Helical Portfolio - First Year Review III
Helical Portfolio - First Year Review III
The continued review of the Helical Portfolio will focus on risk and consider the transactions that worked and failed during the year. I noted in the initial post that the 'all healthcare sector' Helical portfolio was up 12.2% in 2011. While that return is certainly cause for some rejoicing, it was tempered a bit by the calculation that I could have had a better return of 13.1% if I had sat on my hands all year long and made no changes in the portfolio at all. That kind of underperformance over good old 'buy and hold' is cause for additional review.
This will be a long post.
The first consideration is portfolio risk. There were a number of times in 2011 when I was quite risk averse, such as in June when I went to 50% cash. I don't objectively measure risk, but instead subjectively consider it. There is no algorithm I apply to provide a measure of portfolio risk, and frankly I would distrust one if I had it, or perhaps better said find it ironically risky to trust such a tool. Instead I prefer to subjectively pool the holdings into bins of high, medium, and low risk. I am more concerned with business risk than valuation risk with such an assessment. I do invest in alignment with behavioral portfolio theory in which an investor builds a layer pyramid of risk in an attempt to both protect wealth and drive returns. This may not be optimal, but is more mentally embraceable than a pie chart, so embrace the framework I have (Yoda voice).
Subjectively, I consider the portfolio as it closed 2011 to be:
28.3% High Risk -----------Comprised of BRLI, GHDX, MAKO, MR
23.9% Medium Risk ------IFAM, ICLR, ROCM, SGEN
48.7% Low risk--------------Cash, CAH, CVS, HCN, JNJ, WLP
A bit top heavy for a pyramid, but I intend this portfolio to be more monolithic in shape i.e. more aggressively invested in general (than say my IRA). I started 2010 with subjectively quite a bit more high risk and less low risk.
I underperformed a 'buy and hold' calculated return in the Helical portfolio. I did so with a decrease in the subjective risk level of the portfolio in a year when I had achieved a good solid market beating return. The portfolio risk structure as currently compromised is reasonably reflective of my 'only mildly optimistic and concerned' outlook for 2012. Not disappointed.
Given the high turnover in the portfolio this year, I thought it also worthwhile to broadly consider the individual transactions. I'll focus on the transactions the significance of which represented more than 1% of the portfolio value at the start of 2011 ($500 or more). I do this in three groups.
1) Sales - Those companies no longer in the portfolio
2) Trades - Equities that came and went, or were sold and bought back
3) Buys - New holdings that were not present at the open of 2011.
I use a FIFO style of viewing these due to simplicity, but being a Roth this isn't terribly important from a tax consideration.
Transactions - Sales
Companies that were present at the start of 2011 but are no longer are include BIO, CPHD, EXEL, KNDL, MDT, NVS, and PPDI. Also my position in JNJ was reduced by 30 shares. All together the initial sales of these companies was for $30,742 or 61% of the portfolios initial value, a large amount of turnover. The sales were costly. Taken collectively, these positions at the end of the year cost me 5.6% of annual return. This is determined by what the value at end of year would have been, subtracting out what I sold the holdings for, the collective result of which is ~$2,800. Dividing by the portfolio at the start of the year, this is 5.6% of annual return that I missed out on. I call this the 'unachieved gain' (phantom loss?).
Looking at individual equities and the difference between the dollar value when I sold them and what they would have been worth end of year, a few jump out as significant (> 1% of start of year portfolio value).
The largest unachieved gain of 3.7% was with Kendle (KNDL). This company was purchased at a premium by private equity during 2011. There were questions related to their need to restructure / refinance their significant debt at the time I sold, which was for a profit. I don't mind missing this one, as it was sold at a profit and for the right reason of increasing perceived risk.
The second largest unachieved gain of 2.5% was with Cepheid (CPHD). This sale was tough, as Cepheid has been a long term high performer in this portfolio. I don't mind the unachieved gain here, as viewed at end of year. Cepheid was sold 3 times in 2011 in January, June, and November. The first couple of sales were a bit of rebalancing as the company what my largest holding, due in large part to its performance. I don't mind missing topside with these sales, as they locked in very solid gains. But, I no longer own Cepheid, feeling that their system could still grow, but won't end the decade as the dominant means of doing diagnostics. So that last sale in November may still be one to regret down the road, but in general, I favor holding GHDX and BRLI as plays in medical diagnostics right now. Yet I remain unsure and could get teased back in to Cepheid at the right price.
The third largest unachieved gain of 1.7% was with Pharmaceutical Products Development Inc (PPDI), but this is partly an artifact of the FIFO accounting. I had round trip trades during the course of the year with PPDI (which sold out to private equity). The 3.6% gain on the trades (profit divided by start of year portfolio value) more than made up for this loss. The use of LIFO accounting would have reduced the total 'unachieved gain' of 5.6% to just 1.9%, due mostly to the mid year round trip trades on PPDI (and less so to ones with NVS, JNJ, and MDT). I had no minor unachieved gains of less than 1% of start of year portfolio value.
There were also 'achieved gains', where the sale of the equity was prudent and yielded a gain over the end of year value. The only one that was significant (>1%) was the sale of Exelixis (EXEL). The share price here collapsed as their drug development plan saw delays. The potential risk of these delays prompted the sale. I had modest 'achieved gains' (< 1% of start of year portfolio value) with the sales of BIO, MDT, JNJ, and NVS, though there were a couple of those equities that also had dividends 'not collected'.
Transactions - Buys
Companies that are present now in the Helical portfolio but didn't start 2011 there include AFAM, HCN, ICLR, MAKO, ROCM, and WLP and the stakes in CVS, CAH, and CVS were increased in 2011. New positions cost ~55% of the 2011 start of year portfolio value. The book is not closed on these holdings of course, but the collective end of year value of these over their cost represents an unrealized gain of 1.7%, mitigating the 5.6% 'unachieved gain' already discussed.
So far significant gains (> 1% of total portfolio) are present with HCN and nearly so with ROCM. None of the new positions has cost me 1% of the portfolio, though there were modest losses with a few at the close of 2011 (MAKO, AFAM and the increased stakes in CVS and CAH).
Transactions - Trades
The Helical portfolio saw a number of round trip trades in 2011. These were of three sorts.
-Companies that were bought and sold (don't own now) - AMED, ATHN, CERN, GNOM, MHS, UNH
-Companies that were sold and rebought (own now) - BRLI, CAH, CVS, GHDX
-Companies that were round trip traded in 2011 and net sold outright (don't own or own less now) - MDT, NVS, PPDI, JNJ.
Collectively, the net of all the round trip trades was a positive $1,597.26, ~3.2% of the start of year portfolio value. Not bad, but it pleases me that this is a Roth where no short term gains taxes are due. This too, along with the 1.7% unrealized gains from new buys helped offset the 5.6% of unachieved gains caused by the apparently premature sales.
The most significant 'trade gain' was the aforementioned 3.6% made with PPDI. Other significant gains of $500-$600 were made with Cerner (CERN), Medco Health (MHS) and athenahealth (ATHN), none of which are currently owned. I don't mind not still owning any of these three, as the first two are richly valued, athenahealth may be revisited in the future as I like the space and perhaps Medco if its acquisition is rejected. More modest gains were made with round trip trades on BRLI, CAH, JNJ, and MDT, three of which are still owned.
Significant losses on round trip trades occurred with Amedisys (1.3%) and Complete Genomics (2.8%). I let the latter run too long, and as a rule try to avoid single equities cause a loss of > 2% to the portfolio. I don't regret the buy which was also noted as speculative, but I should have held a tighter reign on it for that very reason. I still like home health, where I had losses with Amedisys, though it is not yet settled how this industry moves forward, but decided I prefer Almost Family in this space. More modes trade losses of < $500 were experienced with CVS, GHDX (too slow to buy back in), NVS, and UNH (where I now prefer WLP).
The main conclusion from the transactions in the portfolio was that there were perhaps too many. There were periods in 2011 where I sold in groups to raise cash, and then redeployed, resulting in many round trips. Should a large crash have occurred, this would have looked smart, but with a flat year, it really just added frictional cost. As a risk reduction consideration, it was probably worth that cost. The second conclusion relates to Complete Genomics and is to not let a holding, especially a speculation, cost more than 2% of the portfolio value. Sell, pause, and reconsider.
I got a lot out of this exercise, I hope you did so as well reading it.
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