Thursday, February 12, 2015

5 years blogging

I wrote my first blog post on 12th of February 2010 - exactly 5 years ago.
Since then my blog has got over 60,000 pageviews.

When looking back to what I have written I find some things odd. For example, I have written lots about gold even though that has never been major part of our portfolio. Same goes for mining companies.

Most of my investments to mining sector have proven to be if not mistakes then not as profitable as most of my other investments. That is truly a hard sector - but for some reason - continies to be a fascinating one for me.

Early on, I made quite a lot of changes to portfolio. Later I have slowed down rate of change a lot. I think there are three reasons for this. Five years ago, I had more time to follow the market and this lead to more activity. Secondly, when I had to justify changes in the blog, I started to be more critical towards acting on new ideas and towards change in general. Finally, there are now many excellent companies in the portfolio with good long term prospects and it simply is hard to find better ones. Changes make even less sense to positions that have accumulated significant capital gains.

Opposed to what many other people does. I keep the winners (keep the gains accumulating without taxman eating into those) and ditch the loosers (even at loss).

Over the years, the number of my blog posts per year have decreased. This year, I plan to turn around the trend and write more posts than last year ;-)

I went initially for direct invetment into many companies in developing markets. Most of those came out as problematic positions. Either because of the company selection itself or because of taxation of dividends out of those companies in Finland. The biggest lesson that I learnt from those investments is that for inverstor like me, passive ETFs are the best vehicle to get market exposure outside of markets that are familiar.

Some things have been not changed.

I consider still Warren Buffett's annual letters and other materials as some of the best investment advice one can find. I have not always followed his advice and most of the time this has lead to mistakes.

There has also been one crisis after another over these 5 years
- aftermath of US crisis,
- then Euro debt crisis,
- then Greece,
- then Ukraine
- then again Greece...
- (and likely forgot something in above list)

Still, our porfolio has done very well over the years.

So far, almost pure stocks portfolio has paid off - big time compared to stocks/bonds/cash portfolio alternatives.

Let's see what the future brings.

Wednesday, January 7, 2015

Portfolio performance 2009-2014

It's time to compare the performance of our portfolio in the year 2014 against passive index investing.
Our "benchmark investment" is an imaginary passive ETF that closely tracks the performance of MSCI all country world (ACWI) index in euros.

In 2012 we significantly underperformed, in 2013 we significantly overperformed and last year we lost a bit to the benchmark. Overall, we are a bit ahead in terms of performance.

Our performance during 2009-2014 has been as follows:

I have made changes to how "benchmark investment" is calculated and this reflects in performance of all the years (in case you compare to my previous "portfolio performace" articles). Over the years I have also corrected some minor errors in the spreadsheets.

Our portfolio has been more defensive (less risky) and less volatile than the ACWI index. Therefore, it has underperformed in bull market and overperformed in bear market - except for 2013 where our big turnaround bet to Nokia paid off and we also got above market gains from Western Digital and UPM.

During 2014 it looked like we may beat our benchmark by wide margin. Especially our U.S picks from the IT sector delivered above average gains (Western Digital, Intel, Microsoft, Cisco Systems) and overall things were progressing very nicely - until last quarter.

Euro declined from 1,3791 to 1,2141 U.S. dollars (-11,96%) during 2014. Our portfolio is much more tilted to Europe and Eurozone than the ACWI index where U.S dollar exposure is currently 52% (source: XTF). This was likely the most serious headwind for us in 2014. Also, our oil sector positions - especially Fred Olsen Energy - did very badly in the latter part of 2014. Mining sector wasn't doing that good either.

Generally, our european positions - outside of the sectors that did very badly - didn't help the race by producing above average gains - apart from Orion. However, most of our european positions pay out above average dividends compared to what ACWI index funds pay out. Long term that will matter and limits the downside risks.

 Our benchmark index 2009-2014 (based on MSCI All Country World Index; Net; Euros)

I have not calculated our performance during 2007-2008 because we were off the market. During that time and also before that our benchmark index would have been different because the investment objective was different and risk level was much lower.

About the "benchmark investment"

I have chosen to construct my own imaginary benchmark index fund out of MSCI ACWI index instead of choosing one particular index fund that tracks the index. The main reason for this is that I would never invest all our money in any particular fund. I would rather choose several funds managed by several companies that as a whole would track the index close enough. My estimate for average cost level for the benchmark investment is 15EUR + 0.5% per transaction and 0,48% tracking difference per year. The latter is estimated to be 1,6 times Total Expsense Ratio that in turn is estimated to be 0,30%.

Also, I am taking into account paid taxes. The ones that we have paid for real and the ones we would have paid if we would just buy and hold the benchmark investment instead. In Finland, gains of ETFs and stocks are treated the same. There is, however, difference in how payouts are treated. Tax rate for dividends from stocks is lower. That is actually one reason, why we have much more direct investments to stocks than money parked in passive ETFs. Over time, even small differences matter a great deal.

To take into account taxes that would have been paid by us, our benchmark investment gets penalty of 0,60% per year. This is assuming that in reality it would pay out roughly 2% yearly dividend which would be taxed at 30% in Finland before we could invest money back into the fund.

The index data itself is available via MSCI Barra web site as excel-file at least at the time of writing this post. I use a version of ACWI index which has large and mid cap companies in it. I use it with the following parameters:
- EUR (as in euros)
- Daily (as in daily quotations of the index)
- “Net” (as in “With Net Dividends” that takes into account taxes that an insitutional investor or fund would have to pay to various countries where they have holdings)

The benchmark investment is always fully invested into the passive index. Starting balance was invested at end of 2008 to the index. By dividing the money with the value of the index, you get “shares in index”.

About calculating the yearly returns

The yearly return of the index and the "benchmark investment" will be different if more money is added into the brokerage accounts during the year. To take that into account, the yearly returns are calculated as [balance at end of year N] - [(balance at end of year N-1) + (additions to brokerage accounts during the year N)] / [(balance at end of year N-1) + (additions to brokerage accounts during the year N)]

Background materials:

For the changes done this time around, I actually browsed through quite a bit of materials. Best are linked here.

About MSCI index calculation methodology

About tracking difference and "hidden costs" that are not explained by Total Expense Ratio (TER):

Thursday, January 1, 2015

Portfolio update: Allocations and Top 5 positions

Happy New Year 2015 !!

At the beginnig of each year I have two tasks to complete regarding investments: document our portfolio allocation and compare how we did last year against our bechmark.

The latter requires quite many excel drills so I will start with the easier one.
Our portfolio is currently allocated as follows:

Stocks 97,8%
Gold 2,1%
Cash 0,1%

No bonds.
I simply substitute bonds with quality dividend payers in our portfolio.

Geographical Allocation (stocks):

Europe 55,8%
North America 33,2%
Emerging markets 11,0%

Actually, place of incorporation is pretty meaningless for most corporations we have invested in. Most operate and sell globally.

Sector Allocation (stocks):

Information Technology 43,6%
Other 20,2%
Oil & Gas Production 9,3%
Health Care 8,1%
Communication Service Providers 7,3%
Low Emission Power Generation 7,0%
Mining & Exploration 4,5%

Top 5 positions:

Company/ETF (sector) allocation%

Western Digital (IT) 10,0%
Siili Solutions (IT) 8,2%
Nokia (IT) 7,2%
UPM (Other) 6,4%
Intel (IT) 5,9%

20,8% of all stock positions are done via ETFs.
None of those positions made it to top 5 this year.

Saturday, December 27, 2014

Helsinki Top 20

I use a service provided by via Pörssisäätiö to screen stocks listed in NASDAQ OMX Helsinki. I use the screen periodically to check where our holdings stand relative to other companies listed in Helsinki. Naturally I am also continuously screening for new investment ideas.

The results of my personalized screen are disclosed below. I use different criteria and weights than the default "Liisa's list" that is featured in the pages of Pörssisäätiö. For example, Nokia was #24 today in Liisa's list while it is #97 in mine. Often I check both lists to get two different angles. Many companies in top 20 of both are the same.

Our positions are marked with prefix ">".

 Rank Company (Score)
 #1 Orava Asuntorahasto (3,3)
 #2 Fiskars (2,9)
 #3 Technopolis (2,6)
 >#4 Orion (2,5)
 #5 Nokian Renkaat (2,4)
 >#6 Fortum (2,4)
 >#7 Siili Solutions (2,4)
 #8 eQ (2,3)
 #9 Sponda (2,3)
 #10 Revenio Group (2,2)
 #11 Ponsse (2,2)
 >#12 Citycon (2,1)
 >#13 TeliaSonera (2,0)
 #14 Aspo (2,0)
 #15 Keskisuomalainen (2,0)
 #16 Restamax (2,0)
 #17 United Bankers (1,9)
 #18 Norvestia (1,9)
 #19 Sampo (1,9)
 #20 CapMan (1,9)
 >#29 UPM (1,7)
 >#65 Metso (1,0)
 >#97 Nokia (0,3)

Average Score of all companies in the research database: 1,3
Average Score of our positions: 1,8

Median Score 1,1
Worst Score 0,2 (#98 Talvivaara)

Parameters used in screen (weight):
 P/B estimate 2014 (13%)
 P/E estimate 2014, 2015 (8%, 10%)
 Dividend yield estimate 2014, 2015 (8%, 8%)
 ROA estimate 2014 (10%)
 ROI estimated 3 year average 2012-2014 (8%)
 ROE estimated 3 year average 2013-2015 (8%)
 Turnover estimated increase 2013-2015 (8%)
 Net Profit estimated increase in 2013-2015 (8%)
 Gross Margin estimate 2014 (8%)
 Profit Margin estimate 2014 (8%)

The used parameters emphasize attractive valuation (31%), profitability in broad sense (26% weight), growth (16%) and dividend yield (16%).

The screen relies on estimates about future. Those combined with volatility of stock prices means that you should not try to chase screens like these (I don't). Ultimately any investment decision should be based on much more than just looking at the current numbers and estimates of future numbers.

Tuesday, November 25, 2014

Notes on taxation of foreign dividends in Finland

Over the years we have held securities from numerous foreign companies. It has become evident that there are huge differencies on how dividends are taxed in Finland. Cumulative taxes paid on dividends can vary from 25,5% to 55,5% (or more!) depending on the case.

For Finnish investor like myself, the following parameters needs to be obverved
  • country (or in worst case countries) where the investor is taxed
  • country (or countries) where the investor has brokerage account(s)
  • country of incorporation (home country of the company)
  • where company is listed
In Finland, tax on capital gains and dividends is 30% up to 40.000 euros (2015: 30.000 euros) after which it's 32% (2015: 33%). However, 15% of dividend is tax free and this applies to foreign as well as to domestic stocks (corporations listed in a stock exchange) as long as the country of incorporation is:
  • an EU country
  • a country with which Finland has a double taxation treaty (like USA)
Typically dividends are double taxed in "source" and "destination" countries. Here is where the double taxation treatys come in play - in most cases. The problems arise from case where more is withheld than assumed under the tax treaty. In those cases, the only way is to apply for a refund from the tax authorities of the country concerned.

The problematic cases I have encountered so far:
  1. France: withhelds more than assumed under tax treaty with Finland.
  2. Hong Kong: does not have tax treaty with Finland. Dividends are treated as regular income, which is progressively taxed in Finland (can go beyond 50%).
  3. British companies listed in USA: you might end up being withheld 15% while tax treaty assumes 0%.
(1) I have read also Germany, Switzerland and Denmark withhelds more than assumed in tax treaty with Finland.
(2) Any "tax haven" falls into same gategory than HK. E.g. Bermuda where many companies are incorporated even if otherwise clearly European or U.S. companies.

While the above is directly applicable only in Finland, I would assume that an investor in any country might encounter these type of cases. Recommend to check these issues upfront. In many cases I didn't and payed price for it.