ANALYSIS OF PORTFOLIO RETURNS FOR 2025 - the Good the Bad and the Ugly

 PORTFOLIO RETURN AND ANALYSIS FOR 2025

I use the nearest year-end Friday to rule off results.

June Y/e	PORTFOLIO	BENCHMARK
2025	18.8%	11.5%
2024	20.8%	13.4%
2023	16.9%	7.6%
CAGR	19.0%	10.8%

 

Please note that the portfolio numbers are based on the total market value after deducting fees and taxes, including regulatory, accounting and audit fees. The benchmark has no fees or taxes deducted. There are now large unrealised tax liabilities in the portfolio that may be realised over time. I may highlight these at some point in the future if they become larger. Taxes paid by my SMSF and Company are deducted from the returns, while taxes of the family trust are paid by me separately.  Secondly, the portfolio is the bulk of my wealth, by a large margin, which means this strategy is not a moonshot satellite or absolute return risk-seeking approach; the return of capital is as important as the return on capital, an important factor to consider when contemplating these returns. Risk management is critical, that is, a very low probability of permanent capital loss.

Broader Commentary on Returns and Market Environment

As stated in the benchmark commentary, 2025 was an above-average year in returns. Although at times that did not seem to be the case. There were two mini panics over the year. The Japanese carry trade, which has disappeared into market history, and the “Trump Dump”. Fortunately, I was active in both. I did not carry too much cash throughout much of the year, especially post the Dump, but was active in both sell-offs, switching to better stories. When there is a panic, not all shares move in tandem, so opportunities arise, and selling shares you are not happy with at lows and moving to other, better-positioned shares can result in less tax. Therefore, activity in these periods usually makes a lot of sense. Although market sell-offs are not enjoyable, they have created the foundation for great returns in the future if you take action and have the financial and psychological wherewithal to last. When I was buying shares on that fateful “Trump Dump” day, I was preparing myself that it could take 2 years to get my money back, of course, that proved wrong; it was weeks.

Overall, I'm pretty happy with my discipline and execution over the year in this regard, not so other areas!

Commentary on Winners

32 stocks were held for the whole year. I will briefly comment on the best and worst performers defined as those that over- or underperformed the benchmark by at least 20%, ie +30% and -10%. Small holdings and insignificant part-year holdings are ignored.

EOL +195%-The only stock to ever graduate from speculative to the proper investment portfolio. I am surprised why the stock suddenly went on a big run after being in it for a long while. EOL has the collection of characteristics I like in specs, being profitable, showing earnings growth and some proven international ambitions. The stock now has a market cap with expectations of much more progress. Management upgraded earnings guidance over the year, which sparked the run.

TNE +118%-The software specialist upgraded guidance with better-than-expected results and appears positioned to take further share. The valuation is now full. Strong fundamentals but full value, a stock made for the times. Hold

HUB +87%- Top 10 holding and a long-term holding as the platform provider continues to march market share higher. The Trump Dump was used to add to the position at what appeared to be attractive prices, but no bargain. Another example of buying strong fundamentals on a market pullback rather than poor fundamentals into a value position. Valuation is usually full except for market panics.

CBA +46%-A long-term holding and was added to in C19. At these levels hard to see how it generates any long-term value. Maybe AI allows the cost base to fall, but other banks would follow. It’s a funding source. I have been selling this down slowly, but like the magic pudding, it keeps growing back.

PNI +42%--top 10 holding and was added to in the Trump dump. PNI has just raised capital at prices around $20ps, shortly before the pullback to circa $13. PNI’s model remains attractive and continues to generate value. PNI is market sensitive so market pullbacks will occur and open opportunities. Earning growth remains sound or even strong.

ADYEN +36%-The Dutch founder-driven payments company continues to add clients and offer an attractive value proposition and differentiated offer in the enterprise space. Valuation can be full, and opportunities to add are rare. Payments remain terribly competitive, and progress in the use of stablecoins has to be watched.

RMD +34%--Now almost fully recovered from the GLP-1 sell-off of a year or so ago. RMD fundamentals continue to be strong as they were throughout the whole GLP-1 drama. There continues to be fears that earnings will ultimately fall from GLP-1 usage or new technologies; it’s a case of waiting until proof arrives.

TLS +33%-TLS was acquired on the C19 selloff, and although it is (another) Australian oligopoly with a steady source of profits, it remains a funding source for me. It's ok, but hopefully we can do better.

TSM +31%--A top 10 holding acquired when there were fears of a Chinese invasion of Taiwan. Another buy the fear category. The stock remains pre-eminent in semiconductor manufacture, and the offshore FABs appear to be coming on as planned. Earnings remain very strong.

V +30%--A top 10 holding. One of the strongest business models ever. The only concern is how stablecoins are processed and whether that is outside the Visa rails. There is a long way to go on that story. Valuation is now much fuller, and opportunities to add are rare.

 

Commentary on Losers

About the best thing that can be said about these stocks is that the weights are modest, for the most part. Lol.

BHP -12%--I have been reducing BHP for some time. Although BHP has some excellent mines, delivering through the cycle profits, LT investment is problematic due to the LT outlook for iron ore and other commodities, unpredictable. BHP was acquired in the C19 selloff and has probably done its work. Exit likely

DDR -17%--Not a great business, but one that has a reasonable record. Interesting that profits have been lower, not much, but lower over the year. The question here for DDR is market saturation, making it hard to get share gains, so DDR then moves with the market. It's ok, not great, another case where earnings growth has slowed or reversed. Earnings momentum trumps valuation so far.

CSL -21%. The former blue-chip glamour stock. In February 2024, I wrote a blog about my thoughts on CSL, called “losing my religion”.  I reduced the exposure then, and the situation has not improved except for the share price now offering more “value”. The destruction of the ROE here has been significant; for me, it's a funding vehicle unless returns improve. Earnings continue to expand after the dilution a couple of years back, offering some cause for optimism.

LVMH -39% No doubt a quality company in luxury, but facing earnings downgrades and negative earnings post the C19 worldwide spending spree. Negative earnings have occurred, and the market only buys into the story when it appears earnings growth is derisked. Which could occur very quickly. An interesting statistic and an example of how the market punishes earnings downgrades is that LVMH, with earnings of $13B has a market cap of $261B, while Hermes with no earnings downgrades and earns under $5B, has a market cap of $284B. It can’t get much more stark than that. Maybe.

DMP -47%-Multiple years of earnings stagnation as the Japanese and French franchises prove to be problematic. Without positive earnings growth, the PE has been left exposed, making the trade-off between growth and PE difficult to call. Another situation where, it could be argued, earnings growth (or lack of) trumps valuation, valuation was high to start with.

MIN -65%--Earnings down a lot, trouble with the CEO's actions, large debt overhang, unpredictable commodity exposure, the growth story is on hold here, big time. There is potentially huge value accretion, but dependent on commodity prices and operational improvements to pay off the debt. Way too many issues. MIN represents a possible permanent loss of capital, the only obvious example to me in the portfolio. A situation I tend to avoid.

IEL -75%--Large earnings downgrades as student volumes fall from political restrictions and threats. The negative operational leverage has been more than expected, but the decline in student numbers has been more than expected as well. Another case of buying into deteriorating fundamentals that trump any LT value arguments.

There is no doubt that the returns for the whole portfolio would have been dramatically different if portfolio weights were not as they were. That shows my lack of conviction for the smaller holdings or having small exploratory positions. Which asks questions itself. The portfolio returns clearly show only one negative return in the top 20 holdings and several absolute losers in the bottom 20. There is a message in that statistic, imo.

Thoughts to tweak the strategy. My process is to buy quality when on sale. By “sale”, that usually means the SP is lower than the intrinsic value. Implicit in that statement is that intrinsic value can be determined with the same confidence at all times and across all holdings. That is not the case. When a company, for instance, misses its numbers in a surprising and or large way, what does that imply? One implication is that you haven’t assessed the risks properly or understand the business dynamics. The next question is, have you got a good bead on what's happening? The market takes no prisoners and will mark down uncertainty and poor surprises harshly. When there is uncertainty and negative revisions, it also attracts short sellers that exacerbate downward SP movements. Just adds to the poor momentum.

In this regard, Share prices can fall because of 1. The whole market falls, 2. There is an earnings or a fundamentally driven disappointment 3, There are potential but unsubstantiated fears about something in the future. To me, these are three distinct events and imply different levels of risk. The first is market risk, and if that comes from a liquidity event or geopolitical issues, then that issue is known and can be assessed on its merits. Secondly, a future unsubstantiated event that is driving the SP down means that the market is pricing in something that may or may not occur. That appears to be a risk that may be worth taking. The third is an announced earnings downgrade. That is clear and delivered. The issue then is, can the issue be fixed quickly? if it was a surprise, does that mean there will be more surprises? If it is a large miss, can the hole be fixed, or has it exposed a previously unknown issue in the business model? Under this scenario, can intrinsic value be calculated with the same confidence? I would say that is possible, but not like the other two scenarios, this one incorporates much more risk.

Following this framework and with a broad universe of stocks, taking positions in the more problematic category anytime before a full assessment and more information is forthcoming, for instance, stabilisation in results, is a risky venture and has caused the portfolio most of its losses. The burden of proof lies with the business results.

 

STRATEGIC MOVES

The strategy to move funds from an International ETF to individual stocks continued. The reason is that there is significant stock volatility, which opens up opportunities that cannot be accessed in an ETF structure, not by me anyway. The work I started in 2022, understanding international companies, is ongoing and has now reached a level where I am ready to take on more positions. Secondly, there are the EFT fees, which are not a determining factor but count for something. The ETF is also tax inefficient, as trading in the fund can generate taxable income when it isn’t needed. There is no hurry to implement this, but market falls allow switches in a tax-effective manner. Over the year, positions were opened in AMZN +17%, MSFT +25%, ASML +15% and META +23%, all potentially long-term holdings and hopefully acquired at reasonable prices (returns to date quoted) The other reason for adding international names is that including analysis of international stocks increases the number of quality growers substantially, as opposed to just Australia. That increase in choice allows me to be much more selective in portfolio additions and allows more patience and better opportunities, imo. The interesting learning here is that, for eg the US has many more quality companies than Australia, no surprise there, but that they exhibit higher volatility, a surprise and an opportunity, imo.

AMD was switched for NVDA, both are in the same industry, but NVDA is a leader, and I feel more likely to add in weakness for NVDA than AMD. The switch was made near the market lows. The position was upscaled, showing more conviction.

The gold exposure was changed a fair bit. The operational miners EVN and NST were exited and replaced with royalty/streamers, WPM and FNV. There is also a holding of bullion. The gold price has performed spectacularly, and this is a defensive move. Gold holdings are potentially funding vehicles. FNV and WPM are extremely strong business models with little or no debt; it is hard to imagine them going broke under almost any scenario. The gold holdings, about 7% of the total portfolio, were a strong contributor over the year.

There were other sales, mainly of low growers, that I wanted to put into faster-growing stocks at better valuations. Perhaps the unusual one was Evolution AB, the casino game supplier, which started to encounter regulatory issues, and there is some lack of clarity around their source of profits. NPAT continues to grow, much slower, but I am watching from the sidelines. Management is buying.

There was one takeover being PSC Insurance.

The speculative portfolio delivered some positives over the year for a change. A strong market has helped, but there is a recurring theme amongst the winners. DSE +112%, BVS +107%, SPZ +87% and XRF +40%. Flattered by a takeover of DSE and a corporate turnaround of BVS, but there is a constant story to generate attractive long-term returns in this tricky space. IMO, they are profitability, some proven growth, and some proven international expansion are an attractive mix; value is a secondary factor.

New positions in four stocks were made, being NVO -14%, JIN -26%, PWH -24% and SDF +14%. These are all strong fundamental companies, but a couple are facing earnings disappointments, JIN and PWH, while NVO continues to grow earnings but at a slower rate than expected and SDF was acquired after a SP fall due to a poor media story. The lesson here is that buying into deteriorating fundamentals is a very tricky game in a market run by momentum. These were reasonably modest holdings, but the story of backing value when that value is being clearly and rightly disputed in some cases, ie in front of deteriorating fundamentals, is not working. Large additions to positions should be coupled with improving fundamentals.

SUMMARY/CONCLUSIONS

I believe that since the GFC, we have seen a change in the market mix, and the chances of going back to a predominantly valuation-based, mean-reversion market are low. We saw a bit in 2022, when the C19 avalanche hit, and it would take a similar shock, imo, to initiate another value run market. The two main impacts post-GFC have been the rise of passive, momentum and closet momentum investing styles that now significantly outnumber active valuation-based investing. The upshot of this is that valuation investing is less relevant than it was before; the likelihood of value investors coming into a stock just on SP falls is less likely. Passive and momentum do not reward value, simple as that. Lol. Secondly, the organic growth rate of the economies, especially the developed West, has slowed considerably. That is the identifiable outcome, the reason we can argue over, but I would wait until confirmation of the opposite before betting on the lack of growth changing. The upshot for investing is that growth, with its secular growth characteristic, will dominate value as a style, as value depends on inflation and high growth rates, situations where earnings growth is abundant and not priced at a premium. That is the underpinning of quality growth investing and why it should continue to outperform. The other issue of buying value in front of deteriorating fundamentals and lack of clarity over where intrinsic value lies, I have covered at length in this piece and means being much more patient and selective in choices.

The great run of the benchmark and the portfolio’s run above the b/m returns continues, although every year gets closer to a setback. The psychological challenge is the hardest part in those circumstances.

The only change to BAU I see is that there is a clear systematic error taking place in my stock bets. It is based on intrinsic value being above the current share prices when there is a significant question mark over the near-term or medium-term earnings outlook. Historically, I have taken a holding position and been reluctant to add, but have added every now and then. The outcome of these actions has been brutal and clear. The chances of further falls in the SP exist, and the concept of value only becomes relevant as stock-specific risks recede. Then the situation can change very quickly. The burden of proof lies on the recovery or stabilisation of earnings, not on a mean reversion conclusion. That is the main lesson I take from the last few years.

One of the positives of writing this note is that it highlights strengths and weaknesses and possible opportunities to improve the process. I think that is clear in these notes, on to 2026.