Kings Portfolio Newsletter Q2 2020 – “A game of inches”

Economy & Capital Markets

The US Federal Reserve expects to hold short term interest rates at 0.1% for the next three years. At present the ECB’s short term rate is 0%, the BoJ’s -0.1%, the SNB’s -0.75% and PBC’s 3.85%; punishing cautious savers, pensions and those who should not undertake risk, to benefit limited liability structures and those with capital buffers. Although smoothing the business cycles allows certainty in planning, it hinders the adoption of latest productive techniques by maintaining companies with sub-”normal profits”. Further the failure to apply anti-monopoly/trust law has created huge economies of scale for incumbents that crush new entrants. All of which leads to increasing inequality of income. Combined with the relaxation of temporary martial law measures, changing educational standards and susceptibility to social media, a spring of social unrest ensued.

Diminishing global fertility rates combined with communication and IT advances hold inflation in check while the further suppression of pricing pressure from adoption of AI awaits.

The UK left the EU in January 2020 but remains subject to EU law until the final agreement signalled for 31st December 2020 is negotiated. The UK’s persistent net deficit on goods and services trade with the EU reached £66bn in 2018 with additional net contributions to the EU budget of £7.8bn, over time we expect this to moderate. Inflation in the UK may rise as internal supply chains are developed and property price growth may slow from the reduction of immigration. Whilst in the EU we believe that GDP growth will further slow.

A US presidential election is scheduled for November 3rd with candidates appearing in 3 live broadcast debates from September 29th. As in the previous election, polls favour the Democrat candidate. Apart from style the policy differences are: the DNC’s preference for tax, regulation and global elitism whilst; Trump attempts a fair and equal playing field. Neither address better application of existing government/central bank programs for low wealth citizens and small enterprise. Negotiating the 2nd phase of China trade deal awaits the victor.

EU political administration’s similarity to the CCP makes them natural allies.

Performance

The Kings portfolio returned 3% in the first half, with a low in the period of negative 6%. Including realised profits in i) longs: of 112% for Alibaba Health Information and 58% for ZTO Express Cayman, and ii) shorts: Banco Marco falling 56%, Micro Focus International falling 66% and Sasol falling 94%. In the same period the S&P finished the period down 4% falling 32% at its low. The MSCI ACWI, that better represents the universe of our potential positions, finished the period down 8% falling 33% at its low.

Family Office Bulletin – Investing – Earnings Estimates, COVID-19 & V-Shaped Recovery

12 minute introduction to understanding consensus earnings estimates. Their use in valuation models. How they represent a generalisation of the underlying economy. Why the stockmarket may not represent the consensus earnings view. Effect of COVID-19 (coronavirus) on earnings expectations. How they can provide a guide for managing operating business’.

Kings Portfolio Newsletter Q1 2020 – Now That’s What I Call A Quarter

Economy & Capital Markets
The S&P500 fell 35% and the U.S. Federal Reserve Bank cut effected funds rate from 1.59% to 0.25% in 24 trading days. This followed a reversal of Western Governments response to airborne COVID-19 (first globally reported on new years eve), initially failing to impose “cheap” measures pre-boarder, then enforcing delayed internal draconian ones. Government treasuries price rose then moderated, as the size of fiscal expansion further elevated borrowing levels on a diminishing or slowing income tax base. Although an opportunity to move to fiscal surplus and improve savings rates were missed during the previous decade, we maintain a lack of inflation accommodates both monetary and fiscal easing to combat the immediate slowdown in economic growth.


Multiple companies have identified potential vaccines for COVID-19 expected by year end and doctors are already sharing best “non-approved” remedies. Evidence from Japan and Korea support (as the secondary strategy) local authority social distancing orders to protect and bolster health service facilities and internally develop supply for testing, remedial and protective equipment. After which the spreadability can be embraced so non-vulnerable and non-infected citizens are released from quarantine back to normal activities. From mid-April individual economies can stagger start to accelerate through the end of the year. It is likely there will be no significant (5%) variance in 2020 from the death rate in 2019 (2.8m Americans in 2018).


Remodelling supply lines, to reduce exposure to China in favour of its low cost neighbours and home production, is anticipated to accelerate. International travel is expect to have health prescreening enforced similar to terrorism after 9/11, adding to cost and duration. Communication and broadcasting providers are likely beneficiaries. A large number of previously loss making business are not expected to reopen.


In the quarter OPEC and Russia could not agree production limits while Brent crude oil prices fell sixty percent.

As we expressed during the 2008 recession (http://sjc.capital/blog/index.php/2019/08/10/the-cohenplan/), economic disruption takes the form of an absence of liquidity and moral hazard brought about by the inability of commercial financial institutions to distribute funds made available to them by central banks. If central banks are unable to LEND directly to the general economy, governments should provide generous loan facilities underwritten by central banks and administered by the commercial banks, based on tax registration of LOW INCOME individuals and previously PROFITABLE business taxed entities. The moral hazard of bail-out and need for massive fiscal stimulus could then also be avoided. Once the liquidity crisis is over commercial banks should then be forced to adopt these loans.


Performance
Over the last 12 months our net exposure to equities fluctuated around the zero mark due to excessive valuations. As an investing portfolio the minimum holding period for any position is three months, therefore when western governments preparations for the epidemic proved to be “the Emperors New Clothes” we were unable to react, in response we have accelerated development of AI market sentiment tools. During the quarter we had overexposure to the transport sectors and underexposure to energy sectors that balanced out, with a marginal exposure to equities. The net performance of the strategy over the last three months was -3.5% providing a 39 month performance of +32% with 0.8 sharp ratio, compared to the S&P500 performance of -20%, +15% and 0.3 respectively.

Year 2019 in review

• Successes.
– Developed and implemented first deep-learning applications providing a massive improvement in analytical power by leveraging previous years hardware purchases
– Acceleration in pipeline of third party cutting edge quantitative research to implement
– Impressive performance from improved security selection criteria
– Further improved the fundamental and technical criteria for security selection
– Corrected and refined machine learning methods in asset allocation
– Further improved econometric criteria in asset allocation
– Developed new software to access better data sources
– Now accepting client defined portfolio universes (asset allocation, ESG, religious etc.)
– First venture capital investment
• Fails.
– Single digit net return for year (annualised double digit return over three years)
– Poor asset allocation due to not applying correct procedures for machine learning
– Natural language processing sentiment analysis not developed further

A.I. Stock-Picking October Gross Realised Results: 0.83%

Jan17- Oct19 net cumulative return 39% & sharp ratio 1.03 against it’s ACWI universe 35% & 0.81.

Trade, FX, Ticker, Holding Period, Position Return, Portfolio Contribution

Short, CAD, CPG, 16Jul-10Oct, -18.20%, -0.20%

Short, GBP, DRX, 16Jul-10Oct, 4.40%, 0.04%

Short, GBP, INTU, 16Jul-10Oct, 52.40%, 0.53%

Short, GBP, TED, 16Jul-10Oct, 41.75%, 0.46%

Immediate transparency, 3 day full liquidity, 3rd party custodian.

The A.I. assesses Econometric, Fundamental, Qualitative, Quantitative, Technical and Traditional data and, sentiment from documentation and news flow.

Our A.I.’s Stock-Picking September Realised Results

Trade, FX, Ticker, Dates, P&L, Contribution

Short, EUR, APAM, Jun27-Sep24, 6.29%, 0.21%

Short, EUR, VAS, Jun27-Sep24, 17.89, 0.46%

Long, HKD, 3968, Jun27-Sep24, -9.16%, -0.07%

Long, HKD, 688, Jun27-Sep24, -13.32%, -0.24%

Long, USD, EBR, Jun27-Sep24, 11.21%, 0.09%

Long, USD, LKOD, Mar22-Sep24, -6.32%, -0.04%

Gross Month Realised Return: 0.41%

Net cumulative return 36% (Jan17-Sep19) and Sharp Ratio 0.98 against it’s ACWI universe 31% and 0.74.

Immediate transparency, 3 day full liquidity, 3rd party custodian.

The A.I. assesses Econometric, Fundamental, Qualitative, Quantitative, Technical and Traditional data and, sentiment from documentation and news flow.

STOCK MARKET THEMATIC ROTATION AND OVERCOMING BAD LUCK.

Between Wednesday 28th August and Wednesday 11th September (the last 10 bars in the charts below) the S&P 500 Index had a mild recovery to near record highs on light volume.

However over the same period the DJ US Thematic Market Neutral Momentum index fell steeply, in it’s most violent move ever.

Whilst the DJ US Thematic Market Neutral Value index recovered strongly.

Further during the period we incurred several security specific news items that were detrimental to our positions.

Securities in our AI selected global equity strategy have a minimum holding period of three months and profitable positions suffered from this rapid reversal. The AI does however assesses both momentum and value and will adapt (over time) to changes in thematic rotation whilst not suffering behavioural issues of short term misfortunes.

Broker statements are always available for inspection.