Time flies. Tong’s Absolute Returns Portfolio has just turned six months old, in what certainly seems like the blink of an eye. Still, plenty has happened in the global markets during this relatively short time, including bursts of high global market volatility — for instance, the Standard & Poor’s 500 index dropping sharply between mid-July and early August before quickly rallying to fresh record-highs — and, of course, the much-anticipated US Federal Reserve’s kicking off of the interest rate cut cycle with a big 50-basis-point reduction.
Fed chair Jerome Powell went to great pains to emphasise that the outsized cut was to protect the still-strong job market as inflation declined, and not because it has fallen behind the curve. Against this backdrop of heightened uncertainties, the Absolute Returns Portfolio performed very well — chalking up total returns of 14.9% since it started on March 21, 2024.
We have made several changes to the portfolio’s stock composition since its inception, reflecting changes in expectations and where we see better opportunities. Save for the short periods between the selling of a stock and reinvestment of the proceeds, we have kept the Absolute Returns Portfolio fully invested — even though we are exercising more caution as market volatility rises. As we explained at the outset, our objective is to grow a retirement fund. And when you invest for the long term, timing the market becomes secondary. Time in market, on the other hand, is very important — because of the power of compounding.
This portfolio is intended to be non-speculative for obvious reasons. Capital preservation is the priority. Case in point: The portfolio has a lower-than-market-average risk; the beta is only 0.8. Despite its relative defensiveness, Tong’s Absolute Returns Portfolio has outperformed the MSCI World Net Total Return Index, which is up 8.3% over the same period (see Chart).
Of the original 10 stocks, we have since disposed of Sun Hung Kai Properties (mainly so we could reinvest in stocks that we believe have better prospects in the near-medium term), the Vanguard S&P 500 ETF (VOO) and Microsoft Corp. The rationale for selling the latter two stocks is similar — we are cautious on the generative artificial intelligence (AI) fuelled tech rally. We thought the storytelling was excessive and increasingly difficult to justify, given the pace of the monetisation of AI applications as it unfolds. The Magnificent 7 mega cap tech stocks — which account for almost one-third of the total market cap of S&P 500 companies — are trading at high valuations. And high stock valuations mean prices will be more susceptible to bad news (that is, higher risks).
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Two of the three new stocks we acquired are related to the residential property sector. DR Horton is one of the largest homebuilders in the US and CRH is a building material and solutions provider. With US interest rates in a new downcycle, cheaper borrowing costs (better affordability) should stimulate housing demand. The Fed’s latest dot plot indicates that the federal funds rate will drop faster than previously expected, by 1% this year and another 1% in 2025 to 3.4% and, beyond this, further lowered to a median estimate of 2.9%. Both DR Horton and CRH have performed well. DR Horton has gained 34% since our acquisition in June 2024, and CRH has gained 5.8% in the roughly six weeks since we bought the stock.
The other new stock we acquired was more opportunistic. The share price of cybersecurity tech company CrowdStrike Holdings fell sharply after its software update crashed millions of Windows systems and caused a global IT outage in July. Yes, there are valid concerns over reputational damage and perhaps liability claims due to the outage in the short term. Importantly, though, the outage was not triggered by a security breach, that is, the integrity of the company’s underlying cybersecurity business is intact. As such, we see its risk-reward proposition as attractive.
The Absolute Returns Portfolio has a relatively heavy 40% weighting in US stocks (four of the 10 stocks). We believe the US market will continue to outperform in the near-medium term. It has the highest concentration of tech companies with strong growth prospects, many of which have a global presence. And its economy is more resilient and expanding faster than much of the developed world.
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The two Singapore-based banks, DBS Group Holdings and Oversea-Chinese Banking Corp, too, have outperformed the broader global market index, up 27.7% and 22.1% respectively in the last six months or so. We remain confident about their prospects. Meanwhile, the share price of one a leading sogo shosa (Japanese wholesale company), Itochu Corp, showed resilience, holding on to a 23.5% gain from our initial investment cost, despite being buffeted by the strengthening yen that has driven the Nikkei 225 lower from its alltime record-high levels reached in July 2024.
We retained two Hong Kong/China stocks in our portfolio, both of which have benefited from the ongoing rally driven by the unprecedented monetary stimulus announced by the People’s Bank of China on Sept 24. Key measures include offering RMB500 billion in swap facilities for financial institutions to purchase stocks; RMB300 billion in relending facilities with a 1.75% interest rate for listed companies to buy back shares; lowering existing mortgage rates; and reducing down payments. In addition to the monetary stimulus, the Chinese government also announced a rare one-time cash allowance for those in extreme poverty to further boost the economy. These combined actions have significantly improved market sentiment, pushing the Hang Seng Index up 23% since Sept 23.
The recent rally has made Tencent Holdings the best-performing stock in the portfolio, up 64.9% since our acquisition. The company continues to generate strong cash flows and is taking steps to boost shareholder value, including raising its share buyback programme and annual dividend. A new video game, Black Myth: Wukong backed by Tencent, which made news headlines globally in August as the most played game on a major online platform, may have helped further lift sentiment. Swire Properties, on the other hand, also turned profitable for us last week. Our investment in this would be one for the long haul. At current low valuations of only 0.36 times book value, there is very limited downside risks, and the potential risk-returns is good.
Airbus (our sole exposure to Europe) has been somewhat of a disappointment for us. The stock is down 23.4%. The problem is not that demand is weak or weakening. On the contrary, its current order backlog is nearly 12 years, based on 2023 delivery rates. Demand from airlines remains strong. The issue is persistent supply chain disruptions, where parts shortages have forced it to cut production targets, resulting in delivery delays for several aircraft models. This one needs investor patience (more than we had initially expected), which admittedly is hard to find these days.
The truth is that very few actually invest for the long term and are content with 5% to 8% consistent annual returns. It is why Berkshire Hathaway stands apart, for its discipline in value investing and patience. It is also why Berkshire is the first non-tech US company to break into the trillion-dollar club (market capitalisation surpassing US$1 trillion).
As we said, our portfolio is intended to be long term, a retirement fund for which capital preservation is the priority. Our minimum annual returns target is 10% on average. It may sound overly “modest” for some but, remember, because of the power of compounding, the eventual returns, with a consistent 10% annual growth, will be huge. We have met this goal in the first six months since inception, but it is early days yet. We hope to emulate the long-term success of Berkshire for the Absolute Returns Portfolio.
The Absolute Returns Portfolio gained 2.2% for the week ended Oct 2, lifting total returns since inception to 14.9%. The top gainers were Tencent (+16.2%), Swire Properties (+14.9%) and DR Horton (+1.8%). The top losing stocks last week were Airbus (-5.4%), CRH (-2.6%) and CrowdStrike (-2.2%).
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The Malaysian Portfolio fell 0.4%, performing better than the benchmark FBM KLCI, which fell 2%. Insas Bhd – Warrants C (2.5%), Kumpulan Kitacon (2%) and IOI Properties Group (1%) were the top gainers for the week; the biggest losers were Kim Loong Resources (-4.6%) and LPI Capital (-3.2%). Total portfolio returns now stand at 196.9% since inception. This portfolio is outperforming the benchmark FBM KLCI, which is down 10.4% over the same period, by a long, long way.
Disclaimer: This is a personal portfolio for information purposes only and does not constitute a recommendation or solicitation or expression of views to influence readers to buy/sell stocks, including the particular stocks mentioned herein. It does not take into account an individual investor’s particular financial situation, investment objectives, investment horizon, risk profile and/ or risk preference. Our shareholders, directors and employees may have positions in or may be materially interested in any of the stocks. We may also have or have had dealings with or may provide or have provided content services to the companies mentioned in the reports.
