2021 Portfolio Review

For calendar year 2021, the Superfluous Value portfolio gained 29.7% in AUD, comparing favourably to the MSCI ACWI IMI which gained 23.5%. The declining Aussie Dollar proved a tailwind for the year, as I was up 23% when measured in constant currency (USD).

More importantly, since I began formally tracking my portfolio in Aug 2018, I have gained a cumulative 40.7%, modestly underperforming the MSCI which has returned 47% (both in AUD).

Continuing to modestly trail the index is a slightly irritating, but I remain focused on the absolute cheapness of the portfolio and flexibility of my cash position (currently 20%) and think that these will matter significantly moving forward, when compared to the tech/SaaS filled broader indexes teetering near all-time highs.

Resource companies dominated the biggest contributors for the year with Cameco, Gazprom, Petrobras and UK defence firm Babcock International material positive contributors, while Barrick Gold and Saipem contributing negatively. Saipem has continued its disappointing performance into 2022, with a profit warning triggering a savage decline last week.

Outside of commodities, I continue to see major opportunities in Emerging Markets and UK value stocks, many of which pay sustainable dividends in the 5-10% range. I am not trying to shoot the lights out in a generally high-priced global market, so if safe yields of this size are on offer with some potential for upward mean-reversion, I will take that all day.

The historically-wide sentiment gap between growth and value remains in place, similarly between the US and the ROTW. I have never been so certain that global value will outperform over the next market cycle, but whether this dipsersion resolves itself through value recovering as growth crumbles or merely value falling less than growth is the million-dollar question. Here’s hoping for the former, Dotcom-crash style!

The core of the portfolio is a number of old-economy businesses that didn’t move much over the year but are seeing notable operational progress and remain extremely cheap. These would be characterised by KT Corp, Lloyds Bank, Telefonica Brasil and First Pacific, which I view as coiled springs that can only be ignored by the market for so long.

Although I am not generally a catalyst-driven investor, I own two notable special situation-type investments, both of which should benefit from events this year. Aimia, through the restructuring of Aeromexico, leading to the purchase of the company’s PLM stake for around its recent market cap and ABS CBN Corp, through presidential elections in the Philippines pressuring the candidates to reinstate its broadcasting franchise.

The most pleasing aspect of the year was position turnover, as I only bought four new holdings for the period and barely transacted after May, except for some minor changes in existing positions. This is the kind of measured calm I hope to continue going forward, as it is optimal on multiple fronts including mental energy/effort, taxes and allowing my ideas the time to play out.

I am truly aiming to hold for 5-7 years, so only want to buy after serious work and conviction has been established. The portfolio consisted of 16 positions at year end.

Top Holdings

Cameco (9%)

Cameco ended the year as my largest position after the uranium thesis gained significant traction throughout 2021. At one point I was nearly at a triple from my $9 purchase, but the shares fizzled late in the year, settling around $20/share.

I believe the long-term bull case for uranium is extremely compelling and see Cameco as the ideal way to express it. It has some of the world’s largest and best mines, strong management and a net cash balance sheet. Over time, uranium will come into favour as a carbon neutral baseload power option and there are only two companies in the world that possess it in size (Kazatomprom being the other). Cameco trades at a steep discount to the value of its proven and probable reserves, with many more assets thrown in for free.

Micro Focus (8%)

I have written about this company more than anyone cares to read about (here, here and here) and it has been a very bumpy ride, but I continue to love the risk/reward. Micro Focus currently trades on a 4 P/E, should earn its market cap in the next four years, reinstated a healthy dividend last year, has had insiders recently buying stock and is a strong chance of successfully executing its turnaround plan, all of which justify a multiple of today’s price, in my view.

KT Corp (7%)

I like to think KT epitomises my investing style. It plods along expanding glacially each year, pays a decent and well-covered dividend and is simply far too cheap at 1/2 of book value and <3x EV/EBITDA. I have zero expectation of growth and it is quite unneccessary for the company to re-rate. Management is ho-hum, but as long as they don’t torch value on mass, my investment will do fine- you don’t need Buffett-style capital allocation if you pay a cheap enough price.

It’s not that the market hates the company, it’s just that it couldn’t give a rats and all the flows have gone elsewhere. It should be handsomely rewarded whenever the market’s focus shifts away from US tech and I am happy to wait in the meantime. Korean assets are generally quite undervalued and it seems like a technical absurdity the country is classified an emerging market at all, having much more in common with Japan than any developing peers.

Babcock International (7%)

I wrote about Babcock last year and my thinking is unchanged. I believe the company will be a private equity target and that new management under David Lockwood is doing all the right things- reducing debt and focusing on core performance.

The company is actually an underappreciated reopening play, with losses on their fixed-price contracts having crippled margins, and trades for only 7x my conservative estimation of its earnings power. My fair value target is 600-700p/share and I expect this to be realised as the company’s turnaround becomes apparent and sentiment towards UK value stocks improves.

Lukoil (6%)

Lukoil remains one of the best-run oil majors in the world. With high quality, long-life fields and a low cost of production, the company makes great sense for those willing to hold for the long term. It is now two years into its policy of paying out all adjusted FCF as a dividend, which should make a 10% yield sustainable going forward, even at lower oil prices, with the potential of higher prices a bonus.

Russian-NATO tensions have recently cropped up again over Crimea, hitting the price of Russian assets. It is clearly in everyone’s interests to reach a peaceful solution and I think this is the likely outcome, however in the event of hostilities, my buy price is well below current pricing and I would be predisposed towards buying more.

Summary

Acknowledging your own ignorance is very liberating in investing. I have no idea what 2022 will hold for the markets, although I believe they are generally overvalued, some dangerously so.

With preservation of capital front and centre of mind, I believe the best way forward is to favour businesses selling at bargain valuations, producing generous Free Cash Flow, and keep a little cash on the side in order to purchase more of these in the event of further market volatility.

Guy

I own positions in all the companies mentioned

PS. As always (and especially when I'm mentioning so many stocks), this isn't investment advice. Please do your own due diligence and seek professional advice if you're unsure about your finances.