Dear Investors,
I’m pleased to report that the Family Fund gained +17.2% for the year with a largest monthly drawdown of -3.6% vs the market which made nothing and had a drawdown of -8.8%. This means that the Fund made a much larger return in 2016 using more than 2x lesser risk. The outperformance has been encouraging given a year that would be described as tumultuous.
Year of Dark Horses
2016 would be remembered as a year of Dark Horses. The year started with a sudden market collapse of -9% triggered by China concerns, continuing from the horrors since mid-2015 which saw the market down -14% for the fully year. While the market rebounded strongly after, the Dark Horse results of Brexit in July and a Trump win in November punctuated the year as major risk events. On hindsight, these have been excellent entry points to buy into quality stocks which we have done. But ex-ante, one would imagined them to trigger a sell-down and not a rally. This has caused many other large funds to miss the rally and underperform.
Early Defensive Approach in Q1’16
The Fund benefitted from a defensive approach early and avoided a big loss in Q1. This allowed us to preserve capital and confidence to buy stocks aggressively post-Brexit in July, making up to 20% returns in the space of 4 months.
Buying DBS despite the headwinds
One of the key quality stocks that we bought was DBS at an average entry price of $14.5. DBS had collapsed from a high of $21 last year on a faltering energy market where the price of oil fell to below $30 in Q1’16. This has put significant pressure on its loan book which is exposed to local oil and gas services companies. However, at $14.5, the price-to-book ratio of DBS is 0.9x. This means that the market expects the current equity in DBS to be worth 90c on the dollar and DBS to not be profitable for the future. Based on stress-tested scenarios on its loan book, and projecting future growth, I find that scenario to be extremely unlikely. This decision turned out well so far with the stock price reaching around $18 at the end of the year, returning nearly 25%.
Overall, the Fund navigated a difficult year well with the right decisions at the right time. 2017 is looking to be an interesting year with the key points being Trump’s policy slant as the new president and the fate of the EU with Brexit.