Investment process in more detail

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The Funnel

When I evaluated fund managers, I often asked them to describe their full investment process. Most fund managers present this as some sort of funnel, where you start with your whole investable universe at one end, and the stocks in your portfolio in the other and in between the steps how you got there. Just as an example it could look something like this:

funnel-graphrev

This is my first post where I start defining my own funnel, which in essence is a filter process to get a huge universe down to something manageable. This process is currently rather unclear even to myself. An important part of starting this blog has been to force me to define a funnel, or at least something similar. I need a strategy both for which companies I should look closer at and what to focus on when valuing the company. This may sounds easy, but currently I have a huge lack of consistency on what parameters I evaluate a company on. In a similar way I do not have a process for finding what company is most worthwhile to research.

1. The Universe – Global

As the name of my blog implies my universe is global and also not restricted at the moment to any minimum liquidity cap. Meaning I more or less have the full world universe at my disposal. Minimal constraints in theory gives most room for out-performance, but looking at it practically a small one man show as mine has no possible chance in a lifetime to evaluate all existing companies, so something clearly needs to be done to narrow this down.

2. Filtering the Universe

2.1 Liquidity

I henceforth put a minimum cap on liquidity of average 3 month volume at 100 000 USD. This is very low and I probably will revise this in the future, but I currently have one holding which has poor liquidity and that is Highpower International. Given that I just invest my own money I don’t have a need for high liqudity at the moment. In the future I intend to make my process scalable for investing larger amounts and then I want to already have the same process in place. My thoughts for future minimum liquidity is around 1 million USD average daily volume. This will be my first step in narrowing down the universe.

2.2 Investable countries

Currently I don’t have brokerage accounts to invest in every single country in the world (few professional investors do either). My investable markets can be summarized as follows: North America, Western Europe, Turkey,  Japan, Hong Kong, China, Philippines, Korea, Taiwan, Thailand, Indonesia, Malaysia, Singapore and Australia.

3. Generating Investment Ideas

Mainly I use what I see, read and experience around me to find interesting prospective investments. I try to think far ahead, what the world will look like in 10 years. I travel quite a lot, that helps for being able to invest globally and to understand consumer around the world. For example I never visited South America and I’m much less confident to invest in that region just for that sole reason. I also spend a lot of time online reading forums and news. This is close to the core of why I love investing. I’m curious about what people think and I like to learn and understand new things. My investment ideas are seldom totally unique, it’s hard to be in a world full of investors, so I steal ideas without shame from all possible sources: fund managers, sell side research, investment blogs, podcast, news articles etc.

4. Specific Screening

Here all types of screens could be applied that is relevant for the current Investment Ideas. Something that makes sense in most cases is screening down to Sector/Sub-sector/Industry for a specific country or region. This comes in handy later when doing peer valuations or just comparing which company is most interesting to look further into. As examples one could try to screen for companies involved in battery production all around the world or consumer staples in China.

5. Factor/Style Screening

I’m a big believer that its favorable to invest along with some well known factor risk premia. When analyzing famous fund managers that have fantastic track records of generating alpha, their out-performance can often be explained in large part through their investment process. Knowing or unknowingly they have built their investment process tilted towards a risk premia that over time has generated some or all of their funds out-performance. One famous example is Warren Buffet’s value investment-style, in combination with a company structure which has enabled him to take on some leverage to the Beta he has been exposed to. Other famous fund managers have exploited Low Vol strategies or more recently Quality and High Dividend tilts.

So the first step for me is to understand/decide what risk premias that are worth investing along with. From the research I read and the experience I gained professionally I have decided to initially focus on Value and Momentum. The reasons for this I will need to explain in further detail later, although some explanations have been given in earlier posts.

6. Invest with tailwind

One important aspect of my investment style is finding some sort of future tailwind in my investments. For me these tailwinds can be of very different types, one example would be investing in stocks with Value characteristics. The normal way of thinking about tailwinds would be and industry that has potential for good growth. This type of tailwind that I focused during the last year has been the development of Electric Vehicles (EVs) and the emerging Chinese middle class. Another tailwind I use frequently is just what the market tells me about the price of a stock (price momentum). During the 15 years I invested I always looked at charts and been intrigued by how Technical Analysis (TA) try to capture psychological aspects of investing. My belief is that there predictive power in price momentum and this has also been shown in numerous research papers.

Long term (5-20 years) upwards price trend is also important to me. It tells me that the company has created share holder value over the long-term, surprisingly many large companies have not. Positive price trend over the long term I also call a tailwind.

6.1 Timing / Short term Momentum

Short term price movements I use to try to time the investment and enter at an attractive level. This is less of a tailwind and more of a proven market anomaly (price momentum) and a personal preference that I like to buy on short term weakness (in general I like to buy stocks on days when the market is down). I realize these attempts at timing might be futile, but I do feel over my 15 years investing I developed some type of fingerspitzengefühl. I might need to back that up with some statistics at some point, that I currently don’t have. When I have more time I will analyze as many past trades as possible and see if I entered the stock at a favorable price point.

6.2 Value Investing

This is such a big topic and also something I still have much to learn about, so I will cover this in Future posts separately.

7. Analysis

For the stocks that passed my filters and requirements I want to do a deep analysis of the company and it’s peers. This step will also need a separate post to go through in further detail. Here I also have much to learn, since by profession I’m not an equity analyst, although I have been analyzing companies for many many years in my spare time. The CFA also helped with some techniques and account knowledge.

8. Portfolio Construction

Finally portfolio construction. My aim is to have a portfolio diversified over sectors, countries, style/risk premias and sometimes even currencies. A colleague of mine used to say, diversification is the only free lunch. The meaning of that is that diversification gives you a higher sharp ratio and less company specific risk for free. What you possibly pay is if you have one outstanding idea and you still just invest with a small amount in the idea, to not give up diversification. But this to me is nonsense (as long as you don’t have insider information, which I don’t). In my belief there are no such investment cases which warrants you to go “all-in”. Here I also have some work to do, one reason I have not come so far, is that the amount of stocks I have researched is too narrow. I don’t have a pool of 50-60 good investment ideas to chose from and select those that give me good diversification in the way I mention above. So i don’t expect to develop these last stages of my investment process before I have come further in the earlier steps.

Conclusion

So now I have created my first own “Funnel” going from the full investable global universe down to Portfolio construction. All steps are not finalized and I have much more work to do, which will probably take me another year or two to iron out. After that I expect to have a professional investment process to follow. This process will both be built in such a way that it will increase my probability to generate out-performance (by quantitatively filtering out companies with favorable metrics) and suit my investment style and the way I like to invest. Both are equally important to me. I believe that merging quant with stock picking skills is the future and exactly what the most advanced investors are already doing today.

 

Why European small cap speculators feel great

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A few lazy days

So I have been fairly stressed out lately, struggling to keep my blog updated and more importantly keeping up with the news flow in stocks I own or follow. The reason for this has been a final push at my old job and everything that needs arranging before my move back to Asia. Now being through the worst, I decided it was high time for a vacation. And lucky me, weather is still summer-ish and I had a few nice super-relaxing days. So now with some time on my hands, I’m going to summarize some thoughts I had over the last few months.

Big Picture

Let’s start with the big picture, what’s my view on equity markets in general? In my view we have all the signs of a late stage mature bull market. Of-course this topic can not be discussed without mentioning the low rates worldwide. Yes, this is unchartered territory, yes, we have never experienced this type of environment with virtually global zero rates. But at the same time that is what is said every time the market get’s toppish – This time is different (Reinhart and Rogoffs’ book title released in 2007 just before the crisis started) comes to mind. What I can conclude is that Every time is different – and that is the whole reasons why markets managed to get overvalued. I was sure we were rolling over into a longer bear market about 1 year ago, when the Chinese markets pulled the rest of us with them. Day by day I’m looking to be more and more wrong on that statement. But I did turn more short term bullish on Asia and Europe around April-May, I expressed this view in my post Market Thoughts May. But investing in this market I still have this nagging feeling of running in a dark room picking up glowing pennies wondering if the steam-roller is catching up with me? Markets do climb a wall of worry, but I feel a disconnect here, private investors are happily buying stocks, which can be seen by the silly out-performance of small and micro-cap companies during the last years. At the same time many “professional” (or let us say educated) investors have been more skeptical for quite some time. Let’s take a close look at this phenomena.

European Small/Micro Cap investors feeling great!

Let’s look at the following two graphs.

small_vs_large_Europe

microsmall_outperformance

The first one shows MSCI Europe Small Cap ETF versus Stoxx 50 Europe (very large cap). The out-performance is striking, small cap +14% and large caps down -12.5%. As a large cap investor in Europe you really felt pain and as I already mentioned in May, far from recovering. But as a small cap investor, you are fine, great actually, just shy of all time highs.

The second graph shows a much more extreme example, in Sweden. This shows the performance of the main index OMXS30 versus the wider OMX Small Cap index as well as the Micro Cap index of stocks listed on a venture exchange called AktieTorget. This smallest list is mostly available to local/nordic investors. It’s astounding, since the highs set by most indices in May 2015, this small cap benchmarks have gained another 35% and 55% respectively. No wonder that retail investors focusing at least partly at these smaller companies are feeling great. So I’m just going to say it – This is what a bubble looks like. I will try to actually give some historical proof of why that is the case.

The Small Cap Factor

factor_characteristics

This graph takes some explaining, so bear with me, because it is has a very important point for the small cap style investing (red line in graph).

Background

This graph is taken from a very recent research piece on factor investing. For those of you not familiar with factor investing, it goes all the way back to Fama French’s (now old) groundbreaking research of how returns can be explained by more than the Beta in the CAPM model. This is today expressed through products like Smart/Enhanced Beta, Risk Premia Investing and such. A complex topic which I’m happy to write more about if somebody reading is interested. Are you new to this, at least read Fama–French three-factor model.

Three factors

So the three factors created in this test are called Small Minus Big (SMB), Up Minus Down (UMD) and High Minus Low (HML). The UMD factor approximates Momentum investing and HML Value Investing. But what we will focus on this time is SMB – which approximates investing in Small Cap stocks.

Graph construction

What this graph then shows is the out or underperformance versus a benchmark of these 3 factors. The SMB factor is constructed by being long small caps and shorting the benchmark (simplification). Instead of time on the x-axis this graph is constructed to show skewness of returns. They do that by sorting all returns for the whole time period (in this case since 1950). Imagine sorting all returns day by day for this SMB factor, from smallest daily changes first, to the largest (up or down) at the end. Then accumulate the returns starting with the smallest, until you finally added together all returns ending with the largest daily movement (not considering when it happened in time).

How it’s described in the research paper

“Graf shows the ranked amplitude P&L of the three Fama-French factors in the US since 1950. Clearly, SMB and UMD show the typical humped shape observed for the market ERP in the previous section, therefore corresponding to a negative overall skewness equal, respectively, to _∗ = −1.39 and −1.38. For UMD, the 5% largest events contribute to losses that amount to 20% of the gains accumulated by the 95% small to moderate returns, whereas for SMB nearly all the gains are erased by the 5% largest events!”

Conclusion

This clearly shows that investing in small cap stocks works extremely well in normal markets, with great out-performance. BUT, when we start to see larger moves in the factor, it gives it all up again. As we know (also from other research) most of the extreme moves happen when markets fall sharply. So investing in Small Cap stocks really is like picking pennies in front of a steam roller, it works great, until it doesn’t and at least historically it has not added any major outperformance. Saying it in another way, investing in small caps has a cycle of out and underperformance. Both Value and Momentum investing has historically shown both much better outperformance – and skewness results. Which is very attractive if you as me are afraid that we are in the late stage of the bull market. So for all of you out there who made great money in the small cap space – well don’t expect to get out at the peak, get out now. I will also try to minimize my exposure to small caps going forward.

Value investing decent protection and opportunity

So I have previously alluded that it’s been tough going being a Value investor for quite some time. What I mean by that is that the Value factor has been underperforming. Of course Value can be defined in many different ways, the easiest being just ranking companies by Book to Price. Some investment banks have come up with more refined ways of defining it. I chose to present such a way, which is Pure in the sense it’s neutralized for Beta and Sector risk. As can be seen it has been doing very poorly. Keeping in mind the nice properties of Value outperforming in shaky markets that we just learned about in the skewness graph (blue line in graph above). Together with it’s current underperformance, it might be high time to start loading up on those Value stocks. And definitely something I have to spend some effort on since my portfolio is too geared towards high growth companies at the moment.

equity_value_underperformance

Final words

It should be mentioned that this is mostly conclusions drawn on the European stock markets. The relationships in SMB in the US is at the moment are not the same. Much due to the S&P still at its all time highs, with some seriously large companies performing very well, so we are clearly in different stages of the cycle. I’m of the firm opinion that some larger stocks in the US are also valued too high.

My next post will be about some seriously outstanding results and stock performance of my holding in the battery company Coslight Technology.

You win some, you lose some

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So the earnings season continues and it is definitely throwing a mixed bag at me this time, some serious burns and a few good ones. Let’s go through the largest movers:

NetEase

The day before the earnings release I cut my holding with 30%. So was that a good move? Yes and no. Yes, because the stock price actually initially fell 6-7%, but since I am not a day-trader that doesn’t matter much to me. The stock later recovered and is now trading a few percent below my selling price. No, because they actually came out with the best possible earnings I could imagine, I’m actually surprised the stock has not traded higher. So at the moment the market is still putting a fairly substantial risk premium to this stock, I still feel its american investors not trusting a Chinese company.

Zhengtong Auto

Well this was a disaster report, I have counted this as one of my value stocks in the portfolio. A lot of the other car sales and services companies in China has started to recover nicely, both in terms of earnings and share-price appreciation. But Zhengtong is clearly lagging her, suffering from mainly their tilt towards BMW cars. BMW sales have been weak, because BMW is not delivering new models attractive to the Chinese consumers. Stock was down -15% on the report and continued down from there, ouch.

Shanghai Fosun Pharmaceutical

I bought this just before their earnings release, which was solid, not amazing, but solid. The stock market slowly took the figures to its heart and the stock trended slowly upwards ending up over +8% on the day, lucky start for this holding.

CRRC

OK earnings and net income, but outlook was weaker than expected, the report was not well liked by the market, I think it has been punished somewhat harshly, but my doubling up in this stock just before earnings became terrible, the stock is down -9% from where I increased my position, again, ouch.

Slicing and dicing – NetEase, CRRC and Autoliv

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Tomorrow NetEase, which has become the portfolios biggest position will report results, I still believe in the company long-term but I decided to slice the position somewhat, to lock in some profits while we are close to what I saw as the short term price potential of the stock. I sell 30% of my NetEase holding as of close today. I’m still optimistic about the report though, Tencent released it results today and they beat analyst estimates, mainly due to very strong gaming profits in their mobile games. NetEase is not as heavily tilted towards mobile (yet), but I still see it as a positive that the sector seems to still have some legs to it’s growth. As a Chinese colleague of mine explained to me, the urbanisation has created all these huge cities where people have 40-50 min daily commutes on the subway, what else would they do than play games on their smartphones to and from work.

The cash from NetEase I place in CRRC, which I had at a smaller weight and now take up to a full size position. From the cash I have left I also take a 3% position in Autoliv, the stock has been trading fairly weak lately, although they have a lot going for them in the smart car space.

 

 

My first pharma holding and Portfolio Update

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Yes, it’s time to deeplet these high cash levels, I have suffered some serious performance drag having 15% cash in an uptrending market. First it was LG Chem announced the other day. As of today’s close I’m allocating a 6% position in my first Pharmaceutical company – and no, it’s not Valeant (although it seems to have bottomed out by now).

Shanghai Fosun Pharmaceutical (2196 HK)

Yet again I dig into the Chinese market, this time through the fairly famous Fosun Group, which I previously been a shareholder in.  Shanghai Fosun Pharmaceutical (from now on Fosun Pharma) is a H-share listed in Hong Kong, meaning it’s also listed in mainland China (as is some of my other holdings – BYD, Ping An)

Fosun Pharma:

  1. Develop drugs (metabolism, anti-infection, cardiovascular, oncology etc).
  2. Provide Healthcare services, they have been fairly aggressively buying up hospitals.
  3. In Co-operation with it’s big shareholding and partner Sinopharm they co-operate in drug distribution in China.
  4. Produce Medical Devices.

I’m taking this position for a number of reasons:

  1. In general I think the Pharmaceutical companies need a re-visit, after being the market darling stocks, they have taken a beating lately and I have been looking for a good candidate to invest in.
  2. Fosun Pharma listed in HK is fairly cheap, trading at trailing P/E 15 and looking like 2016 figures will come out around P/E 13-14.
  3. The stock looks oversold and the China listed stock has started to move upwards lately, the spread between China and HK listed stock is as stretched valuations as they historically ever been. See picture below for spread in orange.
  4. Fosun Pharma is a big shareholder (11%) in the pharmacy distributions company SinoPharm, this stock has been soaring lately. This holding accounts for over 50% of the price for Fosun Pharma’s stock price, meaning you get the rest of it’s business very cheap.
  5. I need a Pharma holding in my Portfolio.

Fosun_Spread

This is the first time the China listed stock has been moving so significantly, without any spike in either the stock or the Chinese stock market.

Portfolio Update

I also include a Portfolio update (not including Fosun Pharma yet).

Holdings_20160815

A lot of beats

Skandiabanken came out with fantastic results that beat estimates, after Altor came in as a new big investor, the stock has been soaring. As always when you bet correctly you wish you did not allocate more in an earlier stage, but with this significant gain the current weight in the portfolio has become a high conviction position.

NetEase continues to deliver, awaiting a report in a few days, if the stock keeps soaring I will probably cut the weight in this one short term. It’s a struggle to stay long-term in companies where the gains you were hoping for over the coming 1-2 years materialize in 3-4 months. Definitely the type of luxury problems I would like to keep having.

Microsoft also came with a beat, the market seems to start to value it’s Cloud business (my reason for investing), not sure about the hefty price tag for buying LinkedIn though..

Sony beat estimates with a strong report, I read some comment like “Nintendo should look at Sony, a Japanese game maker that actually makes money”.

One big disappointment was Ramirent’s report and the market struck down the stock -13% over two days. The momentum seems to keep holding though, which was one of the one the reasons I bought this stock (no I’m not a value investor).

Overall in the strong market many holdings has started to recover (Zhengtong, Ctrip, CRRC and MQ). The only company that is strangely weak is Avanza Bank, I might need to re-evaluate this one, as I always listen to what the market is trying to tell me. Stocks going side-ways in a up-trending market will not do well the day the market breaks down. I have also discussed this company with some friends who are knowledgeable about Swedish Banking, they think Avanza will have a tough time finding ways to making money out of their customers. More to follow..

 

New investment – LG Chem

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So after the sale of Criteo the portfolio has been suffering from way too high (unintended) cash levels (17%). Somewhat hurtful in a market which just keeps rallying. So it’s high time to add a new holding to the portfolio.

Why LG Chem

Today I initiate a full position at 7% in LG Chem listed in Korea. This is large Chemicals company that also happens to be one of the major battery manufacturers in the world. LG Chem has also had the most sophisticated batteries for electric cars, in terms of cost per kWh and I hope they will defend that position. Due to this technical advantage LG Chem has tied many car manufacturers to its list of customers. Among these are Chevrolet and the Chevy Volt seems to be selling well and soon the all electric Chevy Bolt is going to be released.

img-automobile_battery_differentiation09

Although my main reason for buying LG Chem is their growth potential in batteries, one have to be respectful that 85% of their current sales comes from elsewhere and mainly from the Basic Materials & Chemicals division, which produce different type of petrochemical products. What I like about this, is that the battery industry at the moment is in a stage of heavy investments. Some serious cash is needed to build and ramp up production of the next gen batteries. Most of the smaller players can’t handle that, thanks to LG Chems other divisions generating significant cash, they are able to do just that. So I believe I get the petrochemical business at a reasonable multiple with good potential for growth in the battery division over the coming 5-10 years. This is a very long-term play though and much can happen on the way there.

Still early days for EV sales

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Sales concentrated to a few models

Inside EVs is a great page for keeping on-top of the world of EVs and batteries. They do some nice data on EV sales in the US, as can be seen below.

2016-sales-chart-July-vfinal1-750x715

Very interesting to me is how the Chevrolet Volt (which is a Plug-in hybrid) has started to gain some serious momentum, surpassing the Model S in sales. This car makes a lot of sense to commuters and I think this is the big selling point of EVs at the moment. We are still far away from EVs being the ultimate car for all situations. But commuting cost money and time, and with EVs you can reduce the monetary part significantly and in the US often also time, since you are allowed to drive in the High-Occupancy Lane normally reserved for people that share their car with others for the commute.

Still below 1% penetration

The 13423 sold cars in July sums up to about 0.9% of the total vehicle sales in the US. So penetration is still at very early stages. As can be seen sales is driven by very few models at the moment. With the Tesla Model 3, we can probably expect at least 10 000 units per month just from that car (based on pre-orders). I think we are not that far from moving from the the Innovators stage to actually talking Early Adopters. As you know technology often follows an S-curve, when a tipping point is reached, it goes very quickly (think fridge, flat-TV or Smartphone). So still very hard to see when we will reach the tipping point, but many have guessed around 2020. I think it is somewhat too optimistic and that we will linger in the 5-10% penetration range until the big players like GM, BMW, Audi really jumps on the train and that is when we will see enough charging stations around the world as well.

DiffusionOfInnovation

adoption an s

Just looking at me personally, I have not had the urge to move over to EV, but with the Model 3, Chev Bolt, or hybrids with pure EV range that actually is enough for most shorter rides we city people do, it starts to make sense. To me personally the one problem holding me back is the question about charging.

Conclusion

Important to keep an eye on penetration rates, all of a sudden sales will start to move quickly. Norway is the only example where they already reached the tipping point and as they did it moved quickly. Also good to keep track of which battery producer is supplying which car. For example LG Chem is supplying Chevy and Samsung SDI is supplying BMW.

 

Interesting ETF – Global X Lithium

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For the ones that have been following my posts, you know that I have been struggling with how to express my theme of the EV future. I touched upon this dilemma in numerous post and mainly in this one: Investments in EV Value Chain. Today when I reviewed the largest shareholders in the battery producer Coslight Technology, which I’m invested in, something interesting popped up – an ETF called Global X Lithium was a shareholder. I went ahead and looked at what this ETF actually holds in it’s portfolio, and I was surprised to see how close the holdings resembled the list of stocks that I have under watch and try to follow, regarding news-flow etc. This could definitely be a catch all ETF for you readers to buy, who don’t have access to, or do not bother to buy stocks in markets around the world like I do. I won’t invest in an ETF for this blog, but it’s still worth exploring the ETF.

Solactive Global Lithium Index

The ETF tries to replicate the Solactive Global Lithium Index, in the index description one can read: “The Solactive Global Lithium Index tracks the performance of the largest and most liquid listed companies active in exploration and/or mining of Lithium or the production of Lithium batteries. The index is calculated as a total return index in USD and adjusted semi-annually.”

Let’s take a look at how they built the index.

Constituents

The Index has 25 constituents and it’s interesting to see that I own(ed) several of them (BYD, Coslight and SAFT which I sold due to take-over). I also have Samsung SDI and LG Chem on my watchlist of potential stocks to invest with.

Name Weight %
FMC Corp 20.0
Sociedad Quimica y Minera de Chile SA 10.4
Orocobre Ltd 6.8
Albemarle Corp 6.3
Galaxy Resources Ltd 4.9
Saft Groupe SA 4.6
Johnson Controls Inc 4.1
BYD Co Ltd 4.0
Samsung SDI Co Ltd 4.0
Simplo Technology Co Ltd 3.9
Tesla Motors Inc 3.9
GS Yuasa Corp 3.8
Panasonic Corp 3.3
LG Chem Ltd 3.2
FDG Electric Vehicles Ltd 3.1
Dynapack International Technology Corp 2.9
Lithium Americas Corp 2.3
Advanced Lithium Electrochemistry Co Ltd 2.0
Vitzrocell Co Ltd 1.7
Changs Ascending Enterprise Co Ltd 1.2
COSLIGHT TECH 0.9
Blue Solutions 0.8
Bacanora Minerals Ltd 0.8
Ultralife Corp 0.7
China BAK Battery Inc 0.4

Weighting rules

I was a bit confused with why Tesla and BYD had so small weights in the Index, although they are huge companies MCAP wise, this was explained in the weighting rules:

“The Percentage Weight of an Index Component which is a Mining Company is capped at 20.00 percent, the Percentage Weight of an Index Component which is a Battery Company is capped at 4.75 percent on the Selection Days. The collective Percentage Weight of all Index Components with a Percentage Weight exceeding 4.75 percent is capped at 44.5 percent on the Selection Days. The excess weight is allocated proportionally to all Index Components whose Percentage Weight is not capped.”

The ETF is important

In my view this ETF can be important for a few reasons. One is as an indication of investor interest in the EV-Theme, by looking at how much Assets it attracts. Here is a historic graph over Assets Under Management and Price since it was launched:

ETF_AUM_Price

Without doing a too deep dive, I’m guessing the ETF was promoted at launch and thereafter interest has fallen as performance has not been good at all. A few other things can be noticed, starting around this spring the performance has turned around and interest (AUM) has at the same time spiked. Still in relative terms, this basket has massively underperformed most benchmarks around the world. The Index is down -41% since start of 2011 whereas S&P (without dividends) has returned 70%. This year, 2016, the Index has outperformed S&P with 16%. Could this be start of a turn-around and the long up-trend I believe we will see in the sector?

Possible buying squeeze

Another interesting factor is something seen in other ETFs that become “too popular”. Fairly small companies can belong to an ETF which gets massive inflows and the ETF providers are forced to buy stocks in the smaller company and thereby pushing the price significantly. This happened earlier with the Cyber Security ETF (HACK US) and affected the small Finish Anti-virus provider F-Secure.

Let’s calculate how much inflow is needed in the ETF to start pushing the price in my holding Coslight Technology. The fund holds a 0.9% position in Coslight. Looking at this years spike in AUM, the biggest inflow was on June 13 with 15.7 MUSD in one single day. This translates to 15.7*0.9%*7.75 = 1.1 MHKD, which is about 30% of an average daily volume, so not enough to move the stock price (the stock was actually down over the day). But this ETF is obviously not something famous (yet). So let’s play with the thought that the ETF gets the same type of exposure as the HACK ETF which grew from a few million AUM to over 1bn USD. It had an maximum inflow of 175 MUSD on one single day. Re-doing our calculus: 175*0.9%*7.75= 12.2 MHKD which is about 4x the average daily volume, obviously a somewhat unrealistic scenario, but you never know.

Conclusion

This ETF might be a good choice for a portfolio that believe in the Future of EV. Just remember that there is a possibility that EV becomes a reality, but competition is so fierce so no money is made by the companies in this space, something like the aero-industry, never put all eggs in one basket.

 

 

 

Criteo – Lawsuit scares me – I’m out

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Criteo the company I recently wrote an article about, has started a legal battle with the private competitor SteelHouse. So what is it all about? Well you can read it yourself in these two business insider articles: It started with Criteo and then SteelHouse came back with a counter.

The growth numbers Criteo have been pulling, are impressive indeed. But if it was one thing that was very hard for me to understand, it was the inner mechanics of how they generate their revenue. Since I don’t fully understand it, you might say I should not have invested in the first place. I guess I somehow was tempted of all that juice growth, in this case i never really considered any fraudulent behaviour.  And that might be my lesson, but here I am, not any longer comfortable with Criteo’s “black box” as SteelHouse calls it of revenue generation. One lessons I learned in the past is, if you are no longer sure of your thesis, then sell. You can always buy it back later. I sold my full holding as of today’s close.

Now I have way too much cash on my hand (17%), I need to find some new good investments.

BYD – Electric bus and car maker

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Introduction

BYD’s stands for Build Your Dreams and its products are probably not that well known to you, at least if you live in a western country. But it is infact a huge company with 200 000 employees and a MCAP of 20bn USD, listed both in Mainland China and on the Hong Kong Stock Exchange. Even Warren Buffet is a believer in the company and has held 9% stake in the company since 2008. It is believed that the famous Chinese investor Li Lu brought the company to Warren’s attention. Since then BYD stock price has been through several rollercoaster rides, mostly fueled by hopes of future growth in Electric Vehicle sales. The last two years has been exciting, since BYD has managed to grab considerable market share in sales of electrical buses. How well they can compete on the electric car stage is yet to be decided. I often read comments like, check out the Chinese Tesla – BYD, but that is not entirely accurate. First off I quote BYD Motors President Stella Li: ““We are in a different market than Tesla,” Li says. “Tesla is for rich people. We are for normal people.” But more than that, BYD is also a company with a much broader business set. I also recommend this Bloomberg article for all you Tesla fans out there: Take that Tesla

Business segments

BYD has three reportable operating segments as follows:

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