Mechelany Advisors’ MODEL PORTFOLIO has been running in a fully transparent way since January 1st 2014. Its Purpose is to implement the conclusions of our research analytical process in a portfolio managed using institutional liquidity, diversification, risk management and asset allocation processes. In our TRANSACTION UPDATES we keep our reader informed in real time of the transactions in our MODEL PORTFOLIO
In a record year for most asset classes, our MODEL PORTFOLIO delivered its best year ever with a +33.32 % performance in 2019, ending the year with a bang at +9.14 % increase in December.
With 6 full years of management completed – 6 continuous years of positive double-digit performances – our MODEL PORTFOLIO registered a cumulative performance of 230.47 % and an average performance of +22.27 % per annum.
In other words, the MODEL PORTFOLIO more than TREBLED in value in 6 years.
We did experience volatility in 2019, with a sharp drawdowns in May and November 2019 and very strong months in January and December.
As a matter of comparison, the MSCI World Equity Index increased by +25.19 % in 2019 and delivered a cumulative performance of +41.95 % since the inception of the MODEL PORTFOLIO in January 2014. The Average performance of the Index stands at +6.72 % per annum
The outperformance of our actively managed MODEL PORTFOLIO, when compared to a passive investment in the MSCI WORLD INDEX, is considerable, representing a cumulative outperformance of + 188.47 % and an annual outperformance of + 15.84 % per annum.
Besides the fact that we have delivered positive performances every year of the past 6 years while the World markets had two negative years and the fact that we have outperformed the benchmark significantly each and every year, the table below summarizes the management metrics in comparison to the MSCI WORLD INDEX as at the end of Dec 2019.
As can be seen, the outperformance is considerable both in absolute terms and in risk-adjusted terms as the Sharpe Ratio of our MODEL PORTFOLIO stands at 2.72 against 0.50 for the MSCI World Index.
US$ 10’000 invested in our MODEL PORTFOLIO would be worth US$ 33’320 six years later against $ 14’198 if invested in the MSCI World Index
Undoubtedly, 2019, surprisingly, was a record year for equity markets despite low growth and declining corporate earnings, but extremely accommodative monetary policies lifted equity markets through massive valuation expansion.
The following tables summarize the gross performance of the world major equity indexes
Our Model Portfolio is in the top league with the US NASDAQ and the Chinese CSI 300 Index despite having been hedged a large part of the year, and in particular in the last few months.
However, our strong emphasis in Chinese equities, our US small-caps, our bond positions and our precious metal exposure coupled with our active risk management have delivered this record yearly performance.
As our regular readers know, we are extremely worried by the speculative nature of the rally in US equities and the extreme concentration in very few mega-cap stocks, a sure sign that the end of the secular bull market in US equities in near.
As a result, we end the year with 87 % cash in our portfolio and a 60 % short position in equities against only 25 % long equities.
As the details of our MODEL PORTFOLIO below show, we have been short the FAANGs for quite some time now, being taken on the wrong footing by the last quarter irrational melt-up in these stocks.
As a matter of illustration, the chart of Apple Inc, up +106% this year despite declining corporate earnings, illustrates the state of irrational exuberance reached in US equities,
This exuberance is confirmed by all the sentiment indicators that are all showing excessive greed and optimism, from the CNN Fear and Greed indicator to the Sentiment trader short and medium-term indicators.
Another worrying factor is the extremes reached in the optimism of individual investors – the most in fifteen years – and the extreme divergence with professional investors who are the most pessimistic since 20 years.
Conversely, we have made extremely good money on our Chinese equity exposure as Chinese equities pulled out of their multi-year consolidation from extremely depressed levels in 2019.
Our stock-picking was also very favorable wit several individual positions delivering 100 or even 300 % as was the case with TONGDA GROUP in China or MICROBOT MEDICAL in the USA.
Commodities and Precious Metals played a very positive role as well, as the metals delivered significant performances and we expect much more form Silver and Platinum ahead
Silver and Platinum
Finally, we also made money on European stocks albeit at a lower rate and played the bond markets relatively well, including Argentina where we expect significant returns next year.
We are extremely cautious about going into the first quarter of 2020 as the 2019 year-end rally is showing every sign of a trend ending speculative blowoff that should lead to a significant wash out in US equities in the first few months of the year.
We are soon entering the earnings reporting season and we do not expect it to be particularly good. We are extremely worried about the potential deterioration of conditions in the Repo market, the excessive leverage in corporate debt, the ballooning US budget deficit and the political risks associated with the elections, the impeachment of the US President, the North Korea situation and the Iranian situation.
On the macro-economic side, we fear a major back-up in global bond yields as inflation will prove to be stubbornly high.
We remain confident that China is pulling out of its economic slowdown and the recent opening of its financial and insurance markets will trigger a flow of investments towards its bond and equity markets.
We see the US Dollar weakening significantly in 2020 with the EUR and emerging market currencies appreciating. We have increased the exposure of our MODEL PORTFOLIO to 32 % at the beginning of December.
As a consequence, Gold, Silver, and Platinum should embark on the second leg of their bullish journey.
We wish you a Very Happy 2020 and will do our utmost best to make it another positive year for our MODEL PORTFOLIO
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