Portfolio Two Updated October 2014

Portfolio Two is our second longest lived portfolio, at over ten years.  The beneficiary contributed $5500 and the trustee $11,000 for a total of $16,500.  The current value is $25,036 for a gain of $8536 or 51%, which works out to about 7% over the life of the fund when adjusted for the timing of cash flows.  See the details here or the link on the right.

We will be watching a few stocks.  Transalta has declined and has a dividend that might be unsustainable.  Yahoo went up on the Alibaba IPO and we will watch what they do in the future.  Both Diageo and Siemens have been hit by the fall in the UK Pound and the Euro vs. the dollar and we will keep them on watch as well.

Portfolio Two Updated November 2013

Portfolio Two is our second longest lived portfolio, at nine years. The beneficiary contributed $5500 and the trustee $11,000 for a total of $16,500. The current value is $23,245, for a gain of $6745 or 41%, which works out to annual performance of 5.6% / year over the life of the portfolio. There are 18 stocks in the portfolio, of which 9 are US and 9 are overseas. As we noted with Portfolio One, a rough guide is that when you have beyond ten or so “different” stocks you have a diversified portfolio. Most of the stocks are around $1100 / each, with a few around $2000. You can see the detailed portfolio here or at the list on the right.

The portfolio recently has had a couple of big winners with Facebook and Splunk. These two combined for about 1/3 of the total gain in the portfolio. Many of the stocks are near all time or 5 year highs, including Oracle, China Petroleum, Siemens, Diageo, Exxon-Mobil, Toyota and NIDEC. These stocks had been hit hard just a couple of years’ ago and we will watch them closely to make sure they don’t fall back too far.

Oracle, WYNN and Urban Outfitters currently have stop loss orders in that we will need to review in early December. We are going to keep them on Urban Outfitters and WYNN because we don’t want to fall below original purchase prices and Oracle we will review along with many of the other stocks that have soared over the last couple of years.

Portfolio Two Updated August 2012

Portfolio Two is the second longest lived-portfolio, at about 8 years old. A link to the updated statement is here or you can find it in the link list on the right side of the page. The current value is $13,780. Investment by the trustee has been $8000 and the beneficiary $4000, for a total of $12,000. The gain so far is $1780 or 14.8%, about 3.1% / year since inception.

Current Portfolio

We are reviewing the stocks in Portfolio Two as part of the preparation for purchasing stocks for 2012. Wynn is a casino company in the US that has interests in Macau (which dwarfs Las Vegas) and has been involved in lawsuits with their Japanese partner, resulting in a lost of 32% when adjusted for dividends. We need to consider whether this stock can come back or if we no longer believe it will recover in the near or medium term. Urban Outfitters (URBN) faced a large loss when they missed earnings but have made up about 1/2 that loss since then. Wal-Mart and Diageo (ADR) have been good performers recently.

Stocks Sold Previously

Most of the sales were right with 20/20 hindsight (not present in real life) – we booked big gains on BHP and CHL and the stocks have yet to hit those highs.

Stock Portfolio Review

In any portfolio it is good to keep and eye out for stocks that have had a big run up and might be at a point to sell as well as stocks that have dropped and don’t seem to have a chance to come back in the near term. We also watch for stocks that are just stagnant.

While we don’t rapid-trade in these funds we do rebalance occasionally. I am looking to re-balance before we buy stocks again as part of the annual purchase process (I contribute $500, they contribute $500, and then I “match” $500 for a total of $1500 every year) which happens at the end of the summer. Since many stocks are held in more than 1 portfolio I only describe them one time.

Portfolio One

– Urban Outfitters – low debt, seemingly well run, has recently had departure of top executives. Holding on a bit to see if they can turn things around since drop already priced in. if they don’t turn around by end of summer will drop

– Procter and Gamble – has been a core of the portfolio for a long time with a strong dividend. The CEO recently had a bad conference call and the company hasn’t been growing much when compared to rivals

– Canon – has been a good long term performer but Japan still refuses to have a stock market rally. Need to look at this more but want to have some Japan exposure

– Comcast – held on for a long time when the stock did nothing or tanked because believed in broadband growth and they also added and boosted their dividend over the years. Will watch to see if now it is over valued after the run up

– Ebay – another stock that did nothing for years and went down but finally came back. No dividend but basically a bet on pay pal since they sold Skype. Will look into this some more may want to take profits

– Exelon – the nations’ biggest nuclear utility. Now getting beat because of the low price of natural gas. This hurts coal much more than nuclear because nuclear always runs but it limits its profits, as well. They just took over a big Eastern utility. Will keep holding but watch

– Wal-Mart – recently ensnared in a bribery case. Given their massive size it didn’t move their stock price that much. They have been buying back shares aggressively and boosting the dividend which increases profits per share. On watch

– Philip Morris – had an immediate, great run up. Also a good dividend. May want to see for gains

Portfolio Two

– Also Urban outfitters, Wal-Mart

– Wynn – took almost a 20% hit out of the gate with the share holder dispute issue. Has regained half that loss. Still a great play on China gambling. Will watch

– Siemens – had a big run up but now back to break even. OK run but subject to Euro issues and overseas expropriation and potential corruption issues. Will watch

– Diageo – had big run up and fall, much of which was caused by gyration of UK currency vs. US dollar. Up now at some point may take profits

Portfolio Three

– Also Urban Outfitters, Siemens, Wal-Mart, Wynn

Portfolio Four

– Also Wal-Mart, Exelon

– Nucor – a well run metals company in the US that is subject to vagaries of US economy as well as foreign price competition. Will watch but hate to part with it because it is well run but may not be able to sustain high valuation (see Southwest Airlines)

Portfolio Five

– Also Seimens

– Alcoa is a company like Nucor, well run but hit hard by foreign competition and international prices and demand. Like Nucor would benefit from US rally post “great recession” but that never really materialized. Will continue to watch

– Riverbed – a company with high growth prospects that lost 30% of its value in a single day when they slightly missed their earnings. Held on and since they have hung on at about the same price. Will hold through an earnings release or two seems transient not permanent

Portfolio Two Performance Updated July, 2010

Portfolio two is my second longest running portfolio. It has been in existence for 6 years. The portfolio lost 12% during the quarter, with the indexes dropping about 10% and then the ADR’s in foreign currency generally falling a bit further because of the appreciation of the dollar during this time frame (for the Euro denominated ones).

Over the long haul (6 years) this portfolio has an annual return of -2% and we have put $9000 into the portfolio ($6000 by me, $3000 by the beneficiary) and it is worth $8387, which is down about 7%. These numbers are good as far as “relative” performance over the 6 year time frame, but as they say, “You can’t live on relative performance”. The portfolio has been above cost and below cost for the last few years during the market tumult. The sales that we did generally turned out OK; in particular we sold China Mobile (CHL) for a big gain and BHP the Australian mining giant for another big gain and their stocks today are far below the price we sold them at. I track subsequent performance of all sales in the cover sheet for each portfolio (I must be a masochist to do this, but the kids ask).

The portfolio has 10 stock holdings, with an average balance of a bit more than $800. This makes it a reasonably well diversified portfolio, all else being equal (at about 10 stocks you achieve most of the benefits of diversification, assuming that the stocks aren’t mostly from industries with the same characteristics). One stock that looks like it is on the block is Nokia (NOK), which has failed to restructure and although it has a large percentage of the worlds’ cell phone market, it is a laggard in smart phones. Toyota (TM) is another holding, and I was very worried about it with the brake issue in the US but since then BP showed us all how to really decimate market value so paradoxically I feel a bit better about this. In the past Toyota has always proved resilient so I am inclined to give them the benefit of the doubt.

Diageo (DEO) has lost about 23% of its value but pays a decent dividend and per my recent analysis on currency moves and an ADR the bad performance as of late has mainly been due to the decline of the UK pound against the US dollar and not an absolute decline in the company’s performance.

Currency Impact on ADR’s

In a previous post I calculated the impact of currency change on a specific ADR, Diageo, the UK spirits company. To do this, I looked at the price in US dollars on the US exchange (in this case the NYSE) and the price of the “underlying” stock on its resident exchange, in this case in Pounds on the London Stock Exchange (LSE). In the case of this stock, the ADR (which we own in the US) decreased in US dollar terms (what we really care about) by 25%, while the “underlying” stock on the LSE increased in value by 4%, for a “performance gap” of about 29%. The UK Pound dropped by about 27% during this period against the US dollar, which accounts for this difference.

Due to the large impact of currency moves on ADR’s, I am going to attempt to track this going forward on the spreadsheets that I use for each portfolio. For each ADR I buy I will do the following:

– track the price of the ADR on the US exchange at the time I bought it (already doing this)
– track the price of the ADR on its “home” exchange at the same date (this is new)
– track the ratio of US Dollars to the relevant foreign currency (in the case of Diageo, it is dollar vs. Pound relationship) on that same date
– then for each update I will track how the performance of the “underlying” stock is on its home exchange (in the case of Diageo, up 4%)
– I will track the performance of the US dollar vs. the foreign currency
– Then I will determine the portion of the gap tied to foreign currency moves, which will likely be the total performance difference between the ADR and the underlying value on the home exchange

In this post, I describe the process that I use to track stock performance and overall portfolio performance on each of my accounts (up to 5 now). The process of tracking performance is MUCH more complicated and tedious than you might think, since I am trying to track a lot of items that your brokerage statement either doesn’t want you to know or hasn’t thought through the process of giving it to you in a useful format. For 99% of the population out there (maybe even a higher percentage) taking apart the brokerage statement in detail and looking at the component pieces of return will teach you something that you don’t know. While the quality of the analytics provided by outside vendors is increasing, it is still not simple to track performance, pull out expenses, the portion of return due to dividends, etc… And I would be willing to bet that the average investor doesn’t know the portion of their portfolio’s return due to currency moves between the parent and the underlying exchange for ADR’s, for instance.

For those that are expert investors there are other impacts of currency moves WITHIN the stock price that aren’t simple to show like the Diageo example, above. For instance, if a company produces goods in a country with a strong currency and sells them in a country with a weak currency, that company’s profit will be impacted negatively, which will show up in their profit and loss statement, and impact the stock value. To avoid this impact many companies try to “source” production in the same country where it is sold, if that is possible. Companies can also “hedge” by purchasing contracts which, for the cost of the contract, will make the currency impact go away, and to make it more complex many companies only partially hedge. For the purpose of this analysis I am simplifying this away because it is already captured within the existing stock price valuation and future prospects.

I will add this analysis to the stocks that are ADR’s in the portfolio and get this for the update needed for “stock selection season”, which is coming up in late August before the kids / now some are adults go back to school / college for the year.

Impact of Currency Moves On An ADR

One of the stocks recommended in prior years’ and currently held in Portfolio 2 is Diageo, the UK spirits company.  Since the portfolios that I run for my nephews and nieces only purchase and hold stocks on US exchanges (for simplicity reasons), in order to get international exposure to companies like Diageo they are purchased as an ADR, or “American Depository Receipt”.    Here is a decent definition of an ADR, from wikipedia:

An American Depositary Receipt (abbreviated ADR) represents ownership in the shares of a non-U.S. company that trades in U.S. financial markets. The stock of many non-US companies trade on US stock exchanges through the use of ADRs. ADRs enable U.S. investors to buy shares in foreign companies without the hazards or inconveniences of cross-border & cross-currency transactions. ADRs carry prices in US dollars, pay dividends in US dollars, and can be traded like the shares of US-based companies.

Each ADR is issued by a U.S. depositary bank and can represent a fraction of a share, a single share, or multiple shares of the foreign stock. An owner of an ADR has the right to obtain the foreign stock it represents, but US investors usually find it more convenient simply to own the ADR. The price of an ADR often tracks the price of the foreign stock in its home market, adjusted for the ratio of ADRs to foreign company shares.

Thus for practical purposes the ADR is issued in US markets which enable US investors to easily hold and trade the stock and receive dividends.

Our shares of Diageo (the ADR is on the NYSE,  while the “main” stock is issued on the London Stock Exchanges or LSE) were purchased in late September, 2007 at a price of $88.75.  The current price of the ADR as of mid June 2010 is $66.42, calculated as (88.75-66.42/88.75) a LOSS of 25% of its value, as traded on the NYSE as an ADR.

The “main” stock on the LSE, however, traded for about 1074p in September, 2007 and is now worth 1,115p as of mid June 2010, for a (1115-1074/1074) GAIN of 4%.

Leaving aside the issue of tracking error on in the US ADR which is not likely to be significant, the gap in performance of 29% between our loss and their gain is measured by the performance of the US dollar vs. the British Pound.  In September, 2007 the British Pound was trading for roughly $2 against the dollar.  It is currently trading at approximately $1.46 against the dollar, for a  (2 – 1.46/2) LOSS OF  27%.

Thus the difference in performance between the two stocks was 29% and the fall in the British Pound vs. the US dollar was about 27%, so you can see that this delta is almost totally caused by the change in currency value during this time.

For years this currency effect has worked in FAVOR of US investors putting money in overseas stocks because the dollar was declining against other major currencies (the pound, the Euro).  However, now the US Dollar is strengthening against foreign currencies so the impact is reversed, and if you have significant overseas exposures in most currencies you are now seeing losses when they are translated into US Dollar terms.

Since I track a lot of items on the custom spreadsheets that I make for each portfolio I will start tracking the currency impact on ADR’s as distinguishable from the performance on the underlying exchange.  This will highlight the DIRECT portion due to changes in currency costs.

A couple of minor items:

– for my portfolios where I don’t usually owe taxes one minor annoyance is that taxes are withheld for overseas dividends.  If you pay foreign taxes you can net them against your US obligations (at a simplistic level) but since my portfolios don’t generally pay taxes due to their low level of gains and losses I don’t get this back.  Here is a company site explaining how a Finnish company withholds taxes on dividends which is useful.  For my purposes in the portfolio I only show the “net” proceeds; on my yield calculation I may start to show it “net” of withholding since I don’t get it back

– of course currency issues are far more complicated than this in that the company may earn in USD or in British Pounds; for example Diageo earns a lot of its income on US sales so it may book gains or losses anyways on currency but these are already “embedded” in the income statement.  The ADR price between the LSE and NYSE is due to the  “currency change” impact, but changes in currency rates may also impact the price of Diageo on the LSE itself