This Is The End

No, it’s not the end of my investment career, but these are the last song lyrics I’ll write for you. (Edward Bear). Hopefully, we are coming to the end of the Fed’s utilizing interest rates to wage war on inflation, but in the meantime, Putin’s continued annexation of Ukraine, the drop in the British pound versus the dollar and North Korea’s launch of an intermediate-range ballistic missile over Japan may lead to the end of the world as we know it. (R.E.M.) I guess only time will tell. (Jimmy Buffet).

Investors may question whether inflation has been tamed, but certainly the capital markets have been. In equities, except for some select Emerging Markets, there was no place to hide for the first nine months of 2022. Global growth indices did a little better than value indices in the third quarter, but year-to date underperformed value regardless of size or region.

High exposure to Europe, and hence negatively impacted by the geopolitical events and weakening currencies, Frigate continued to struggle through the third quarter. Individual companies suffered from supply-side shut-downs and inflation and year-to-date some of the biggest detractors remained the same as the first half, including: paint and coating producer AkzoNobel, industrial conglomerate Siemens and its spin-off chipmaker Infineon, and IT company Wipro. Adidas was one of the worst performers as it continued to lose sales in China. Even the ADRs of stocks that performed well in their local markets like pharmaceutical companies AstraZeneca and Takeda, HSBC Holdings PLC and Deutsche Boerse had negative returns for the period in US dollars. Two stocks which did well in local and USD were Brazilian Banco Bradesco and provider of offshore oil and gas solutions TechnipFMC PLC. Since inception, Folio estimates Frigates cumulative, gross return of 36.29% as of September 30, 2022.

Stock with good payout ratios had been defensive most of the year, but with interest rates rising they became less attractive than safer instruments with similar yields. Still Treasure Harbor continued to perform better than Frigate. Same as the first half, major detractors were semi-conductor tester ASX, luxury good provider Richemont and Deutsche Post. Bank of Nova Scotia joined the ranks of underperformers after reporting a drop in fees linked to market activity and wealth management. Shell PLC and Pembina pipeline remained top performers for the nine months and they were joined by Singapore Telecom, which reported good first quarter earnings (ending June, 2022), especially in its Australian businesses. Folio estimates that since inception Treasure Harbor has generated a cumulative, gross return of 16.76% through September 30, 2022.

Although the Yellowtail model isn’t intact, I still track most of the stocks in an ersatz compilation in third-party software. Not all, but many of these smid-caps have had significant corrections. Simply Wall Street estimates that the intrinsic value of the portfolio based on free cash flows is 56.9% undervalued. We dissolved the funded Yellowtail model due to IBs decision to terminate holding securities in models that are denominated in foreign currencies. Ironically with the contraction of many international stocks, we could reconstitute an international SMID model in ADRs. Please let me know if there is any interest.

The Door’s song mentioned in the title has special meaning for me. During my husband’s first trip to Paris, he was determined to visit Jim Morrison’s grave in Père Lachaise Cemetery. As we wondered among many beautiful and famous monuments a very suave Parisian addressed us in a “Eh, what are you looking for, how can I help you?” “Oh, Morrison is down that row,” he waved his hand in one direction and then pointed in another and laughed, “and by the way, Chopin is up there.” We visited and photographed both graves and I brought back a copy of Chopin’s for my piano teacher. So the kindness of a stranger in Paris touched the heart of a piano instructor 4000 miles away. Global kindness? We’ve been this way before, we’ll be this way, again. (Neil Diamond.)

Wishing for you and yours a healthy and safe start to the holiday season.

– Lauretta “Retz” Ann Reeves, CFA AMWA

Footnotes:

(i) Performance figures are estimated and unaudited. Estimated Benchmark Returns are in the column to the right of its respective Folio. Net Returns are after international taxes on dividends, management fees and trading fees, when necessary. Historical returns are available on request and at Callan and Investment Metrics.
(ii) Gross Return
(iii) Benchmark is 15% SPDR S&P Emerging Markets Dividend ETF + 85% SPDR S&P International Dividend ETF. Returns estimated based on NAV.

Disclaimer: This post nor any of the material linked to herein in any way constitutes investment advice. Historical performance data above represents performance results as reported by the portfolio identified. Performance results are for illustration purposes only. Historical results are not indicative of future performance. Positive returns are not guaranteed. Individual results will vary depending on market conditions and timing of initial investment. Investing may cause capital loss. The publication of this performance data is in no way a solicitation or offer to sell securities or investment advisory services.