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2018 Wrap-Up

Each year, Rivkin Members are provided with a summary of the performance of each ASX strategy for that year. The 2018 wrap-up article has been reproduced here for non-members so that they can see how Rivkin performed in 2018.

Now that we are well into 2019, we thought it a good idea to provide a summary of our strategy performance for 2018.

Momentum

After a weak January and early February, the momentum strategy really accelerated at the end of February with big gains on The A2 Milk Company (A2M) which jumped 39% in the space of two days. The turned out to be the beginning of a strong upward trend in this strategy that carried it to a 2018 high of +20%, reached in late September. The best gainers over that time, after A2M, were Xero (XRO) and Evolution (EVN) which were closed out at 20% and 13.8% profit respectively. From October onwards, however, markets turned and the momentum strategy was dragged down with it. The defensive mechanism built into this strategy quickly came into action as fewer and fewer stocks had sufficient momentum to be included into the portfolio. This caused cash to build in the portfolio up until the end of the year, at which point it held 100% cash. Although this was an unexciting way to enter into 2019, it protected investors from the market declines in December and allowed the portfolio to finish with a 4.7% gain for the year.

Value

With the Value strategy only beginning in February of 2018, it started life just a day before a large single day decline on the ASX. This seemed like a very unlucky turn of events for investors in this strategy although within two weeks the declines had been recovered and the portfolio started making new highs. The portfolio gained steadily throughout the first half of the year but had been trading flat for some time coming into reporting season in August-September. Early September saw the release of annual reports for several of the portfolio companies and the market reaction to these reports was very strong. The portfolio gained over 10% in the space of a week. As an example, Domino's Pizza was closed out in the September rebalance with a 31% gain. Unfortunately, the market started to turn shortly after this and the portfolio entered a decline that lasted until the end of the year. The full year result was a decline of 10% which is a disappointing result however the beginning of 2019 has already seen a greater than 10% rally, fully offsetting 2018's decline.

Event

The level of activity in the Event strategy in 2018 was pleasing with 12 closed trades, although one of these trades was the NABHA hybrids which wasn't a typical event trade and had been in the portfolio for several years. We decided to close this trade out following a sustained rally in 2017 and realised a gain of 11.2% not including dividends. Excluding this trade, there were 9 profitable event trades out of a total of 11 with an average profit per trade of 6%. The most profitable trade for the year was Sirtex (SRX) for which a higher bid emerged after we had entered the trade. This allowed us to realise an average profit of 17% on the trade after realising profits early on 50% of the trade value to take some risk of the table during the takeover process. The high level of event activity has continued so far into 2019 so we expect this to remain an active portfolio.

Blue Chips

As one of the more market following strategies, Blue Chips naturally declined with the market during the latter part of the year although the high dividend yields actually saw the portfolio outperform the broader market during this time, particularly in December. Notwithstanding this, the portfolio finished down 3% for the year, after dividends but excluding franking, which was the result of several factors. First, the Royal commission into the banks did no favours for their stock prices and only now are we starting to see the negative press subside. Second, Telstra (TLS) was an underperformer for the year as the Telecommunications industry faces challenges from the NBN and strong competition. Finally, AMP Ltd (AMP) had a horrible year resulting mainly from the business impacts on the company stemming from the Royal Commission. The share price has rallied over the past month but this comes after a year of almost constant declines. In summary, although several of the portfolio stocks had a terrible year, it actually finished the year better than the broader market thanks to its December outperformance.

The good news regarding this portfolio is that the dividend yields are now extremely high and assuming they don't get cut, should provide considerable support to the share prices. We therefore look forward to 2019 as a turnaround year for this portfolio.

Income

The income portfolio had a solid 2018, especially considering the negative return of the broader market. The portfolio returned 5.9% for the year, a large part of which came from a substantial windfall from our SVWPA holding. In August, SVW came up with a proposal to convert remaining hybrids into SVW shares at a ratio that valued them at between $90-$100 per hybrid. This allowed us to sell out for a price of $96 and realise a capital gain on this investment of 32%. This comes on top of the approximately $25 in dividends that we received over the holding period. Aside from this particular event, the other income holdings continued to provide a steady stream of dividends that is great for members needing regular income.

Summary

In what turned out to be a volatile year for equity markets, the strength of Rivkin's portfolios really came to the fore. Both Income and Events produced returns completely independently from the market while Momentum's defensive component provided significant downside protection in December. Although Value was the weakest performer, it is already showing in the early part of 2019 that it has the ability to recover in a very short period of time. Blue Chips provided investors with almost $3,000 in dividends for the year (for a $50,000 portfolio) plus the associated franking. Early signs for 2019 are looking good and we are hopeful it will be another good year for members.