Monthly Archives

June 2021


Investing Without Borders

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Click here for the introduction to our “Investing in the Post-Covid Era” series of materials.

With the recent turmoil in global equity market, we look at the essential skill for achieving strong investment returns.

The dramatic fluctuation in global equity markets of the past 18 months have caused many people to reconsider their investment strategies. We hope that one of the outcomes will be that investors will be less complacent.

To be a good international investment manager one should be a generalist, not a specialist.  Contrary to what investment professionals may say, we believe that strong investment returns are founded on a few simple concepts.  In the mid-1990’s, Daniel Brosseau, a co-founder of Letko, Brosseau and Associates, outlined these concepts to industry peers in a presentation title. “Investing Without Borders’. The analogy is simple and clear and as relevant today as it was a decades or so ago.  Of course some of the company names will seem outdated but the concept remains as robust as ever and of course the global economy is more intricate and intertwined as ever.

Imagine a dinner menu with a fixed menu and an à la carte menu (see Table 1 below). As an investor, you can choose the fixed menu of country allocations, such as the US, Europe, Japan or Asia. We prefer the à la carte menu by which we look at the world from an industry perspective and select a favourite dish in each country.

Imagine another list (see Table 2) which portfolio managers might choose from, from the Dow Jones index and a list of auto producers.

The greater your knowledge, the higher the probability of success

Everything we have learnt from a business and economic point of view tells us it is much easier to deal with and analyze Manager B’s list because it is comprised of companies in the same industry. One can examine competitive position, cost structures, profit margins, capacity growth, etc. Even international questions such as the impact of currency swings, interest rates and duties can be analyzed more easily from the industrial perspective using Manager B’s list.

Analyzing Manager A’s list is more difficult. Comparing IBM or McDonalds to Nike is not easy. What you can say or conclude is limited. However, if you compare GM to Honda or BMW, things become clearer. It is more natural to compare GM to Toyota than to Walt Disney.

In order to shop in a very large store with excellent products, prices and variety, it follows that one has to go to the global store but how does one increase the probability of achieving superior investment results in a world without borders?

Getting it Right

The greater your knowledge, the higher the probability of success.  But a little knowledge may be damaging and too much knowledge can hurt as you may end up focusing on the details to the detriment of the larger picture.

The Valuation Model

The valuation model and the quality of the analysis and judgment are very important in order to be able to properly interpret the facts. The better and more rigorous the analysis, the higher the probability of being right.  This is usually improved by looking at a variety of situations.

Amplitude of Valuation Distortions

The greater the valuation distortions are, the greater the odds of being right.   A corollary of this is that the wider the population of investment candidates to choose from, the greater the probability of finding undervalued securities.

When you widen your analysis, you increase the investment candidates and the environment in which they operate.  As knowledge increases, the quality of analysis should also improve. As you increase your population of companies, the chance of finding cheap stocks increases.  Thus, the probability of making right decisions increases.  Superior investment returns are attained by the consistency of making the right investment decisions.

People often say that to invest in Europe, one needs a European manager.   It should be noted that to do quality analysis and observe valuation distortions, the manager’s location is unimportant.

You may retort that some people have better sources of facts.  Clearly, the investor or portfolio manager who plays golf with a senior executive of General Motors may have an edge over the one who does not.  However, in today’s world, we believe that those benefits are eroding, due to the quantity and speed with which information is now made available

The question we hope to raise through this article is whether the allocation decision is best made with a top-down approach, that is to say, an approach which distributes funds between world markets periodically, or, by an ongoing analysis of industries and companies which compares valuations and opportunities on a global basis.

Table 1:

Fixed Menu A la Carte
US S&P 500 Chemicals Semi-conductors Forest Products
Japan Nikkei 225 Metals Airlines Auto
U.K. FTSE 100 Media Retail Oil & Gas
Germany Dax Telcom Mining Food Processing
France CAC 40 Healthcare Pipelines Software

Table 2:

Manager A Manager B
Dow Jones Companies 10 International Auto Companies
Microsoft McDonalds Corp Toyota Motor Renault SA
Boeing Co Nike Ford Motor General Motors
Pfizer General Motors Fiat Chrysler Volvo AG
Coco-Cola Co Walt Disney Honda Motors Scania
Cisco Systems Procter & Gamble BMW Hyundai

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Vintage Wine Market Update – June, 2021

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The international wine market is  quite different from how it looked 10 years ago.  While Bordeaux used to be the dominant growing region, its trade share by value is now just  slightly more than 35%, according to Liv-ex.   That the market continues to broaden is a positive thing for wine lovers across the world, offering them a chance to discover great bottles to enjoy.

Furthermore, a broader wine market is also an important factor to take into consideration when building a wine investment portfolio.   A well diverse collection of wines is a key to wealth preservation.

Liv-ex reports that the Fine Wine index 100 is now close to the highs reached in June 2011.  The index 100 is the industry benchmark, including the price movement of the 100 most sought-after fine wines in the secondary market.   Over the past 12 months, the Index 100 has steadily climbed despite many hurdles along the way, such as Brexit, COVID-19, US tariffs and stock market fluctuations.

As of the first week of June, Liv-ex index Champagne 50 is showing the best performance with a year-over-year gain of 13.2%, followed closely by the Burgundy 150 index’s 9.9% increase.

Bordeaux 2020 and the En primeur campaign

The verdict is out:  the 2020 vintage is definitively part of a trilogy of excellent vintages along with 2019 and 2018.    Wine critics also agree that it is an irregular vintage.  The well-established rivalry between left bank and right bank, Merlot versus Cabernet Sauvignon seems to be going full swing right now, with some wine professionals stating that the Merlot grape is showing better than the Cabernet.

However, the more reserved wine critics seem to think that it is not so clear-cut and that both left and right banks have produced outstanding wines.    The key factor is the soil composition and the well-known concept of “terroir”.   In other words, the capacity that some estates have to cope with difficult climatic growing seasons due to the quality of their land and having the financial resources available to do what is necessary in the vineyard.

In comparison with the 2019 vintage, there has been a slight increase In prices, of between 5 to 10%,

The world of auctions

As Christie’s summarizes it: “Asian buyers continue to drive global demand”.   With a sell-through rate of 88% and half of the lots selling above their high estimates, the May week-long series of auctions in Hong Kong was certainly considered a success.   On May 20th, 98% of the wines offered were sold for a total of US$5.9 million.   Three magnums of DRC Romanée Conti 2004 were sold for US$129,359.

Still in Hong Kong in May, Sotheby’s sold 99% of its lots for a total of close to US$16.5 million. The star of the show was a unique lot of 6 bottles of Vosne Romanée Cros Parantoux 1989 from the famous Henri Jayer, which sold for over US$386,000.

The possibility of following the auction and bidding online has been greatly beneficial to the auction houses.   It opened the door to a much younger crowd of buyers around the world and Asia in particular.

Bordeaux is back

The wine-making style for the 2020 vintage is more in line with classical Bordeaux – producing wines that are less extracted, with lower levels of alcohol and softer maceration.  Freshness is a recurring adjective in tasting notes.  According to many wine critics, the 2020 vintage is a continuity of what has been happening for the past few years.

In terms of trade, Bordeaux wines are back in demand.  The suspension of US tariffs, a succession of excellent vintages with a superb but relatively under-priced 2019 vintage are contributing to a renewal of interest.   Famous brands such as Lafite Rothschild are currently very popular on the secondary market.

Burgundy 2019:  an overview

Is the 2019 vintage in Burgundy an extraordinary one?   It would seem to be the case according to merchants and wine critics who agree that quality is present across the board from regional and village appellations to the most sought-after Grand Cru wines.  Balanced wines are present for both reds and whites, with great aromatic expression and fine but powerful tannins.

For most wine professionals, this is a unique vintage of superb quality with great aging potential.   The down side of this vintage is the quantity. Frost in springtime and a long dry summer contributed to a rather smallish production.

In conclusion, the general quality of the vintage 2019 offers the opportunity to buy wonderful white and red wines from less well-known and less expensive appellations.   A chance for everyone to taste the magic of great Burgundy.


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