At Nintai we believe our selection criteria (see Our Investment Strategy and Portfolio Selection) for inclusion in the portfolio will produce outperformance of the general markets in the long term. With a focused portfolio we must be confident about key specific corporate data and our projections. We believe this focus is the basis – along with great companies – to our returns over the past 15 years. However, our portfolio doesn't operate in a vacuum and sometimes we need to step away and look at the totality versus the markets themselves.
The majority of our investment partners test our returns against that never smiling enemy – the dreaded index. For Nintai, we use a composite of the Morningstar US Market Index and the Vanguard Total International Stock Index (weighted by Nintai’s portfolio holdings) as a proxy. We use this because our mandate gives us freedom to invest in any size company both in the US and around the world. Currently we are weighted roughly 75% US equities, 20% global equities, and 5% cash.
While we are generally agnostic on where the markets are trading, (both historically and in the future as predicted by the financial wizards of Wall Street) we try to demonstrate to our investors why we believe the portfolio is positioned to outperform the markets in general.
We do this in two ways – first is by sharing a detailed evaluation of each holding including our financial models and key assumptions. These generally include a two page written overview along with a valuation spreadsheet that consists of seven (7) tabs ranging from a DCF calculation to allocation of capital. The second is a high level evaluation of the stocks aggregate numbers versus the indices previously mentioned. It’s this section of the report I’d like to talk about today.
Low Cost, High Profitability, High Growth
For sustained outperformance it is critical to toe the line to one of the more archaic and overused investment terms – buy low, sell high. We believe this is accurate but not the whole story. At Nintai we believe the underlying formula should consist of buy cheaply, buy profitable, and buy high growth companies. If you get that right, over time you should hopefully be able to sell high at a later date. To see if our portfolio meets such criteria lets take a look at the measures we use in our reports to our investors.
First is to buy low. Assuming we have done our job in purchasing equities at a discount to fair value we assume this criteria can be met. However, what we are looking for is a relatively easy calculation to show the portfolio’s cheapness versus the overall markets. For this, we calculate the aggregate Price/Earnings (PE) ratio of the portfolio (20 companies in total) and use the S&P 500 and S&P 1500 PE averages. While not the most detailed – or appropriate – measure, it gives us a reasonable proximation of the markets. For the month of November, the Nintai portfolio’s aggregate PE was 14.7. The S&P 500’s aggregate PE was 17.1 and the S&P 1500 was 18.2. In this instance, our portfolio PE is roughly 16% below the S&P 500 and 19% below the S&P 1500. This represents a portfolio cheaper than the overall markets. We are comfortable our portfolio is undervalued both at an individual and market level.
The next is profitability. For this we calculate both Return on Equity (ROE) and Return on Assets (ROA) for the portfolio and compare this versus both the S&P 500 and S&P 1500. For the month of November the Nintai portfolio had a Return on Assets of 17.2% and a Return on Equity of 26.4%. Compared to both the S&P 500 and S&P 1500 the Nintai portfolio achieved roughly double the ROA and roughly 25% better ROE of both. From this perspective the Nintai portfolio can be considered more profitable than the general markets.
Finally, we like to see the projected 5 year EPS growth be significantly higher than the market averages. In doing so, we believe the portfolio will achieve better returns than the market. The Nintai portfolio has a projected EPS growth rate of roughly 11.6%. This is roughly 25% higher than both the S&P 500 and S&P 1500. Thus the portfolio is estimated to grow faster than the general markets by a considerable amount.
As a basic graphic the results of this November’s analysis looks like the following (Please note: for demonstrative purposes we have used only the S&P 500):
| Projected EPS | |||||
| Fund | P/E | ROE | ROA | Growth - 5 YR | |
| Nintai Portfolio | 14.74 | 26.61 | 17.40 | 11.59 | |
| S&P 500 Differential | 0.84 | 1.26 | 2.12 | 1.2 | |
Seen from this perspective the portfolio is cheaper than the broader markets, achieves better returns (Assets & Equity) and is projected to grow faster than the general markets.
Conclusions
While a portfolio is made up of individual companies and their respective stock, it is important sometimes to evaluate the averages of the total holdings versus several relevant benchmarks. This can give a better understanding and methodology to project returns versus the general markets. It can also help your investors understand why you might – or might not – expect certain returns and outcomes. In the final analysis we use this tool as another quiver in our arrow to lay our investment theses and graphically demonstrate our portfolio placement. Our investment partners would expect nothing less.
As always we look forward to your comments and thoughts.
