that have been paying off.  We think demand for electricity is going to eventually skyrocket (not decrease).  We think there's going to be a move away from computer screens and back toward physical retail models.  We think food and water are going to become more and more unaffordable while houses become cheaper.  There are many more...
Stock take
Tassal Group is Australia's largest Salmon grower and seafood processor.
Tassal Group (ASX: TGR) has been a great buy for portfolios this year.

We started buying the company at under $4.00.  The price closed for the year at $4.42, with holders enjoying a dividend of around 4% p.a. in addition to the 10% capital gain.

Tassal has forecast sales, production and earnings growth supported by national and international demand for seafood, which is expected to outstrip supply.  It has recently purchased 3 prawn farms in New South Wales and Queensland and will be investing in these to further increase returns for shareholders.

The business matches our hunt for value and our sector conviction in a growing world shortage of salmon.  Although the buying opportunity has now passed, we'll be watching other similar possibilities through 2019.
The year ahead
There's a number of ways things could go on the road in 2019.  On my map of hazardous roads and perfect highways are the US v. China trade situation, Theresa May's Brexit deal, Italy's growth under it's new Government, Central Bank interest rate plans and the continued dynamism of emerging markets. 

All of these roads offer potential for acceleration or treacherous conditions.  Immediately before the New Year, Trump announced that the US and China are working on a cooperative trade deal.  The markets liked that and finished with a small rally, recovering some of November and December's nasty fall.

Although there's a very big "if" as to whether Theresa May can get her deal through the British parliament, the deal does seem to have delivered on most of the desired factors, ending freedom of migration movement but retaining single market access.  The UK's ability to attract wealthy and dynamic migrants as opposed to sharing a border with Poland, Romania and Greece to name a few, will surely in the long run present new growth opportunities.

Right now for investors, it's a great time to enter the market and start building a portfolio of value buys as and when they present.  It's a good time to get in touch.  By next month I expect to have news of a new and exciting development.  For now, I wish you a successful and prosperous New Year with some more time to invest in your most precious assets of all - your family, friends and those closest to you.
If you're a client, thanks for taking the long view with Vistafolio.  If you'd like to find out more about our innovative, managed account solutions for eligible or wholesale investors, please visit vistafolio.com

*Past performance is not an indicator for future performance. Your actual portfolio will differ from the composite portfolio mentioned. Annualized returns are after management fees and after withholding taxes. The information contained in this document does not constitute an offer to sell or a solicitation to buy an investment, nor should it be construed as investment advice.
Copyright © 2019 Vistafolio, All rights reserved.


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