We’ve come to the close of our first 12 months. While we were proud of our performance for the first 10 months to August – which was nearly stellar – the months of August and September hit us like a tsunami for numerous reasons, principally macro ones:
– The euro suddenly rose sharply against the dollar. With most of our holdings (64%) and cash in US and Canadian dollars, we were significantly affected.
– The Chinese economic slowdown became increasingly clear and created a drag on Chinese and Hong Kong markets. Our biggest HK-listed company Waison fell 15.5% in August alone, and for no good reason. In fact Waison’s Q2 sales and profit performance exceeded analyst expectations. Margins were resilient and even appreciated despite the changed product mix, signaling the end of a price war.
– Even the slightest ‘if’ in this nervous environment justified selling off illiquid holdings. One such holding in our portfolio was Enphase, which not only lost its finance director but also potential business in Canada. We have been supporting the view (along with IMS) that the company will win out in the end when microinverters become the disruptive technology in the inverter world since its target is to cut costs dramatically. In the meantime, the dramatic 14.6% sell-off was probably caused by the emergence of a hint of doubt about Enphase’s management, who have been known to make overly ambitious statements (eg “we have no competitors”).
The good news is that these disappointments were somewhat offset by some very strong performances across a broad range of sectors: efficiency, storage and even wind. Enersys published another great set of results thanks to strong demand for batteries and faster charging. Greenko rebounded nicely in response to the power blackout in India.
A few final points as we move away from the last 12 months. We had two takeovers in the portfolio: smartgrid company Elster, and rare earths processor Neo Materials Technologies. True, the terms of the latter buyout were not as attractive as we would have hoped (the exchange for Molycorp was a big mistake by the Neo Materials board). But two takeovers out of 23 stocks is a decent score. We put the greatest emphasis on stock-picking, our most valuable value added, and that will continue to be one of our strengths.
Our Q4 strategy:
We will continue to invest in the ‘quality’ companies in our universe with the best visibility, transparency, quality management, balance sheets and sustainable business models. Our high beta stocks will again be partially balanced by defensive, dividend–yielding companies.
We used no cover or leverage, and we intend to in future for less stressful risk management. We will also put our stop-losses more rigorously in place. This will free up time to find the next best investment opportunities.
We have kept our cash balance to a minimum but may increase that to take advantage of buying opportunities following the US election.
We are increasing our overall yen exposure, because the economic fundamentals are relatively strong. The last QE in Japan was good for the equity market and, if the locals stop buying US dollars and euros, the yen should rise. Additionally, Japan is set to become one of the biggest and by far the most profitable solar market in the world in 2013 and the foreseeable future.