Vltava Fund 4Q21 Commentary

Hedge Fund Pay Jumps As Profits SurgeAfter 2 bumper years, pay in the hedge fund market is increasing. A few of the biggest names in the market have paid themselves significant wages after acquiring big earnings in 2020, and it appears the same theme could play out for the year ahead. Q3 2021 hedge fund letters, conferences and more Read More2021
Recalling upon the past year, one could describe 2021 as a year of very strong growth in success amongst the business we hold in our portfolio. The revenues of these business grew even quicker than did the Funds NAV. Certainly, if we determine the NAV of the Fund versus the present success of the business we own, then the Vltava Fund portfolio is more affordable at the end of 2021 than it was at its start, in spite of the past years significant development in NAV. For me personally, that is the primary takeaway from a look back.
Vltava Funds Portfolio Update
At the beginning of the year, we sold the shares of Union Pacific Corporation (NYSE: UNP). In the last quarter of the year, we offered rather against our will both common and choice shares of Teekay Lng Partners, L.P. (NYSE: TGP). We had anticipated to make much more from it through coming years.
There were 2 new additions to the portfolio last year– shares of the insurance broker Willis Towers Watson PLC (NASDAQ: WLTW) and shares of the retail company Williams-Sonoma, Inc. (NYSE: WSM). There were many more deals in the portfolio over the previous year. We have been acquiring essentially all the stocks we hold, numerous of them repeatedly.
Our largest positions in the portfolio are mainly of an older date and the more recent ones, purchased let us say within the previous 2 years, are rather at the bottom of the table according to size. Nevertheless, likewise amongst newer positions are companies that may well remain in the portfolio for a very long time. Stocks such as JPMorgan Chase & & Co. (NYSE: JPM), Lockheed Martin Corporation (NYSE: LMT), CVS Health Corp (NYSE: CVS) or NVR, Inc. (NYSE: NVR) surely have this capacity.
Most of the portfolio remains purchased industrialized markets. In emerging markets we have three positions (Samsung, Sberbank and Quálitas Controladora), and by type our financial investment into the Japanese Nikkei 225 index varies somewhat from the rest of our portfolio.
3 companies that the majority of pleasantly surprised us by their success last year are Sberbank Rossii PAO (MCX: SBER), Bayerische Motoren Werke AG (ETR: BMW) and Laboratory Corp. of America Holdings (NYSE: LH). Last years revenue per share is anticipated to be 55 roubles and the dividend around 27 roubles. If we take into account that we first bought Sberbank stock for 90 roubles, then, relative to the initial purchase rate, the current revenues yield (the inverted value of the P/E) is 61% and dividend yield 30%.
BMW is another intriguing case. In a year that was marked by a lack of chips and therefore also by lower international vehicles production, BMW accomplished a brand-new historic record– by far– in its profitability. That is regardless of its producing about 10% less cars and trucks than it otherwise would have had there sufficed chips. Usually, demand for cars and trucks today considerably exceeds supply and cars and truck manufacturers who have so-called prices power are benefiting from record margins. There is even a reasonably large unmet built up demand, which ought to continue to bring carmakers good sales and margins likewise in years to come. In BMWs case, its profitability will likewise be pushed up by its plan to increase BMWs stake in its Chinese joint venture from 50% to 75%. China is a rewarding and immense market for BMW. We can state something similar about BMW if we think about Sberbank to be at the top in terms of profitability ratios. The typical ROCE (return on capital used) over the previous ten years for BMWs vehicle company is about 58%. ROCE is among the primary signs of a companys capital effectiveness, and it is difficult to discover a similarly high number either among vehicle business or amongst business in numerous other sectors.
LabCorp is making a lot on COVID-19 PCR tests. While 2 years ago this organization did not exist at all, today it is driving the businesss big development in success. Although we expect– and hope– that the variety of tests carried out will drop considerably quickly (and by the way, LabCorp is able to do 250,000 of them daily), LabCorps success over the previous 2 years has extremely happily surprised us.
Of course, not all of our business are doing better than we anticipated. Lockheed Martin Corporation (NYSE: LMT), Qualitas Controladora SAB de CV (BMV: Q) and Magna Prima Bhd (KLSE: MAGNA) fell rather brief of our expectations last year. In Magnas case, the trouble is that it does not have the same kind of prices power vis-à-vis its clients as does BMW, and the lower and irregular production is negatively shown in its success.
As a vehicle insurance company, Quálitas had a terrific year in 2020. Due to lockdowns, individuals drove less and there were significantly fewer accidents. Fewer cars and trucks were stolen, too, and all this together indicated suddenly high earnings for Quálitas. Success was last year moving back towards normal, as we had anticipated. That suggests it was lower, however we had actually not expected it to come down rather a lot. All in all, the success of our business last year was roughly in line with our expectations, possibly a little better. All the companies, consisting of even those that disappointed us a bit, stayed highly profitable and, most importantly, we anticipate the total development in success to continue this year.
In the brief run stock rates might be wholly disconnected from what is in fact going on and from the profitability of individual companies, share rate developments in the long run need to track the development of business success. We bring into the Vltava Fund portfolio stocks of business that are frequently extremely lucrative over the long term and whose capability to attain revenues has actually been evaluated in a range of financial conditions. In taking this method, we may not see the prices of our stocks miraculously and rapidly shooting up, but, with small exceptions, we most likely also will avoid stocks that lose us cash.
Character Of The Market
What was then just a faint and incipient hint has actually considering that changed into rather a brutal bear market in some market segments. For some time, extremely popular among speculators and financiers were stocks they related to as ingenious, disruptive, stocks they believed merely own the future and are worth investing into at virtually any rate (and frequently no matter how suspicious the business designs of these companies). Comparable investment opinions and themes are absolutely nothing unusual or new in the markets.
At the end of that summer, however, it had actually seemed that common sense and an understanding that a stocks purchase rate actually matters was gradually returning to investing. Today, it is rather obvious that the speculative mania of 2020 will end likewise as did the speculative mania of 2000, and that suggests by dramatic decrease in the costs of stocks that were at the centre of all the speculation.
We had prevented these shares when they were skyrocketing, and maybe we looked silly for doing so. We did not care, however, because we are not bettors. Now, nevertheless, we can relax and view how these titles are understanding and collapsing that we have nothing to do with them. That is a far more enjoyable feeling. We think that a number of these stocks are still too pricey and that their declines are far from over. In contrast to this, the view of our portfolio is much calmer. Of all our positions, we have only one that is somewhat at a loss (Burford Capital). All the others remain in the black varying from a few percentage points to several hundred percent.
Present Topics
Current market events are dominated by the following three interrelated topics: sluggish retreat of the pandemic, interrupted supply chains, and inflation.
The pandemic is gradually receding, which is good, however, the truth be told, at the start all of us probably pictured it would come to an end faster. What is essential from the financial investment perspective is that, even as numerous constraints are likely still to continue for some time, a total shutdown of the economy as taken place in the spring of 2020 is unlikely to happen. Be that as it may, we are aiming to spend for the presumption that the infection will remain with us for still a long time. Some sectors (tourism, airline companies, hotels, restaurants) continue to be extremely much affected, so we would rather prevent these. A lot of other sectors are more or less near to regular and in some cases even are doing much better than normal. On the other side of the proverbial coin, substantial federal government deficit spending in the majority of big nations have bubbled to the surface area in the forms of large corporate revenues and a big boost in the savings of the population. The high cost savings rate suggests big accumulated and disappointed demand on the consumers side and, combined with low rates of interest, represents the potential for additional economic development. The environment of gradually declining pandemic in combination with financial normalisation has had a very positive effect on the profitability of LabCorp, JP Morgan and Sberbank in particular.
Numerous other constraints and economic closures have impacted adversely upon the smooth running of supply chains all over the world. The notion of a smoothly working global economy has actually shown subject to major fracturing. The changing structure of customer need, which has actually partially moved from unavailable services towards goods, has actually likewise contributed, and the world has not had the ability to react adequately. All these inefficient relationships will level gradually, due to the fact that both firms and people have the ability to adapt to new conditions. Ironically, disturbance of supply chains has actually had a very positive impact on the success of BMW and Samsung and, on the other hand, a negative impact on the profitability of Magna and Lockheed Martin.
The most significant concern however remains inflation. It is much higher and more persistent than a lot of reserve banks had anticipated. The action of central banks remains typically inadequate. The U.S. Federal Reserve and European Central Bank, for circumstances, have actually not yet lifted a finger versus inflation and are most likely praying that it will go away by itself. There is an obvious asymmetry in their technique to fixing issues. As quickly as inflation seems low, main banks loudly announce that they will do “whatever it takes” to push it higher, but as soon as inflation leaves hand to the upside, they do nothing. As I have stated previously, part of the issue may be that central lenders are usually so young that they have never in their lives had to combat greater inflation. The general environment with record low unfavorable genuine interest rates and extremely pro-inflationary spending plan deficits is still conducive to high inflation.
We have been stating already for some time that we as investors will be operating in an environment of unfavorable real rates in the long term and that the scissors in between inflation and interest rates will tend to open up. We anticipate more of the same as we go forward.
In our case, business like BMW, Crest Nicholson and Sberbank are presently benefiting most from the inflation. Inflation, as a general boost in the rate level of services and products, tends to push the numbers up in nominal terms on business income declarations and balance sheets. An excellent historical example is supplied by the stock markets of nations that are or have been in the past having a hard time with high inflation for a longer time (e.g. Argentina, Brazil, Israel).
The existing high inflation also will tend to rise stock indices in small terms. There will be a pull of war in between rising revenues and the effect of potentially rising rate of interest. If the latter were to increase really substantially, they would press stock (and other asset) valuations downwards. Main banks of the majority of western countries have their hands connected on raising rates, however, as they know very well that oftentimes extremely over-indebted federal government budgets would not have the ability to sustain it. And so the path of least resistance is marked by deeply unfavorable genuine rates, which on the one hand assistance to wipe away the genuine level of government debt but on the other deteriorate the genuine level of peoples deposits just as quickly. I do not like this scenario, however it does not matter what I dislike or like. We understand that we must invest not according to how we would like the world to look however according to what we think it will look like. And I have to state that the environment I have actually described above, and which is likely to be with us for the long term, is rather conducive to long-lasting growth in stock rates.
Upgraded on Jan 6, 2022, 3:23 pm

Looking back upon the previous year, one could describe 2021 as a year of really strong development in success among the business we hold in our portfolio. If we measure the NAV of the Fund against the present success of the business we own, then the Vltava Fund portfolio is less expensive at the end of 2021 than it was at its beginning, in spite of the past years substantial growth in NAV. 3 business that a lot of pleasantly surprised us by their profitability last year are Sberbank Rossii PAO (MCX: SBER), Bayerische Motoren Werke AG (ETR: BMW) and Laboratory Corp. of America Holdings (NYSE: LH). While 2 years ago this organization did not exist at all, today it is driving the companys substantial growth in success. All the companies, including even those that disappointed us a bit, remained strongly rewarding and, most significantly, we anticipate the general development in success to continue this year.

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