Ricapitolare.

May 2023.

Performance.

Returns came at +5.69% in May (+3.57% at constant currency), leaving the year-to-date performance of the portfolio at +28.13% (+27.57% at c.c.).
This compares to a +5.64% (+1.54% at c.c.) for the S&P500 non-financials (SPXN) over the same period, whose year-to-date performance is +12.74% (+12.38% at c.c.).

Since inception in January 2022, the total return has been +23.39% (+24.12% at c.c.), which annualised corresponds to a CAGR of +16.05% (or +16.54% p.a. at c.c.).
This compares to a -1.65% (-8.28% at c.c.) for the SPXN over the same period, which annualised corresponds to a CAGR of -1.17% (or -5.94% p.a. at constant currency).

Note:
Performance is measured following the money-weighed return (MWRR) methodology.

Contributors.

The top contributors to market performance last month were Meta Platforms (+2.03%), Mader (+1.48%) and Adobe (+1.28%).
On the other hand, the top detractors to market performance were LVMH (-0.61%), Auto Partner (-0.49%) and Brookfield (-0.08%)

Year to date, the top contributors to market performance have been Meta Platforms (+13.77%), Mader (+4.32%) and Temenos (+4.16%), with Water Intelligence (-2.95%), ZIGExN (-0.18%) and Kelly Partners (-0.16%) as the main detractors

Since inception, the top historical performers have been ASML (+63.47%), Mader (+56.94%) and Games Workshop (+36.92%), leaving the top underperformance positions to Water Intelligence (-22.61%), Brookfield (-2.45%) and Temenos (+0.50%).

Activity.

Stakes in CentralNic and Dotdigital were sold at a loss of -6.16% and a gain of +11.67% (respectively) for similar reasons. Although the conviction levels were higher in the second holding, it was not an enjoyable experience to discover that both of these enterprises recently shifted how they describe their operations, highlighting and, in my view, over-promoting the use of AI in their activities when this was never mentioned before.
I am not a big fan of tendencies and time may prove this decision to be a mistake, but I consider it a red enough flag to prefer seeing how it unfolds from the sideline.

Below are some snapshots from CentralNic’s most recent trading update, as well as Dotdigital’s report on enhanced AI functionalities across its platform. Although I believe the correct use of AI algorithms effectively improves both CentralNic’s Online Marketing segment and Dotdigital advertisement targeting abilities, the recent and sudden shift seems to be more an attempt to gain interest from potential investors than a strategic decision.

The proceeds from these sales were used to increase other holdings in portfolio, as well as initiating a position in Brookfield Corporation. I am simply amazed by everything I’ve read and listened to so far about Bruce Flatt’s abilities, discipline and patience concerning capital allocation. Valuation seems to be more appealing for the parent company (BN) than the recent split-off (BAM) at current levels, probably translating the market worries about the risks related to a more direct exposure to the underlying assets of the former one.

Look-through metrics.

In the last twelve months, the weighted owner’s earnings (defined as EPS growth plus dividends collected) of the portfolio has increased by 8.5%.

On average, LTM cash returns on capital employed are 28.5% (20.2% when measuring free-cash-flow).
The five-year CAGR of top line, EPS and FCFPS is 18.6%, 17.2% and 26.7%, respectively.
Profitability levels in the last twelve months are 65.0%, 24.6% and 19.6% for gross, operating and FCF margins -respectively- with an efficiency (measured as NPAT conversion to FCF) of 117.5%.
Indebtedness (measured both as EBIT/Interest Expense and Total Liabilities/BV) is 52.7 times and 134.1%, respectively.