Iolite Partners Q3 Letter: Thoughts on portfolio positioning

Iolite Partners Q3 Letter: Thoughts on portfolio positioning

For the quarter ended September 30, 2014, Iolite Partners’ portfolio returned net +5.5% in EUR (-1.3% in USD). Since inception on October 1, 2008, the portfolio has generated net cumulative returns of +145.5% in EUR (+126.4% in USD) and annualized net returns of +16.1% in EUR (+14.6% in USD).

Net return: no leverage, after all fees & expenses (no mgmt fee, 25% success fee after 4% hurdle).

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Iolite Partners: Market Review

Global equity markets continued to rise, with a strong recovery seen in China. The US dollar strengthened against most other currencies in September, as the US Federal Reserve noted a gradual improvement in outlook for the economy and said it expected to end its extraordinary bond-purchase program in October and start raising interest rates from near-zero back to more historically typical levels next year. Meanwhile in Europe, ECB chairman Mario Draghi announced a plan to purchase more than EUR 1 trillion of asset-backed securities to encourage lending. Alibaba, China’s largest e-commerce company, went public on the New York Stock Exchange in what was branded the biggest-ever listing in the US. Buyers did not seem to care about the deal’s structure, which failed to give shareholders ownership or control of the company’s assets. Geopolitically, the situations in the Ukraine and the Middle East showed no signs of relief. Student protests in Hong Kong for more democracy gained momentum late in the quarter. The Ebola virus continued to spread in West Africa.

Iolite Partners: Portfolio Review

With a quarterly net performance of 5.5%, the portfolio outperformed the index by 20bps. I sold two positions at a net cumulative gain and added back a position that the portfolio had previously held.

Iolite Partners: Quarterly review

For the quarter ended September 30, 2014, the portfolio returned +5.5% in EUR (-1.3% in USD), net of all fees. Since inception on October 1, 2008, the core portfolio has generated net cumulative returns of +145.5% in EUR (+126.4% in USD) and annualized net returns of 16.1% in EUR (+14.6% in USD). A euro invested at inception has turned into €2.46. I consider unleveraged long-term absolute performance far more important than relative performance against a benchmark.

Key contributors to the portfolio’s performance for the quarter included a strengthening of the US dollar (if performance is measured in euros), strong operating results of some holdings, multiple expansion of Chinese and Japanese positions, as well as a strong run of an Australian investment (Cabcharge) that I exited after a holding period of just a few months. However, the portfolio’s performance was hurt by a position in a US technology stock, Telenav Inc (NASDAQ:TNAV), and a new holding that dropped 16% in market price just after I purchased it late in the quarter.

Iolite Partners

Thoughts on portfolio positioning

I have managed this portfolio for six years now and thought I would share a few thoughts on my investment approach and how it has changed over the last few years, along with the global market environment and many lessons learned. Although it is common to evaluate a manager’s investment skill based on past returns alone, I think it is more appropriate to concentrate on the “how” – his investment decisions and the reasoning behind them considering the information available at the time. Was the manager just lucky, did he just ride a trend, and how repeatable is his success going forward?

When I started out in the midst of the financial crisis in 2008, it was very easy to pick big, stable businesses at low valuations (meaning: low risk, high return expectations). For example, eBay was trading at less than five times free cash flow – at this valuation, while the risk of permanent capital loss was very small, the chance to generate returns greater than 20% was very high (either supported by cash generation or multiple expansion). I ended up buying a basket of stocks with a similar profile, some of them well-known names (eBay Inc (NASDAQ:EBAY), Carrefour SA (EPA:CA), MUNICH RE (BIT:MUV2), Kraft Foods Group Inc (NASDAQ:KRFT), Starbucks Corporation (NASDAQ:SBUX), Walgreen Company (NYSE:WAG), McDonald’s Corporation (NYSE:MCD), Microsoft Corporation (NASDAQ:MSFT)) but also smaller, lesser-known names (Orpak, Aspen Insurance Holdings Limited (NYSE:AHL), A.C. Moore, GFK, Paypoint).

Iolite Partners

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