Who are we?
The Investment Team consists of 25 ambitious students of the University of Groningen. All students have an affinity with the financial world and a profound interest in investing. Collectively we manage a diversified portfolio comprised of equities, derivatives and other financial instruments. Once a month we meet to discuss macro-economic trends, current portfolio holdings and new investment opportunities. After each meeting we have a beer at the bar with our fellow investors.
In this week’s article of the Risk Magazine we provide a brief review of our realized returns, we disclose current portfolio holdings, and motivate the structure of our portfolio in preparation for the summer period.
Success stories of the Dutch royal companies; Royal BAM & Royal KPN
In the most recent article of the Investment Team we introduced our long position in Royal BAM and an advanced option strategy with Royal KPN. (click here to view last article) We have recently closed out both positions and in this section we will give our motivation and describe the realized returns.
At the time (January 10th 2017), we anticipated better prospects for the infrastructure and construction industry. The industry was expected to recover from the tough market conditions that it faced in the aftermath of the global financial crisis. By investing in Royal BAM we capitalized on an upward trend in the industry. Next to the positive momentum for construction companies, our team was correct about the fundamentals of Royal BAM. As can be seen from the figure, BAM indeed appeared to be undervalued relative to its peers. In the graph Royal BAM is the blue line, Bouygues SA is the red line, Colas SA is the yellow line and Boskalis is the green line.
At December 13th we bought a covered short straddle KPN. (For an explanation of this strategy you can refer to our previous article) An option expires on the third Friday of the month and our option had a maturity of June 2017, which implied that it was near its maturity date. In our last meeting, dated at May 29th , we closed this strategy by buying back the call and put options, as well as selling the 100 shares. Since December 2016 the stock price of Royal KPN increased by 13% to a value of €3.03. We made profit on the 100 shares and the value-reduced call and put options. The put option with a strike price of €3.18 is still in-the-money at the stock price of € 3.03, but only carries a value of € 0.15 (used to be € 0.61). In total the option strategy resulted in a profit of more than 32%, excluding received cash dividend!
Lyxor ETF FTSE Athex 20
An ETF (Exchange Traded Fund) is a marketable security that tracks an index, a commodity, bonds, or a basket of assets like an index fund. An ETF trades like a common stock on a stock exchange. ETF’s typically have higher daily liquidity and lower fees than mutual fund shares, making them an attractive alternative for individual investors.
One of our current portfolio holdings is the Lyxor ETF FTSE Athex 20. This ETF tracks the performance of the twenty-five largest companies on the Athens Stock Exchange. In the beginning of 2016 the index noted an all-time low due to uncertainty about the continuation of ‘rescue packages’ put forth by the EU and the International Monetary Fund (IMF). Despite the international bailout programme, challenges of securing political stability and debt sustainability remain. Moreover, GDP contracted again in the first quarter of 2017 as growth fails to emerge despite a battery of economic reforms. Besides, the country has by far the highest unemployment rate in the Eurozone.
In the beginning of 2016 the index noted an all-time low due to uncertainty about the continuation of rescue packages.
However, investor confidence improved a bit since April 2017, when Greece, the European Union and the IMF reached a political agreement on the continuation of the support programme. In return, Greece must take additional measures in the field of pensions and taxes in 2018. Furthermore, the election of Emannuel Macron in France also caused the ETF to increase significantly, as Macron is perceived as a pro-Euro politician. Macron was one of the few that supported Greece during the time that he was Minister of Economic Affairs. All in all, positive news for Greece.
At September 27th (2016) we purchased the Lyxor ETF FTSE Athex 20 at a price of €0.73. The objective of our investment is to take advantage of the recovery of the Greek economy. Investing in an ETF comes with the benefit of diversification. By buying the index, instead of an individual Greek stock, we reduce our exposure to firm specific risk (also known as unsystematic risk). In regard of our investment objective we only want to be exposed to market (systematic) risk. Market risk in Greece is relatively high due to its political instability and its dependency on economic conditions of the EU and the IMF. For that reason Greece formally lost its developed market status in 2013, and is now classified as an emerging market. Nevertheless, high levels of uncertainty (risk) are associated with high potential returns. The book value of our return on Lyxor ETF FTSE Athex 20 amounts to an impressive plus of over 38%.
The book value of our return on Lyxor ETF FTSE Athex 20 amounts to an impressive plus of over 38%.
Sell in May and go away, but remember to come back in September?
Recently ( May 29th) the Investment Team had its last meeting of the academic year 2016-2017. Since there are no meetings scheduled for the coming three months, our investment portfolio needed to be risk adjusted. This is the main task for our control group. The control group is responsible for thorough advice regarding current portfolio holdings.
In order to minimize risk exposure we considered selling equities that might fluctuate heavily in the coming months. Based on technical analysis we concluded that Royal KPN is nearing a resistance level (price level where selling is thought to be strong enough to prevent prices from rising higher) and could fall back to a much lower support level which would evaporate our return on the option strategy with Royal KPN. This might induce the holder of the put option to execute its put option, which would imply that we have to buy the 100 stocks for the strike price of €3.18. This led us to buy back the options and sell the stock.
In order to minimize risk exposure we considered selling equities that might fluctuate heavily in the coming months.
Overall we did not cut down the size of our portfolio. Instead, we focused on limiting our risk exposure, keeping constant the level of total invested capital. To limit risk exposure in our portfolio we used the method of hedging. Instead of selling high beta stocks, portfolio risk can be reduced by making an offsetting investment.
In our last meeting of the previous academic year, the majority of our members voted for a long position in the VIX index. The VIX index is a derivative that measures the implied volatility of the S&P 500 index options, and is frequently referred to as the uncertainty index or fear gauge. An increase in the implied volatility of stocks adversely affect stock prices. Hence, in theory, a downward pressure on stock markets should result in a decent gain on our long position in the VIX index. In practice, however, this strategy did not payoff due to negative roll yield on our long position in the VIX index. (For an elaborate explanation click here).
This year, we decided to keep Flow Traders in our portfolio. Flow Traders is a market maker that delivers bid and ask prices for Exchange Traded Products (ETPs), a collective name for index products such as Exchange-traded securities and commodity funds. The difference between bid and ask prices is the profit for the company. This spread is usually higher when markets are more volatile. Recently, Flow Traders published its earnings which were lower than expected. As a result, Flow Traders was trading at an all time low during our final meeting. This, together with the fact that Flow Traders benefits from volatile markets led us to keep Flow Traders for the summer to protect our portfolio against increasing volatility. Catalysts for rising volatility could be the speed of interest rate hikes in the US, the upcoming election in the UK, economic policy of Donald Trump, ending of ECB acquisition program or Greece sliding back towards a new recession.
Joining the Investment Team
Are you interested in the Investment Team after reading this article? More information can be found on www.riskinvestmentteam.nl. In case you are interested or have further questions, please contact us via our email: firstname.lastname@example.org