Monday, January 16, 2017 0 comments ++[ CLICK TO COMMENT ]++

Portfolio Performance in 2016

Since I started seriously investing after a few years of absence, here is how my portfolio performed in 2016. I didn't make any long-term investments and didn't have any from before so it is sort of an unusual portfolio.

I used to use computer software (Microsoft Money and Quicken) but am doing things by hand now. I redid everything by hand and am still tweaking the layout, and working backwards on prior years. I was mostly in cash the last few years so likely underperformed the market (hope to post historical figures in the future). The figures below may be slightly different from final actual numbers.

I have historically measured myself against 3 indexes: S&P 500 Total Return index, S&P TSX Composite Total Return index, and Dow Jones Wilshire Global Total Return index. My goal is actually to earn around 12% per year but I'm not good enough to be an absolute return investor so my current goal is to beat the indexes for now.

The popular S&P 500 represents the US market and influences all other markets. I invest mostly in US stocks so that is a good measure to benchmark. Do note that this is a weighted towards large-cap stocks so if you invest in smaller companies then you may want to pick another index.

Since I live in Canada, I need to benchmark against my basic "equity opportunity cost" which is the S&P TSX Composite. If I was just randomly investing in the Canadian market, I would earn returns similar to this index and my goal is to beat that.

Finally, although I haven't made many foreign investments, I do consider myself willing to invest anywhere so I like to track against a global index as well. In the past I used the Dow Jones Wilshire Global Total Return index, which is the broadest global index and covered around 98% of stocks by market cap (do note that developed countries still constitute most of the market cap). I have had trouble finding easily accessible, free, index data for that so, starting this year, I'm switching to the S&P Global 1200 Total Return index. This covers 70% of the world's market cap.

If you are measuring yourself, don't forget to use total return index, as opposed to price-only index (which leaves out dividends). I also measure in my local currency, Canadian dollars, so I adjust the indexes by the C$/US$ change.

Summary

In 2016, the Canadian dollar gained around 2.9% against the US$ so a Canadian lost some money if  they invested overseas in US$-denominated assets.

If my numbers are right, the S&P 500 returned 9.0% last year, while TSX returns 21.1% and S&P Global 1200 return 6% (all in C$ terms).

The TSX is heavily influenced by commodities and had a massive 21% gain after commodities rallied in 2016. However, the TSX is just recouping from last year after it performed very poorly in 2015 with a return of -8.3% and the C$ declined 19.5% so a US$ foreign investor actually ended up with a loss of 27.8% last year.

The S&P 500 performed slightly above average last year (about 12% in US$ terms) and S&P Global was slightly less than the long-term average.

My portfolio returned around 5.8% in 2016. The return isn't very good and I underperformed the indexes. However, I'm ok with the return since I remain bearish and the strategies were uncorrelated with the market.

I ended the year with around 79% in cash, which was probably down to 25% cash at some point in the year. In any case, such big cash position is definitely a big drag on performance (especially if one can't find enough special situations to invest in).

(Click on image for larger one)


Thoughts

I was exclusively involved in risk arbitrage and liquidations last year. I only started researching stocks for part of last year so didn't do much. Also the market seemed overvalued and didn't find anything attractive so no long-term investments were made. I'll be spending more of this year searching for long-term investment opportunities.

Comdisco were liquidations I entered into several years ago, which finally closed last year. It took way too long and the annualized return was just adequate and less than what I was estimating. The risk with liquidations is that they can run longer than what seems reasonable.

I entered into the liquidation of Khan Resources but had difficulty buying enough shares. I could have paid up to buy more shares but the returns were very low (1-6% with 3% being probable) so didn't want to risk it.

I was satisfied with the risk arbitrage positions. One of them, Syngenta, didn't work out and the deal is still outstanding--deal can still close but probability of European regulatory approval has declined quite a bit in my opinion--but one always needs to be prepared for some deals not working out. I think risk arbitrage will become more risky with the incoming Trump administration in USA and looming trade wars and disputes (already it seems USA will be in dispute with China and Mexico). This increased risk also introduces greater opportunities (depending on how bad the trade wars are, it may be similar to the 2007 risk-arb deals if anyone remembers them from back then).

I ended the year with very high cash levels (79%) and this will be a drag on performance for a while. If I don't find anything attractive, I might pull out some money and pay down the home mortgage or something (this is one thing worth considering if you are bearish on markets and have mortgage or some other loan--interest rates are low but they may be rising soon.)


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