tag:blogger.com,1999:blog-4815867514277794362.post58182615473777301..comments2024-03-08T06:18:28.125+11:00Comments on Bronte Capital: A puzzle for the risk managerJohn Hemptonhttp://www.blogger.com/profile/03766274392122783128noreply@blogger.comBlogger59125tag:blogger.com,1999:blog-4815867514277794362.post-82679807388655871422018-12-20T05:11:48.904+11:002018-12-20T05:11:48.904+11:00Fast forward 10 years, the European banks are chea...Fast forward 10 years, the European banks are cheap on PB and PE measure again. How will it play out this time?Puzhong Yaohttps://www.blogger.com/profile/00782187104142785830noreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-31814213457532770522017-06-01T01:44:51.281+10:002017-06-01T01:44:51.281+10:00Looks like the TCI portfolio.
He lost 40% and made...Looks like the TCI portfolio.<br />He lost 40% and made it all back.<br />He took the view that, as he was the largest investor in his own fund, he was aligned.<br />He also knew that the Fund was not the only vehicle in which his clients were invested. They understood that they had to provide their own diversification.<br />His long term performance vindicates the approach.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-48757018494720348282017-05-09T09:16:31.414+10:002017-05-09T09:16:31.414+10:00The 46% of the portfolio invested in banks was uni...The 46% of the portfolio invested in banks was uniquely concentrated, as the primary counterparties / transactions of those companies are each other. This is really a unique industry feature. It is simply not true in say industrial companies. The big final assembly brands do not sell much to each other or own a claim on assets of each other, so if one goes down, it tends to create opportunity for the other players. <br /><br />In banking, in contrast, most of the assets and transactions ARE with other banks, so if one goes down, it blows a hole in the balance sheet of the others. So by owning 7 or 8 different large cap banks, the portfolio manager effectively has one big undiversified position. (Interesting though exercise / paradox: had he bought just *1* big bank, he might have had less risk. By owning so many, he nearly guaranteed that there would be a run on his holdings. Had he found one that was relatively less exposed, Wells, perhaps, or even BAC (prior to the Countrywide acquisition, which alas, happened, so there was that) he might have had less overall credit cycle risk than he actually took by diversifying.<br /><br />All of the rest of the companies just about had pretty large credit cycle exposures. Media has traditionally been pretty stable, but not so much in the last 15 years, and a major downturn in credit was going to hit advertising.<br /><br />Given the lateness of the credit cycle, I am surprised he did not have more downside protection - puts or index futures. These would have had roll-cost, admittedly, but if he went well out of the money, it might have been manageable. Interest costs were pretty high then, though, so there was that.<br /><br />In all, this was a momentum portfolio. There is nothing really defensive (consumer staples anyone?) at a time when the market was clearly struggling, he was rear-view mirroring. Banks looked super cheap as securitization allowed them to generate fees out of all proportion to their balance sheets. That was risky and someone working in the industry should have known as much.Strategic Investorhttps://www.blogger.com/profile/06847403858456772158noreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-48855425555433024962017-05-02T01:14:08.831+10:002017-05-02T01:14:08.831+10:00Several issues with this book:
The concentration ...Several issues with this book:<br /><br />The concentration in financials is even at the best of of times (i.e. a recovery/reflation trade) extreme. Banks and insurance companies are too opaque to lend themselves for analysis from the outside (and often bank's own boards do not grasp the true exposure in their book. Banks are just an option and the thinnest wedge in a particular macro outcome. Having read plenty of sell side analysis and worked with very smart buy side analysts and PMs formed this view.<br /><br />Second, given the leveraged nature of banks' equity (and the high beta of many of other holdings), the true net long exposure of this book was probably more like +/- 200% net long. The financial crisis was just icing on the cake. <br /><br />Third, the guy a bias to pick poor management and corporate governance: it was well known that management at e.g. Fortis, ING, RBS, BofA, Nomura, but that also extends to e.g. Oracle, Budweiser or Heineken. Particularly in an un-analysable sector such as banking, management quality is paramount. Poor management was evidenced among others by expensive/dilutive/risky M&A (e.g. ABN Amro). <br /><br />Forth, I would question the reason for the 20% exposure in brewing. If this exposure was taken to add a defensive component to the book, clearly the gross and net exposure of the rest of this highly cyclical book needed to be cut aggressively. But I am assuming that this was a consolidation game. <br /><br />Fifth, this is was aggressive positioning at a time when equity markets were expensive. Measures with highly predictive power such as mcap/GDP did show that. So it was a classic mistake of buying poor quality securities towards the top of an economic/equity cycle. <br /><br />Best, Markus Markus Reznynoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-13342881362449627032017-02-08T21:34:35.891+11:002017-02-08T21:34:35.891+11:00Hi! Do you invest in biotech? Im now looking at G...Hi! Do you invest in biotech? Im now looking at GILD and its pretty good seems. But not stockpicker, interesting Pro opinion therefore :))Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-38959447066531862672017-02-02T15:02:18.829+11:002017-02-02T15:02:18.829+11:00I believe the banks were levered between 10 and 30...<br />I believe the banks were levered between 10 and 30 times going into 2008 so looking at the positions by the cash invested strikes me as looking at a futures portfolio by only looking at the margin requirements. <br /><br />I think the portfolio holdings should be rewritten with the debt and asset components of the underlying companies broken out. The return on assets of this portfolio would look terrible, assuming net assets of banks was around 10% the true net exposure is more like 300%, and doing the analysis monthly would show the portfolio exposure growing as bank asset values fell from mid-2007. I am not very familiar with those banks but I expect if they failed that by Mar 2008 their ratios and the rate of change of the ratios of assets to debt was looking much worse than their peers. <br /><br />I think this sort of analysis in equity portfolios has become pretty standard with maturing of private equity strategies. As in this paper - https://www.google.com.au/url?sa=t&rct=j&q=&esrc=s&source=web&cd=9&cad=rja&uact=8&ved=0ahUKEwiiwtLEwfDRAhUEppQKHa-IA50QFghVMAg&url=https%3A%2F%2Fwww.quantopian.com%2Fposts%2Freplicating-private-equity-returns-with-leveraged-small-value-stocks&usg=AFQjCNGfwkNt9eDtDHHuRxRaJ-AgVBKc9g&sig2=sZBBB_HNMlgrAdW08_PxtQ&bvm=bv.146073913,d.dGoMichaelhttps://www.blogger.com/profile/18358791639561137551noreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-44029981524965092992017-01-30T21:56:07.535+11:002017-01-30T21:56:07.535+11:00Assuming the portfolio was managed relative to an ...Assuming the portfolio was managed relative to an index (e.g. MSCI World), a competent risk manager could immediately have shown that the ex-ante tracking error was focused in one sector and a few stocks. <br /><br />Stress testing, VaR analysis (the banking sector under performance was well under way) and factoral attributions through a system such as Sungard or PORT would have revealed all. <br /><br />This Portfolio Manager had only his own arrogance/naivety to blame! Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-88017911185976143292017-01-30T02:55:29.429+11:002017-01-30T02:55:29.429+11:001) Almost half the portfolio in financials 2) Leve...1) Almost half the portfolio in financials 2) Leverage upon 30-1 leverage 3) And I would know what the 12% Other component is and how correlative/additive it is to 1) and 2)<br /><br />Trader Joehttps://www.blogger.com/profile/03122755936413138015noreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-41403424623223174992017-01-28T19:06:33.783+11:002017-01-28T19:06:33.783+11:00The David Dreman portfolio -
The 'E' in P...The David Dreman portfolio -<br /><br />The 'E' in P/E's weren't real. <br /><br />Everyone here talks about too much concentration in banks - but what if he had only 30%? 20%? Aren't value investors meant to concentrate their bets?<br /><br />His biggest error was his highest concentration was based on a valuation and error in judgement.<br /><br />If he used Greenblatt's method of trying to 'normalise earnings' with low multiples then he would have had less bank exposures.mikehttps://www.blogger.com/profile/02080651801156905702noreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-79082245890711415052017-01-28T06:44:28.594+11:002017-01-28T06:44:28.594+11:00highly correlated returns across the entire portfo...highly correlated returns across the entire portfolio...hindsight aside, it doesn't take an FRM to see that a catalytic event would blow up the portfolio. Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-88003612687936118132017-01-25T21:59:25.649+11:002017-01-25T21:59:25.649+11:00The statement:
The four European banks here (Lloyd...The statement:<br />The four European banks here (Lloyds, RBS, Fortis, ING) however received capital injections so large that they were effectively nationalized.<br /><br />... is actually incorrect. ING received government support via a loan scheme (fully repaid last year iirc).<br /><br />You may be mixing up ING with ABN Amro.<br /><br />By March 2008 it was clear RBS and Fortis were joined at the hips (they were part of the consortium that took over ABN Amro) and thus it would be an error to see them a entities with different destinies, especially because the ABN Amro acquisition was very costly and fraught with resistance/contention.<br /><br />Cheers,<br /><br />FMAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-18853470834160080752017-01-25T10:23:45.709+11:002017-01-25T10:23:45.709+11:00As a general rule if you are going to concentrate ...As a general rule if you are going to concentrate your portfolio, you should do it in stocks that you feel comfortable owning for the long-term. In other words, there should be an element of quality in what you chose to invest in. <br /><br />By quality I mean high probability of average-to-good returns. In other words, the asymmetry between the upside and the downside doesn't need to be as wide because the downside isn't as big and the upside is hopefully more reliable. <br /><br />You end up beating the market by holding - i.e. you reduce taxes and trading costs and you capture the compounding effect of reinvestment of retained earnings. <br /><br />If you want to chase long shots then you need a different portfolio. For starters you want the asymmetry between upside and downside to be very wide, at least 4 or 5 times to 1. You don't need to own a lot of something if it has this kind of payoff profile for it to make a big difference. <br /><br />So you want lots of small bets that are as different from each other (uncorrelated) as possible. If you can't find lots of bets then you should have a decent allocation to cash. After all the cash drag will not hurt your performance too much if a few of your 5-1 bets pay off.<br /><br />Such a large allocation to financials goes against this principle. <br /><br />Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-56096532788518125012017-01-21T18:31:14.287+11:002017-01-21T18:31:14.287+11:00Really not sure what the mystery is here. As many ...Really not sure what the mystery is here. As many have mentioned,<br /><br />1) overexposure to single sector<br />2) That sector is banking which is as opaque as you can get<br /><br />The fact that this fund manager is smarter than me is the tell that he is not a suitable custodian of my equity. Too much emphasis is placed on being smart in the fund management industry.<br /><br />I know I am not smart enough to understand the make up of any bank's balance sheet so I will rarely if ever invest in them. However, I do know that banking is cyclical and globally interconnected. Therefore, I know that concentrating a large portion of my portfolio in banks is a dumb idea regardless of how much I understand on a micro level.<br /><br />Investing is a form of gambling. Accepting this makes you realise that what you don't and can never know is much more significant than what you know or can hope to know. I would choose the fund manager that exhibits humility over the smart one every day of the week. Unfortunately, there aren't many of them because humility doesn't sell.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-34622705036980730282017-01-20T21:49:09.201+11:002017-01-20T21:49:09.201+11:00Random thoughts on the systemic error here:
Comme...Random thoughts on the systemic error here:<br /><br />Commercial banking is, on general, not a particularry profitable business. Nor there is sme explosive upside potential. We're suppose to like commercial banks not for that, but for the relative stability.<br /><br />Investment banking, however, is both profitable, and has an upside potential. With the benefit of hindsight we know it comes with the adequate downside potential too, but honestly, pre-08 that wasn't the motto of the day.<br /><br />Hence, many more or less traditional big banks delving deeper and deeper into investment and advanced trading businesses. For the upside ("and we're still cushioned by our core commercial business")<br />This portfolio seem to have followed exactly the same logic.<br />Picking banks with more "upside", e.g. more exposure to capital markets and it's operations.<br />Those are the same that got hit the hardest when it collapsed.<br /><br />As you missed the whole slew of both particular and systemic risks of subprime, and following that the whole cap market bubble, but see well enough the upside of these operations, this portfolio looks perfect. As anything with giant advantage and disadvantage looks when you're blind to the latter.<br /><br />Best regards,<br />Dmitry.Anonymoushttps://www.blogger.com/profile/06248423095771908830noreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-17221398400532841182017-01-19T16:48:49.166+11:002017-01-19T16:48:49.166+11:00Now I ain't no financier, and neither is Stone...Now I ain't no financier, and neither is Stone Cold Steve Austin, but there's too much goddamn finance here!<br /><br />https://2.bp.blogspot.com/-NHKF6vWSycQ/VujEgWCmbhI/AAAAAAAAjvU/6Crh40HRczM05dWwjIg8oa_kgKVul1CvQ/s400/Steveweisers.jpgAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-32056183976182025812017-01-19T16:08:50.374+11:002017-01-19T16:08:50.374+11:00A lot of people suggest having +40% in banks was t...A lot of people suggest having +40% in banks was the real risk. Probably right.<br /><br />What is the ASX weighting to financials?<br />The Banker's Bankerhttps://www.blogger.com/profile/15948074552301184664noreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-36010950498066319932017-01-18T18:31:41.963+11:002017-01-18T18:31:41.963+11:00Looking back as much as I can (obviously some bust...Looking back as much as I can (obviously some bust or taken over) it strikes me that by the beginning of 2008 (and in some cases much earlier), every single name was already displaying significant negative price momentum and was trading below its long term moving average. This guy was not unlucky, he was systematically betting that the market was wrong about his whole portfolio. Mark Tnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-10570946529531528512017-01-18T08:34:59.675+11:002017-01-18T08:34:59.675+11:00You did specify that the portfolio is from a value...You did specify that the portfolio is from a value investor. Value investors are supposed to buy things that are really cheap. All the banking exposure definitely qualifies--but, of course, in retrospect turned out to be value traps. (Funds that my firm was running had no financial exposure and still had 50ish% drawdowns in 2008.) In short, the manager did what they said they were going to do.<br /><br />Every sector got hit hard, but some recovered. Banks did not. Effective leverage across the portfolio is an issue, as is the sector concentration. On the other hand, some value investors say they will run non-diversified portfolios--and do. It also looks like the investor was trying to get significant dividend yields.<br /><br />This kind of blowup is just one of the hazards of value investing. I would say that probably nothing is wrong with the portfolio itself. The problem is simply risk management. At what point do you decide you were wrong or that your names are being swamped by macro and that you need to cut exposure?Anonymoushttps://www.blogger.com/profile/01286779592131351881noreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-70491197227034553572017-01-18T02:49:10.039+11:002017-01-18T02:49:10.039+11:00Besides the obvious over concentration in banks, m...Besides the obvious over concentration in banks, my first thought was: "why own 20% in beer and so much in banks? Why not just bet even bigger on banks and stop kidding yourself that the 'defensive' beer stocks would protect you in the event of a downturn?" This is a generally all or nothing fund. Another question though is, are the bank concentrations because of decades of capital appreciation (thus more forgivable, slightly) or recent allocation? At least to me the odd pairings were the "tell" on trouble (and of course the 40% in banks). Anonymoushttps://www.blogger.com/profile/12220985237641283288noreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-13058919552694210542017-01-15T20:56:04.787+11:002017-01-15T20:56:04.787+11:00Speakimg as a former Portfolio Construction analys...Speakimg as a former Portfolio Construction analyst, it's actually not that difficult. Assuming the PM wanted to outperform the MSCI World, we would build a simple variance covariance risk model, which would highlight the contribution to tracking error for every individual security. By March '08 the financials would have dominated that, and the PM would have to justify his position. Non factor risk would also be evident. <br /><br />Using a (now) standard software package which the fund manager should have had access to (such as Bloomberg PORT or Sungard), the portfolio could be stress tested for various shocks which would highlight other variables (FX, leverage etc). Oliverhttps://www.blogger.com/profile/01258036632250713578noreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-74361953876544121802017-01-14T13:32:50.455+11:002017-01-14T13:32:50.455+11:00here's what "managing risk" means if...here's what "managing risk" means if you are an investor: you sell on the way down because you're getting out of losing positions and buy on the way up? sillyfadewidhttps://www.blogger.com/profile/16879402193134567133noreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-76112803763191765862017-01-14T13:26:36.031+11:002017-01-14T13:26:36.031+11:00great post! there's no such thing as manag...great post! there's no such thing as managing risk if you are a "value investor" the guy is 50% banks for crying out loud.<br /><br />a good investment doesn't care what happens to the price of the investment if it is a good investment. again refer to buffett.fadewidhttps://www.blogger.com/profile/16879402193134567133noreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-24354777808087957492017-01-14T02:44:15.116+11:002017-01-14T02:44:15.116+11:00Found this post interesting but out of my knowledg...Found this post interesting but out of my knowledge base.<br /><br />What do you think of valeant now? Seems like they have 2 years of runway now. I've looked at $50 calls for January 2019. They are under $1. That would imply an equity value of 17-18 billion. Being that they are highly leveraged with 30 billion in debt if something goes right that seems like a cheap risks/reward. With a mkt cap of $5 billion and debt of 30 billion the debt is basically the equity. As a vol of vol play looks interesting.seanhttps://www.blogger.com/profile/10803969112417198813noreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-23660170104075909632017-01-13T18:03:19.643+11:002017-01-13T18:03:19.643+11:00I suspect that the European banks disaster arose f...I suspect that the European banks disaster arose from reliance on screens. Banks are hard to analyze from the outside given the terrible public reporting, multiple lines of business, and high degree of management discretion in reporting quarterly results. Towards the end of a boom, the banks that are riding for a fall will screen better, because they aren't putting up reserves at the same rate as their more cautious peers, aren't hedging, are still writing as many loans as possible, etc. On the other hand, the banks that are doing the right things will look like slow growers that have been left behind by their more nimble and aggressive competitors. And the whole sector will look cheap by comparison to other industries. <br /><br />Of course, bank earnings aren't like earnings in other sectors, because no other sector is levered 30-1 and can easily flip to negative margins on its major lines of business. We all know now, it was always true, and it seems obvious in hindsight. Anyone who has studied history knows that a large chunk of the banks periodically go bust. But how would knowing have been a useful thing to a professional value investor during the period from the 1990s until 2008? Guy who is nervous about the risk of the banks in our portfolio and thinks we should go short everything was a very unpopular guy for almost 20 years, and anyone who listened to him lost money. Imagine being the guy who develops an encyclopedic knowledge of lending standards and knows which banks will take the biggest hit if California housing prices crash in 2002. Totally useless! Probably fired!Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-33380397030896426052017-01-13T12:15:02.210+11:002017-01-13T12:15:02.210+11:00I am an ASX-only investor so I have zero familiari...I am an ASX-only investor so I have zero familiarity with the companies above - so the only thing I can see is the portfolio weightings (which possibly makes it easier). What jumps out at me straight away is 48% of the portfolio is invested in the banking industry. Not just one bank either, but multiple ones in the same markets. Even with warning signs that may or may not have been there in 2008, surely that's too much concentration of risk in one sector.Seannoreply@blogger.com