Dear Co-investors, we are writing this letter to share some ideas with you in a less formal (but equally valuable) way than through our periodic reports. We believe that a good relationship must be based on transparency and trust. It is important to us that our Co-investors share our philosophy, beliefs, approach, and patience.
To this end, we want to explain what we do as simply as possible. We describe you as ‘Co-investors’ because we see our relationship as a partnership in which your role is crucial and because we manage this fund as if it were our own money – which is indeed partly the case… (‘Skin in the game!’; ‘We eat our own cooking!’). Happy reading!
“Investing consists of one thing: dealing with the future. As none of us can know the future with certainty, risk is the essential element in investing.”Howard Marks
Let’s start by reiterating our objective, which is to provide a higher risk-adjusted total return than the global equity markets over a full cycle, by investing in high-quality companies offering attractive, sustainable and growing dividends.
What do we mean by risk? Risk is largely unmeasurable.
To better understand this point, let’s look at Guardiola’s Barça. This team won every possible trophy, not by having the best attack in history or a defensive wall preventing a record number of opponents’ goal-scoring opportunities, but instead through its very high ball-possession rate, averaging around 70%. This means that the team had twice as much ball possession as its opponent, which greatly reduced the risk of the opposition’s potential scoring opportunities. The strength of the team lay in an invisible, unmeasurable element: opponents’ opportunities that never materialized.
The same goes for equities. For example, achieving a 10% performance with ‘a Uni lever’ (bought at a reasonable valuation of course) is, in our opinion, much more valuable than achieving a 10% performance with ‘a niche biotech’ since the number of potentially (un)favourable scenarios is very different for these two companies and the probability of survival/success bears no comparison. Unilever is a very profitable company with a strong balance sheet, a leader in 81% of its categories/countries by virtue of many strong brands that have been meeting the primary needs of billions of people every day for decades. It also has a huge distribution network in 190 countries, low-cost production capacity on every continent and enormous innovation and marketing power. In contrast, the ‘niche biotech’ needs external capital and a 1 in a X,000 chance of its drug reaching the market before it could ever become profitable.
There are also many possible routes to finally achieving this 10% performance. Although volatility offers opportunities for long-term investors, most women and men on our planet are more comfortable with shortcuts rather than journeys that include a 50% loss in the process and require a strong heart and the courage not to sell in the meantime…
Simply admiring the performance of investment funds without meticulously studying the method and above all the risks involved makes no sense to us. It is a bit like judging the work of an architect by admiring the beauty of some of her or his bridges while ignoring the fact that other badly designed ones have collapsed.
Appreciating short-term performance makes even less sense although it is becoming increasingly fashionable by the day. The shorter the period of time over which a performance is observed, the more it is influenced by chance.
Worse still, but no less common, is drawing conclusions about fundamentals based on short-term price movements, a mistake that is all the more dangerous given the human tendency of looking everywhere for causality and taking subjective experience as reality.
We hope that you view your shares in BL Equities Dividend as long-term participation in the success of high-quality companies.
Your role is crucial because, the more you share our philosophy and approach – and extend your investment horizon – the more you help us to work wisely and increase the chances of success, our common goal.
The roller coaster of 2020 Over full-year 2020, BL Equities Dividend’s total return net of fees in euros came to 1.37% for the retail share (B share) and 2.07% for the institutional share (BI share). If you want a yardstick for comparison, you can pick the one most to your liking, at your own risk…
– The MSCI ACWI Net Total Return Index (the index is supposed to represent the global equity market) shows a 6.65% increase (excluding fees).
– The MSCI ACWI High Dividend Yield Net Total Return Index (the index is supposed to represent the global equity market for attractive-dividend stocks) shows a 6.56% decline (excluding fees).
– The Lipper Global Equity Income category (‘dividend funds’) is down 4.47%.
So it was that in 2020, equity markets plunged or jumped based on events as unpredictable as the spread of a virus, reports on the number of infections and rumours about vaccines; political negotiations, measures and elections; or tweets from Donald Trump – and their interpretation by millions of people and algorithms.
In our opinion, the quality of our decisions is neither better or worse when, within the same year, the fund has a clear lead over an index or when it lags.
Is the reputation of a football club determined over the course of one season, good or bad?
Sky is the limit?
– In 2020, there were 480 IPOs in the United States, about 20% more than in the euphoric year 2000. The Renaissance IPO Index (a stock market index based on newly-listed companies) saw performance of 110% in 2020, compared to an average of 13% over the previous 10 years. The proportion of companies with book losses in this index is the same as in 2000.
– In the Russell 3000 Index (index of the 3,000 largest companies listed in the United States), the proportion of ‘zombie’ companies (i.e. presenting 3 consecutive years of operating profit below financial expenses) is at its highest level since 2000, close to 15%.
– The Insider Sell/Buy Ratio (ratio of sales to purchases of company shares by their management teams) for the S&P 500 is at its highest level in decades.
– The GS Non-Profitable Technology Index (a stock market index of US tech companies with book losses) has seen its share price almost quintupled since its low point in March 2020.
– The Bloomberg Galaxy Crypto Index, a cryptocurrency index (not the title of a fantasy film), was up 277% in 2020.
– Today, an investor can be guaranteed a negative return by buying and holding to maturity bonds with maturities of up to 10 years for Spain and France, and 30 years for Germany.
– More than two-thirds of the 2020 performance of the popular MSCI ACWI global index comes solely from the US ‘tech sector’. Just three stocks out of its 2,982 constituents accounted for over half of this performance. The median total return of these constituents shows a 1.7% decline.
– The third-largest contributor to the 2020 performance of the aforementioned index is a company with a stock price increase of 743% over the year and a bigger market capitalization than Switzerland’s GDP, having sold around 400,000 vehicles in the last twelve months.
Our aim is certainly not to make predictions about where the markets are going. We have no idea. We believe that there are two types of people: those who don’t know how to time the market, and those who don’t know that they don’t know how to time the market.
Nevertheless, these figures invite circumspection…