RDR Capital’s MENA portfolio is up 8.8% in 2018 and up 25.0% since inception (the portfolio was incepted on the 1st of October 2016). Our global portfolio is up 2.8% in 2018 in GBP terms (down 2.7% in USD terms) and up 14.7% since inception (the portfolio was incepted on the 1st of January 2017).
We have liquidated our MENA portfolio as at 31 December 2018
We have decided to liquidate our Middle East and North Africa (MENA) portfolio as at 31 December 2018 as our outlook has turned quite negative over the medium term. In addition, we have decided to focus all our efforts on the global portfolio. As such, we will no longer comment on the MENA markets going forward.
2018 was a challenging year for our global portfolio
As per the above, we will focus all our efforts on our global portfolio going forward, and our commentary will be released on an annual basis.
Needless to say, 2018 has been a challenging year, with significant headwinds including a global slowdown in growth, spearheaded by a slowdown in growth in the Chinese economy and exacerbated by a fear of a trade war between the US and China. The slowdown in growth is occurring as central banks are reducing their ultra-loose policies, putting additional pressure on global liquidity.
As such, we have exited all our resource related positions, including our positions in both BHP and Rio Tinto. Our positioning has been increasingly defensive with a significantly high cash position (32.8% as at 31 December 2018), as well as our largest positions being in high quality companies with low leverage, and healthy cash generation and operating margins.
As at year-end, our largest positions are in Diageo and Reckitt Benckiser. Both are very well run companies with leading market positions and strong brands, giving them the ability to perform well in case of further market turmoil in 2019.
We have also initiated a position in Vodafone during the year. Vodafone’s share price has performed quite negatively in 2018 due to the company’s aggressive expansion strategy and high leverage. Despite the negative market sentiment, Vodafone has continued to generate strong free cash flow in 2018, supporting its ability to pay a c8% dividend yield. Both the dividend yield and the ability of Vodafone to improve its operational performance in 2019 made the company an attractive investment for us.
In addition to Vodafone, we have initiated a position in China’s Tencent Holdings during 2018. This is our only direct exposure to the Chinese equity market and it is a speculative investment representing c2.5% of the portfolio. Tencent’s share price has dropped significantly during the year and the company is well positioned to benefit from the resumption of video game approvals in China in 2019.
Lessons of 2018: The value trap strikes again!
The main mistakes of 2018 have been falling in value traps yet again, the eternal pain of the value investor. Three positions in particular could have waited for a better entry point: Reckitt Benckiser, Vodafone and Spire Healthcare. Spire Healthcare in particular is one that we struggled with. It is a position that we have held, painfully, for a while. We decided to add to our position during 2018 essentially to “average down”. We added to the position when the share price was close to its net asset value (the value of the company’s owned hospital properties), but the share price continued to drop well below the NAV as Spire’s NHS related business continued to suffer.
Another lesson from 2018 was our reluctance to add to our position in Ocado, which performed exceptionally well during the year. Had we added to our position, our performance for the year would have been improved significantly.
The year ended with a challenging December, during which we reduced our short positions and increased our exposure to our key investments. However, the market sentiment turned very negative and our performance dropped from c+5.0% to +2.8%. We could not have foreseen this change in sentiment during a month that historically has proven to be positive for global equities.
We remain very cautious entering into 2019. As such, our strategy for 2019 will be to be quite nimble, with structural short positions and large cash levels to be deployed opportunistically.
All the best wishes to our readers for a prosperous 2019, despite the challenging global economic environment.