Tong's Value Investing Portfolio as of February 14, 2019

A fool’s errand
 
Should we panic over treasury yield curve inversion?
 
Investors worked themselves into a tizzy in early-December last year, sending stock prices tumbling around the world. That was when the Treasury yield spread fell sharply (see Chart 1), to the lowest levels since the global financial crisis.
 
Chart 1: Precipitous drop in Treasury yield spread

For those unfamiliar with Treasury yield spread – it is the difference between the short- and long-term bonds. The US Federal Reserve sets short-term interest rate while investors determine rates/yields on the long-dated bonds via market prices.
 
Yields on the long-dated treasury are typically higher than that for shorter duration ones, due to the additional term premium – to compensate for inflation over the duration.
 
Hence, when the difference in yields between the 2- and 10-year bonds – the most popular market yardstick for Treasury yield spread – dropped to just 0.11% in late-2018, investor worries spiked. When this gap turns negative, we deem the yield curve as inverted.
 
The event made for sensational news headlines, triggering fear in markets around the world. Why is a potential yield inversion taken as such an ominous sign for stocks? Well, for one thing, the last five recessions in the US were preceded by an inversion of the yield curve.
 
In reality, the steepness of the yield curve offers little in terms of fresh insight into the underlying economy and more of changing investor expectations.
 
In December, investors’ views took a pessimistic turn on the US and global economy and their actions – buying up long-dated bonds caused yields to fall (bond prices and yields are inversely correlated).
 
Falling long-dated yields while short-term yield remained high translate into flattening of the yield curve. In extreme cases, the yield curve will invert. When that happens, it means investors expect a recession.
 
If the yield curve inversion and recession happen at the same time, which causes which? Bond yields – like stock prices – are reflective of investor expectations for the future. But as we well know, expectations are as likely to happen as not.
 
That said, inversion of the yield curve may have psychological effects that could be self-fulfilling, if it causes everyone to believe that recession is imminent. Banks could start to tighten lending requirements – because of greater risks and lower profitability (smaller net interest margins) – thereby stifling credit, businesses would delay investments and hiring and consumers could start to spend less, all of which will result in slower economic growth.
 
Is the yield curve inversion a signal to sell stocks?

Even if yield curve inversion does precede recession, it can neither predict the timing, length nor depth of the recession – and crucially, how stock markets react. Historically, inversions have happened between 6 months to two years before recession – during which stocks have traded flattish, up and down. (See Chart 2)
 
Chart 2: Is there a correlation between yield spread and stock markets?

I think all these just mean that trying to predict stock market movements is a fool’s errand. Narratives, it seems, do not move stock prices. Rather, reasons are provided for stock movements, after the fact.
 
As value investors, we would be much better off looking at the underlying business, earnings, cash flows and balance sheets instead of trying to time the market.
 
Is a recession imminent?

Economic cycles of expansions and recessions are as inevitable as death and taxes. But I do not think there is any fundamental reason for economic expansion to die from old age.
 
In theory, economic growth gets derailed when rising demand for goods, capital and labour causes inflation, which then results in governments (over)-tightening monetary policy that will lead to a slowdown or worse, recession.
 
However, this traditional relationship between output, employment and inflation appears to have broken down. Case in point, the US recovery is heading into its tenth year and unemployment is at 50-year lows, yet inflation remains benign, barely above the Fed’s 2% target.
 
Real interest rates remain low by historical standards. This is due, in big part, to technology advancements and digitalisation, which have been very effective in capping inflationary pressures.
 
We have seen how technology and digitalisation greatly enhance operational efficiency, improve the price discovery process, raise assets utilisation and productivity and so on.
 
Technology underpinned the rise of the oil shale industry and brought oil prices down from record levels. Continued advancements in green energy technology will likely keep future prices lower. Low oil prices, in turn, play a huge role in tempering costs and price inflation.
 
The Treasury yield spread has widened a little since the lows in December, currently hovering around 0.18% – as the worst of investor panic subsided. It may or may not fall into negative territory in the coming weeks or months, as investors continually recalibrate their expectations for the future.
 
Regardless, I suspect the yield curve will be flatter than we are used to seeing in the past, even after the Fed normalises monetary policy, due to low inflationary expectations.
 
Plus, in reality, most recessions are triggered by exogenous events – such as geopolitics, war, trade conflicts and asset bubbles – that are inherently unpredictable.
  
Stocks in my Global Portfolio ended mostly higher for the week. Total portfolio value gained 5.2%. China-based companies including Sunpower, Nine Dragons and Ausnutria Diary performed well after the long Chinese New Year break.
 
Investor sentiment for equities stayed positive amid rising expectations of a US-China trade deal while a more dovish US Federal Reserve is aiding the recovery in emerging market currencies.
 
Last week’s gains pared total portfolio losses to just 4.1% since inception. By comparison, the MSCI World Net Return Index is down by a lesser 0.4% over the same period.

The FBM KLCI, however, fared comparatively poorly, continuing to underperform regional markets. The bellwether index is down 0.3% for the week ended Thursday and remains in negative territory for the year-to-date.
 
Positively, stocks in my Malaysian Portfolio fared better than the benchmark index, with total portfolio value gaining 1.7%. Notably, shares for Formosa Prosonic – one of InsiderAsia’s top 10 stocks for 2019, were up 11%. For more InsiderAsia stock picks, check out www.absolutelystocks.com.
 
Total portfolio returns now stand at 53.1% since inception. This portfolio continues to outperform the benchmark index, FBM KLCI, which is still down 7.7%, by a long way.
 


Performance Comparison Since Inception (%)

  • Tong's Value Investing Portfolio
  • FBM KLCI
 
SHARES HELD QUANTITY AVERAGE COST COST OF
INVESTMENT
CURRENT
PRICE
CURRENT
VALUE
GAIN /
(LOSS)
GAIN /
(LOSS)
SCGM BHD 11,066 1.732 19,218.4 1.240 13,721.8 (5,496.5) (28.6%)
AJINOMOTO (M) BHD 1,500 11.813 17,720.0 18.740 28,110.0 10,390.0 58.6%
PANASONIC MANUFACTURING MSIA 600 26.157 17,182.0 38.100 22,860.0 5,678.0 33.0%
Y.S.P.SOUTHEAST ASIA HOLDING 10,500 2.413 25,340.0 2.750 28,875.0 3,535.0 14.0%
FORMOSA PROSONIC INDUSTRIES 18,000 1.540 27,720.0 2.020 36,360.0 8,640.0 31.2%
HONG LEONG INDUSTRIES BHD 2,000 9.126 18,251.0 9.360 18,720.0 469.0 2.6%
MALAYAN BANKING BHD 3,000 10.250 30,750.0 9.550 28,650.0 (2,100.0) (6.8%)
ECO WORLD DEVELOPMENT GROUP BERHAD 15,200 1.235 18,772.0 0.915 13,908.0 (4,864.0) (25.9%)
DIALOG GROUP BHD 5,700 3.452 19,676.4 2.990 17,043.0 (2,633.4) (13.4%)
SAM ENGINEERING & EQUIPMENT 3,000 7.380 22,140.0 7.540 22,620.0 480.0 2.2%
POH HUAT RESOURCES HOLDINGS 13,000 1.490 19,370.0 1.550 20,150.0 780.0 4.0%
Total     236,139.8   251,017.8 14,878.1 6.3%
         
Shares bought        
SUPERLON HOLDINGS BHD 15,000 1.300 19,500.0 1.300 19,500.0 0.0 0.0%
         
Total shares held     255,639.8   270,517.8 14,878.1 5.8%
         
Shares sold        
WILLOWGLEN MSC BHD 19,900 0.497 9,900.0 0.464 9,236.0 (664.0) (6.7%)
         
Cash Balance         35,690.3    
Realised Profits / (Losses)         91,330.0    
         
Change since last update Feb 7, 2019        
Portfolio             1.7%
FBMKLCI       (0.3%)
         
         
Portfolio Returns Since Inception     200,000.00   306,208.1 106,208.1 53.1%
Portfolio Returns (Annualised)             12.2%
         
Portfolio Beta             0.671
Risk Adjusted Returns Since Inception             79.1%
         
         
Performance Comparison At Portfolio Start Current Change Relative Portfolio Outperformance
FBM KLCI 1,829.7 1,689.1 (7.7%) 60.8%
FBM Emas 12,700.4 11,745.6 (7.5%) 60.6%
Footnote:
*Current price is as at February 14, 2019.
*Portfolio started on Oct 10, 2014 with MYR200,000.
*This is a personal portfolio for information purposes only and does not constitute a recommendation or solicitation or expression of views to influence readers to buy/sell stocks.

STOCKS SOLD IN THE LAST 12 MONTHS (Currency: MYR)
 
SHARES SOLD DATE BOUGHT DATE SOLD QUANTITY AVERAGE
COST
COST OF
INVESTMENT
PRICE SOLD SALES
PROCEEDS
GAIN /
(LOSS)
GAIN /
(LOSS)
PANASONIC MANUFACTURING MSIA 21-Jan-16 27-Jul-17 400 26.125 10,450.0 37.100 14,840.0 4,390.0 42.0%
ELSOFT RESEARCH BHD 30-Mar-17 24-Aug-17 8,000 1.844 14,750.0 2.650 21,200.0 6,450.0 43.7%
JOHORE TIN BERHAD - WA 12/17 04-May-17 24-Aug-17 17,000 0.655 11,135.0 0.680 11,560.0 425.0 3.8%
FOCUS LUMBER BERHAD 03-May-17 30-Aug-17 6,000 1.660 9,960.0 1.530 9,180.0 (780.0) (7.8%)
WILLOWGLEN MSC BHD 23-Nov-16 30-Aug-17 7,000 0.768 5,377.0 1.430 10,010.0 4,633.0 86.2%
WILLOWGLEN MSC BHD 23-Nov-16 28-Sep-17 7,000 0.770 5,377.0 1.180 8,260.0 2,883.0 53.6%
LII HEN INDUSTRIES BHD 14-Dec-16 28-Sep-17 5,000 2.820 14,100.0 3.720 18,600.0 4,500.0 31.9%
COMFORT GLOVES BERHAD 28-Aug-17 08-Dec-17 25,000 0.960 24,000.0 0.930 23,250.0 (750.0) (3.1%)
JOHORE TIN BHD 08-May-17 08-Dec-17 9,000 1.600 14,400.0 1.180 10,620.0 (3,780.0) (26.3%)
THONG GUAN INDUSTRIES BHD 12-Dec-16 08-Dec-17 5,000 4.243 21,215.0 4.100 20,500.0 (715.0) (3.4%)
KERJAYA PROSPEK GROUP BERHAD 12-Jan-17 15-Mar-18 11,000 1.025 11,280.0 1.540 16,940.0 5,660.0 50.2%
KERJAYA PROSPEK GROUP BERHAD - WARRANTS B 2018/2023 08-Mar-18 15-Mar-18 3,000 0.000 0.0 0.330 990.0 990.0 -
LUXCHEM CORPORATION BHD 30-Aug-17 15-Mar-18 16,500 0.732 12,072.5 0.720 11,880.0 (192.5) (1.6%)
WILLOWGLEN MSC BHD 14-Dec-17 22-Mar-18 20,000 1.010 20,200.0 1.260 25,200.0 5,000.0 24.8%
MUAR BAN LEE GROUP BERHAD 26-Oct-17 22-Mar-18 13,500 1.240 16,740.0 1.170 15,795.0 (945.0) (5.6%)
CHOO BEE METAL INDUSTRIES BHD 07-Sep-17 16-May-18 8,000 2.190 17,520.0 2.440 19,520.0 2,000.0 11.4%
CHOO BEE METAL INDUSTRIES BHD 07-Sep-17 21-May-18 8,000 2.190 17,520.0 2.300 18,400.0 880.0 5.0%
SUPERLON HOLDINGS BHD 01-Dec-17 21-May-18 6,000 1.175 7,050.0 1.550 9,300.0 2,250.0 31.9%
OKA CORPORATION BHD 14-Dec-17 28-Jun-18 12,000 1.541 18,488.0 1.270 15,240.0 (3,248.0) (17.6%)
SUPERLON HOLDINGS BHD 01-Dec-17 28-Jun-18 6,000 1.175 7,050.0 1.210 7,260.0 210.0 3.0%
WILLOWGLEN MSC BHD 14-Dec-17 28-Jun-18 100 0.500 50.0 0.540 54.0 4.0 8.0%
PANTECH GROUP HOLDINGS BHD 17-May-18 02-Aug-18 43,000 0.580 24,940.0 0.560 24,080.0 (860.0) (3.4%)
KERJAYA PROSPEK GROUP BERHAD 10-Jan-17 06-Sep-18 11,000 1.020 11,225.0 1.400 15,400.0 4,175.0 37.2%
LUXCHEM CORPORATION BHD 25-Aug-17 06-Sep-18 16,500 0.717 11,825.0 0.655 10,807.5 (1,017.5) (8.6%)
HOCK SENG LEE BHD 19-Apr-18 06-Sep-18 14,500 1.520 22,033.0 1.370 19,865.0 (2,168.0) (9.8%)
GENTING MALAYSIA BERHAD 06-Sep-18 28-Nov-18 3,800 5.070 19,266.0 3.060 11,628.0 (7,638.0) (39.6%)
TOP GLOVE CORPORATION BHD 06-Sep-18 06-Dec-18 3,600 5.500 19,800.0 6.030 21,708.0 1,908.0 9.6%
MAH SING GROUP BHD 28-Jun-18 14-Jan-19 19,000 1.005 19,095.0 0.930 17,670.0 (1,425.0) (7.5%)
WILLOWGLEN MSC BHD 14-Dec-17 14-Feb-19 19,900 0.500 9,950.0 0.464 9,236.0 (714.0) (7.2%)

A Note to Readers

It is my pleasure to share with you my Value Investing Portfolio. However, I must emphasize that it is by no means a recommendation or a solicitation or expression of views to influence you to buy or sell any stocks. I am just sharing openly on what I am doing with my stock portfolio.

Further, I like to remind all investors that investing is not just about the profits or returns. You will inevitably suffer stock losses too. You need to understand your own investment objective, risk appetite and the amount of loss you can afford to bear. So, while many investors talk only about absolute returns, I am also sharing the computed risk-weighted returns of my portfolio.

Tong Kooi Ong