Added to existing Nintendo position @ JPY 58800 per share by ~1% position weight.
For the past 12 months, Nintendo is doing a great job in terms of updating Animal Crossing with new content and events. It shows that Nintendo is starting to get game as a service concept as an organisation.
In that backdrop, I added as the valuation looks attractive.
What a year! Despite being stuck at home for most of 2020, it has been a very eventful year.
The portfolio delivered a net return of 15.6% in 2020 while FTSE Global All Cap index’s return is 16.8% during the same period. Our portfolio’s cumulative return since 2016 is 100% while the above-mentioned index’s cumulative return is 81.9%. Cash is 32% of the portfolio.
I prefer to show the investment return net of imaginary fees because any aspiring investment manager should be able to generate excess return net of fees.
 Assuming a fee structure of 1) no management fee, and 2) a 20% performance fee above 5% threshold i.e. 18.3% – (18.3%-5%)*(20%) = 15.6%
Live Portfolio’s 2020 Investment Return
Live Portfolio Investment Positions as of 31 Dec 2020
The 5-year milestone
During Warren Buffett’s early years operating his investment partnerships, he encouraged his partners to evaluate his investment performance on a 5-year basis and “preferably with tests of relative results in both strong and weak markets”. And so at this 5-year mark, it is time to take stock and reflect.
I am very pleased to generate an annualised return 15.6% over the last five years which has a respectable 2.2% advantage relative to our performance yardstick, FTSE Global All Cap Index, with an annualised return of 12.7%.
Our high cash level, fluctuating around 20-40%, has been a significant drag on investment performance for the last 5 years. Due to a combination of high market valuation and the relatively limited scope of my circle of competence, I have not being able to find enough attractively priced new ideas. While there is nothing I can do about the high market valuation, I am steadily expanding my circle of competence which should ultimately translate into more investment ideas and lower cash level.
This investment return is generated against the backdrop of a generally rising stock market over the last five years. The portfolio did experience a violent but short bear market in March 2020 where we fared better against the general market’s 30% decline with 15+% decline. By and large, I do not believe that I have experienced a full market cycle of bull and bear market to pass Warren Buffett’s test of “relative results in both strong and weak markets”.
Our investment journey has, so far, been very pleasant as we have not suffered a loss in any year so far. But I would like to make a prediction – this investment operation is almost guaranteed to suffer a loss in at least one of out the next 10 years but I just don’t know when the losses would occur. As Charlies Munger said:
“If you’re not willing to react with equanimity to a market price decline of 50% two or three times a century, you’re not fit to be a common shareholder and you deserve the mediocre result you’re going to get.”
While I would rather avoid any losses, especially the 50% decline ones, it is better to be mentally prepared for it. Unfortunately, I am confident that my prediction would come true. Better to accept it as a fact of life.
While we are on the topic of making predictions, I believe you are entitled to know my expectations for future investment return even if it is largely based on my simple estimates. You should note that my expectations are in fact more like aspirational goals and risk of disappointment is quite high.
Over the last 100 years, the annual return for US equities averages around ~7.5% while the Chinese equity market generated ~9% average annualised return for the last 20 years. So in the long run, we should expect equity returns to be in the range of 6-9%. For our chosen benchmark of FTSE Global All Cap, it generated 7.5% annualised return since its inception in 2002 which falls exactly in the range of 6-9%. Since the goal of this investment operation is to generate above average return, it is reasonable to expect 6-9% return as the lower end of our future return expectation.
While beating 6-9% might not seem like a very ambitious goal, vast majority (90+%) of fund managers are not able to beat the market consistently after accounting for management fees. This is true globally including US and China. Said in another way, only truly exceptional investors can generate better than average return in the long run. If you do not find an exceptional investor, you are better off with index investing.
But there are a few exceptional investors who has been able to outperform the market very consistently for a very long period of time. So it would be illuminating to evaluate their investment track record and use their track record to form the upper limit of our future investment returns.
Below are my best estimates of some of the world’s greatest investors returns based on publicly available information and I tried to use after-fees net return as much as possible.
World-class investors’ track record
These world-class investors generate long-term annualised return in the range of 15-30% and averaging around 20%. These are truly impressive performance as every one percentage point of outperformance when compounded over long period of time can lead to massive difference in cumulative return. For example, the difference in cumulative return between 10% and 9% annualised return over 10 years is 22.6%. Only world-class investors can sustain the advantage of 10-20 points above the long run equity returns of 6-9% for a long period of time.
In general, I believe it is fair to conclude that any investor who can compound at a rate of 20% net of fee for more than 10 years should be considered a highly competent one. Said in another way, any investor’s achievement of 80% return in any single year is clearly not representative of that investor’s long term performance. While 20% return may not sound like a lot, the power of compounding guarantees a very wonderful result over the long term. Just look at Warren Buffett, 99% of his wealth came only after his 50th birthday!
While I have every ambition to become the best investor that I can be, it is hubris to compare myself against the greatest of investors of all time. So I would consider myself doing a great job if I can achieve 15% annualised return net of all fees for the next 10 years. This is going to be no mean feat considering the current valuation is at alarmingly high levels.
Tencent is a company that I have actually spent the most time researching for the past 3 years because of work. While I cannot invest it in personally due to compliance reasons, I want to include it in the portfolio here.
Increased conviction in their Australia growth prospects where they literally don’t have any serious competition because a lot of the Australian retirement village operators are really property developers who are hesitant to take on age care operational risk in the scandal-prone Australia age care sector.
Ryman is hence very uniquely positioned to grow in a huge market for a long period of time. And Ryman charges 20% deferred management fee while competitors charge north of 30%.
How often do you find the lowest cost operator who is also the highest quality operator in a sector with VERY VERY long growth runways.
Added ~3% to Nintendo @ JPY 44500. After the latest result for FY 2020, I am gaining more conviction in the company. Though the management Q&A this time is very short and lacking in solid content. Very disappointing from that regard. More details for Nintendo will come later.
Finally! I executed my first share purchase since the beginning of this crisis. I bought some Ryman shares @ NZD 10.45. It is a relatively small position now (~2%) and I aim to buy more if situation becomes favourable again.
Ryman Healthcare is a company that I have been following for more than one year now. I really started to do work on the company in Nov 2019. It is the largest retirement village operator in New Zealand. Globally, retirement villages are typically average businesses but there is one little quirk about retirement villages in New Zealand that completely transforms the economics of the business. For most real estate asset developers, there are really two ways to generate profits – either sell the assets for a profit upon completion or rent the property to collect the fixed income. For example, most residential property developers would sell the asset upon completion while shopping mall developers often choose to rent the retail property as the long term rental growth would generate a higher return over time. The IRR is better if the property is sold upon completion while the rental model has lower IRR initially and can be more profitable over the long-term if rental growth is respectable.
But is there a business model in which the property is sold immediately upon completion while also retaining the right to collect rental payment over time? You know, have the cake and eat it too.
Turns out that is exactly Ryman’s business model.
It builds retirement villages and “sells” elderly folks the right to live in their villages. The resident pays a deposit that is roughly equal to the value of the retirement unit. Ryman would charge up to a maximum of 20% of the deposit value as a management fee and the residents are granted the right to live in the retirement unit for as long as they wish to. At the point of exit, the resident is paid back 80% of the original deposit. In reality, most residents only stay in the retirement villages for 6-7 years on average because the average entrance age is more like 75+. This business model allows Ryman to recycle capital on day one through the deposit (great for IRR) while retaining the ability to collect fixed payment through the form of the management fee.
So why do the elderly folks chose to move into a retirement village? Many elderly folks find it very hard to maintain their large house as they get older. Property management service provided by the village operators relieves them of these chores. Another important motivation is a change in life circumstances such as the passing of one partner. Many prefer to live in a close-knit community than living alone. There is the hospitality aspect of living in retirement villages. There are weekly drinks, movies, field trips, exercise classes, and parties. It is kind of like living in a hotel with strong healthcare capability. Finally, a move into a retirement village helps to release equity in their home which can be used to finance their lifestyle.
New Zealand has a rapidly ageing population which will see the 75+ population grow by ~3.5% for the next 10 years. The supply of retirement village is growing 5% and hence the penetration of retirement village is growing. The retirement village sector is ramping up supply to meet the growing demand; I would keep a vigilant outlook on the pipeline of new supply. However, Ryman should continue to do well relative to its peers because its villages offer better value for money. Ryman charges 4% management fee p.a. capped at 20% while most competitors charge 5-6% management fee p.a. capped at 25-30%. Furthermore, people will always want the best care and safest pair of hands to take care of them in the twilight of their lives. They also need to trust operators that don’t take advantage of them when their mental and physical states are not in the best shape.
Hence Ryman’s competitive advantage comes from its reputation as a high-quality care provider and a trust-worthy retirement village operator. It offers a continuum of care model for its residents where independent units (normal houses with minimal care provided) and care centres (including hospital care) are on the same site. Elderly folks are not the most flexible bunch. Ryman pays its care staff above market rate to provide premium care and a strong culture of care.
The market also clearly acknowledges Ryman’s superior quality as its valuation is twice of its peers such as Summerset, Oceania and Arvida. Despite the valuation premium, I prefer Ryman over its peers as a strong culture of care is the best protection for long term franchise value. For example, I have found Summerset to have a mercenary attitude as compared to Ryman. This is not to say I will not invest in Summerset. Just that I think the valuation premium is at this moment reasonably justified. While I believe that Ryman is the best operator in the sector, the entire sector is likely to do well given the favourable economics of the business model.
If I am asked to buy the entire business (which I do sometimes fantasize about), I would value Ryman in a similar manner to an asset management company in that it clips ~3% of the total capital base. The capital base is generated by resident deposits. If I assume that Ryman builds out its existing landbank in the next 5 years without adding to the land bank, it would be able to generate, in my estimation, ~NZD 200m of incremental earnings. Note I exclude new sales gain from this analysis. Putting on a 25x earnings multiple, it would imply a share price of ~NZD 12. I think 25x is reasonable because the capital base enjoys 2-3% of house price growth even if there is no unit growth. This is comparable to the 4-5% rental yield in New Zealand. Of course, in reality, Ryman will maintain its land bank for growth beyond 2025. Hence our entry price is a very attractive one.
Now let me address the elephant in the room – can Ryman survive current pandemic?
Ryman’s care revenue is well protected even in a national lock-down as the residents still live in the care centre. New residents are allowed to be admitted because these are typically need-based demand. Of course, there will be stringent isolation protocols in place
Ryman’s care revenue more or less covers the fixed cost of the entire company. So they have liquidity to cover fixed cost even in a prolonged lock down situation
New sales activity will cease but the company has a lot of leeways to stop existing construction projects to conserve cash. As of Sep 2019, the capital commitment is NZD 150m.
Resale activity will cease too and this would impact Ryman’s ability to repay resident deposits on exit. Typically, Ryman promises to repay the deposit within six months after which Ryman will pay ~1-2% interest on the deposit. Legally, Ryman has three years to repay the resident. Even if we assume that COVID-19 lasts for 3 years (super unlikely in my view), Ryman can sell the apartment to pay back the resident
It has roughly NZD 300m of liquidity headroom in an NZD 1.9bn credit facility. The credit facility is secured with underlying assets.
According to the company, there are two main covenants – interest rate cover and gearing ratio
Given the above facts, it seems that Ryman has a very high probability of surviving this crisis.
The demand for Ryman product is mostly like to be delayed and not lost. Hopefully, we should see a reasonable demand recovery.
There is a risk with house price deflation in the event that we go into a recessionary environment coming out of this pandemic. Even though Ryman’s units usually sold at a discount to comparable houses in the same market, it would still impact Ryman because elderly folks need to sell their house to afford a Ryman unit.
Avanza reported strong results and continued to grow its customer base which is up 17% year over year from 837k to 976k in 2019 (Avanza report its customer base in terms of the number of funded customers). A growing customer base is the single most important metric for long term value creation. It demonstrates that Avanza continues to be the most attractive retail investment platform in Sweden. Avanza’s customer base is ~10% of the Swedish population but only has 4.2% market share in the Swedish savings market. Avanza announced the ambition to increase savings market share to 7% by 2025 which means a double of savings capital from SEK ~400bn to ~800bn. This should then translate into a doubling of revenue.
Stock brokerage is high switching cost business, especially for retail investors. The high switching cost works both ways – it protects Avanza existing customer base from poaching by other online stock brokers but also deters Avanza’s attack on incumbent financial institutions. Avanza is winning market share because it is the lowest cost broker in Sweden AND provides a user-friendly investment platform.
Revenue grew 14% which was mainly driven by net interest income growth. Net profit grew 28% due to lower operating cost growth of 6%. Riksbank decided to go against their peers and raise repo rates in Sweden. The repo rate in Sweden is now at 0%. This has helped to increase net interest income by 70%.
The new CEO, Rikard, is very ambitious and continues to build on the customer-focused culture that has driven Avanza’s success in the past.
My view on Avanza remains the same: the best value-for-money investment platform in Sweden that has a very user-friendly online platform. It has an incredible mind share with young professionals, and as they progress in their careers, their savings on Avanza will grow too. There are two main optionalities with Avanza:
1) interest rate sensitivity where every 1% increase in interest rate will lead to incremental interest income of SEK 300m (2019 net profit is SEK 447m). I don’t count on it for the investment case to work but I consider a very valuable;
2) Avanza might grow into an online bank and offer more services to its existing customers hence increase product per customer and then revenue per customers
Trading at 36x P/E, Avanza is not cheap. But the strong growth visibility and the long growth runway means that I can be patient. Since my initial purchase in 2017, the stock is up 55% and generated 14.5% annualised return albeit with huge volatility. Over a longer time period, I believe Avanza is a 10-15% annualised return investment with very limited downside risk. Maintain current position and will add if Mr Market presents attractive opportunities to do so.
Sold all Bitatuo shares and swapped into Yixin group shares. Believe that given the probability of success is the same for two stocks, Yixin clearly offers better risk-reward. Yixin has around 10-20% upside while also offering 15% upside. Bitauto, at current prices, has less than 3% upside but more than 30% of downside.
I am not sure if there is much benefit to broadcast my portfolio online. But it certainly sounds FUN! I was born in a small village with a very auspicious sounding name which loosely translates to mean a hundred victories. I really love that name and in honour of the village, I am calling my portfolio – Invictus. I hope it also brings me many victories in the years ahead.
I have included here is a breakdown of my portfolio as of 31 Dec 2019 and Invictus’s performance since inception in 2016.
Invictus Gross Return is the return after trading cost, admin fees and so on…
Invictus Net Return is the return after I applied an artificial fee structure of 0% fixed charge + 20% of the profit above 5% return. Unfortunately, nobody is paying me any fees now but I am determined to change this!
While I could not care less about what the index does in any month, quarter, and year, it is the best yardstick to measure performance over the long term
Here is how I will update my portfolio on this blog:
Every investment action will be updated here with at most 2-3 days of delay
I will try to explain all of my investment decisions as much as possible but no promises here
Every 6 months, I will provide a comprehensive portfolio update with performance and detail portfolio breakdown as seen above
Every 6 months, I will write a letter to explain my thinkings in more detail
Please feel free to share any feedback/comments with me! Even better if you share an investment idea with me!
Disclaimer: All information and material presented here are based on a virtual portfolio where there might or might not be actual trading activities behind it. The information contained herein is not intended to be a source of investment advice, credit analysis and trading recommendation. The sole purpose of this document is to document general investment thoughts and reflections on different businesses.