RDR Capital 2017 portfolio update (-0.9% in 2017, +14.9% since inception)

RDR Capital’s MENA portfolio is down 0.9% in 2017 and up 14.9% since inception (the portfolio was incepted on the 1st of October 2016). Our global portfolio is up 1.6% in 2017 in GBP terms (up 11.6% in USD terms) and since inception (the portfolio was incepted on the 1st of January 2017).

Geopolitics weighed (again) on the MENA portfolio’s performance during the fourth quarter of 2017

The Middle East and North Africa (MENA) portfolio was under pressure during the fourth quarter of 2017 mainly due to an increase in geopolitical risk in the gulf region, especially in Saudi Arabia, on the back of the arrests of senior Saudi political and business figures. Political stability in Saudi Arabia has always been taken for granted, not any more. The heightened risk was reflected in higher bond yields in Saudi Arabia and across the region.

We were defensively positioned during the 4th quarter of 2017 (4Q17) with a cash balance of c40%, which caused a significant cash drag at the end of the quarter when markets recovered in the region, especially in Saudi Arabia. The Saudi Tadawul benefited from a year-end rally on the back of positive news regarding next year’s expansionary budget. Our portfolio is well positioned to benefit from the improvement in consumer confidence in the kingdom in 2018.

The increase in geopolitical risk during 2017 has especially impacted the performance of our investments in Qatar, with Qatar Fuel and Qatar Electricity and Water share prices down 28.7% and 21.0% respectively since we initiated the positions in 4Q16. We exited our position in Doha Bank in July 2017 as we believed that the investment case has weakened significantly during the year and that headwinds for the bank still lie ahead.

During the 4th quarter, we sold our entire position in Al Hokair Group (c1.5% of the portfolio). The recent news that a member of the Al Hokair family has been detained in Saudi Arabia’s corruption crackdown might negatively impact the entire family’s standing in the kingdom. This will in turn negatively impact the performance of the business which is dependent on consumer confidence and sentiment. We also initiated a position in Aldrees Petroleum and Transport Services Company (ALDREES:AB) of 4.0% of the portfolio. Aldrees operates petrol stations across Saudi Arabia and is well positioned to benefit from the expected increase in the number of cars in the kingdom now that women will be permitted to drive.

We wanted to take this opportunity to highlight some aspects of our investment process. Regular readers will note that any change to our portfolio is communicated through a short post on the RDR Capital website and a mention on tweeter. It is important to note that behind the short post is significant research to support our investment decisions. The research includes macro and sector analysis, and more importantly bottom up company analysis which includes a detailed financial model and company specific fundamental analysis. We have chosen not to publish our detailed analysis because we do not want to give the impression that our posts are investment recommendations, which they certainly are not. As discussed in previous posts, the purpose of the RDR Capital website is to establish a track record for the firm, nothing more. If some of our followers find our updates useful, so be it.

2017 was a challenging year for our style of investing

2017 has proved to be a challenging year for our style of investing. The year has been an excellent year for global markets and especially for momentum style investing. As such, we were disappointed with our performance despite the fact that our focus is on absolute returns. We were too defensive in our positioning during the year with a significant cash drag throughout. In addition, we struggled with finding value in global markets and we were too early in our accumulation process in certain investments (a case of premature accumulation as it is well known in value investing literature). That said, we believe that the portfolio is well positioned for a recovery in 2018 and we look forward to becoming more fully invested as the year progresses.

As for our investments, there was some positive news during the quarter for two of our largest holdings, Reckitt Benckiser and Diageo, coming out of China. Tariffs for 187 product categories dropped from an average 17.3% to 7.7% as of the 1st of December 2017 according to the Chinese Ministry of Finance. The Chinese government wants to help consumers access quality and specialty products that are not widely produced locally. Product categories include infant formula, which is positive for Reckitt, and some spirits, which is positive for Diageo.

Final thoughts

We are positive on the global outlook for 2018 despite the late cycle investment environment, and we are positioning our portfolio accordingly. However, our view will change briskly in the event of an increase in geopolitical risk, which is the key risk for 2018 in our view.