REVIEW OF 2026 PORTFOLIO PERFORMANCE -- BACK TO EARTH!

 REVIEW OF PORTFOLIO PERFORMANCE FOR 2026

 

The Portfolio Performance numbers are after costs, fees and taxes (paid by the SMSF and my company, which comprise about 60% of the portfolio). The Benchmark pays no fees and no taxes. 

Due to the disappointing performance this year, compared to the last few years, I intend to be much more forensic in this analysis. The main issue I want to get to the bottom of was the poor performance, mainly due to my overvalued stocks coming back to reasonable valuations, or was it from poor investments, or some combination. These are quite different and require different solutions. Part of the analysis is looking at my tax awareness and attempting to cost that. Broader issues were the themes impacting the year, including AI fear, and we saw significant sectoral and style changes. The main question is whether this marks a change in the long-term outlook, or a short-term move, or is too difficult to tell. Of course, equities are the major part of my net wealth, and as a retiree with no significant other income, return of capital is as important as return on capital, maybe more so. That means there is an inherent conservatism in the portfolio, IMO.

Part of the analysis will be reviewing similar-style investors and assessing how they performed this year. The reason for this is to understand the impact of style. If similar investors have done much better than I, then that may be an issue.

The chart below shows something very interesting about the 2026 performance. The chart measures the weekly portfolio performance against the median benchmark performance. Median returns, rather than average returns, are used for the portfolio because that is the clean data I have kept. I should use the average benchmark returns, and do so for the performance of the benchmark, which would have the blue line (benchmark) well above the orange line (portfolio) by the end of the period. However, for the points I am about to make, the charts are adequate. Next year, I will try to save the average data.

As can be seen below, from 16th January 2026 to 20th March 2026, the portfolio returns dropped from 109% to 90% of the starting point, while the benchmark dropped from 104% to 93%. A differential performance of 500 basis points over these two months. That is huge. The reason is also quite clear. Over this period, Anthropic launched its most able LLM’s. The ability of these LLMs sparked a fear that intangible assets could potentially be worth a lot less, as they may be disintermediated by ever-improving agents. Of course, we are a long way from that for the vast majority of companies. The threat comes from extrapolating improvements into the future until, eventually, the LLMs will replace the value added by the incumbent companies. Of course, this is difficult to refute; any evidence to the contrary could be met with a response of " it's still coming”, that open-ended response could last for years until it is proven either way. The extent of the sell-off in breadth and degree surprised me. Software companies, of which I had a small exposure, were the obvious first potential victims. That quickly spread to network stocks and even to staid businesses like insurance brokers. My portfolio is intangible heavy and wore the consequences, regardless of the strong profitability of the companies. Below, from in front to well behind!

ATTRIBUTION

Attribution is a measure of where money was made or lost in the portfolio by sector or stock or both. The calculation is active weight, being average stock holding over the period less its benchmark weight, times the stock's performance less the benchmark performance. That is, active weight times differential performance, which gives a basis point result. For my equal-weighted benchmark, the benchmark weight is the same for all stocks at about 0.25%. I can only estimate my average portfolio holding weight, but it should suffice for this exercise. As for stock performance and benchmark performance, both are clearly identifiable. What is missing is any trading in the stocks that would have added or detracted incrementally to the numbers. The results are not 100% accurate, but are close enough to reach conclusions.

Overall, my benchmark was +9.4% (incl divs), and my portfolio was -2.5% including fees, costs, and some taxes. The difference is -11.9%, which is large by many measures, even taking into account taxes and costs, etc. The following is to identify why this occurred. There is some subjectivity, as always, as a decision or outcome is usually not due to one factor alone, but we will see what we can extract. The outcomes I am especially interested in are the results due to style de-ratings and/or poor investment decisions, and how large each was in the outcome, because that has the greatest impact going forward and for lessons learned.

As we have seen, the underperformance was 11.9% for the year below; I can identify 13.8% of the differential performance below, so all of the u/p was due to the stocks and decisions below. The remaining +1.9% was smaller bets and positive results. I have excluded dividends for both the benchmark and stocks because my accounting is not that developed, and it will not change the conclusions. The eleven stocks listed in the first group are core positions for me. They are consciously a mix of exposures, but have one thing in common: I believe all their profits will be much higher in several years than they are now. Of course, that view could change over time. My broad conclusion is that these have effectively moved, in one year, from overvalued to undervalued as style rotation moved momentum money away from these stocks and the quality growth style. One fair question is why didn’t I sell these exposures when they were overvalued with the view to buy in at a possible lower price in the future? That is a question I will try to answer below when I look at activity undertaken below.

The other stocks CSL, Adyen and ADBE are exited positions and can be classified as errors. They total -3.6% for the year. Several smaller positions have been exited that were similarly poor decisions, and I will try to draw general conclusions for lessons to take forward instead of getting into the stock-specific details. One lesson I have learnt is that buying into deteriorating fundamentals is much riskier in the current market than previously. Active managers taking contrary views are just not the force they once were; passive and quant-driven momentum-following short-term trading signals will decimate buying into fundamental weakness. Previously, I suffered losses undertaking this strategy but have now thankfully wound back the position sizing and have little interest in that style of investing going forward. A less risky approach is to buy stocks that are sold off, but the fundamentals are still holding or continue to improve, at least in my opinion. These situations take a deeper understanding, often looking at second-order effects, where the moat duration rather than the current profitability is being questioned. Usually this is where, for instance, profits are still growing, but the ROE or ROI are declining; in other words, the amount of capital it takes to grow is getting larger and less efficient, and that impacts the multiple. Certainly, you could come to that conclusion for the above three stocks, all profitable and growing but getting less capital efficient. For Adyen, it was a reversal of the large profits I saw in the previous periods, back to square one, and I have concentrated my payments exposure into Visa, which appears to have a stronger position, but Adyen is a good business. For ADBE, I probably bought into the Saas apocalypse too early and have now concentrated in more vertical and specialised software rather than more exposed horizontal software. CSL was particularly disappointing, since I wrote a fair bit about the deteriorating fundamentals and sold down, only to buy back in when I thought the coast was clear; clearly it wasn’t. The factor that caught me out was the deterioration in the core plasma business, which I thought was travelling along well, when it was losing share. The error was identifying some of the issues but not pinpointing all the issues with the business, thinking the areas being impacted were in the peripheral businesses, which proved not to be the case. Therefore, this was particularly tricky. The only course of action that could have avoided this outcome was to have a much closer look at the competitors that were eating into CSL's share of its most profitable business, which I ignored to my cost.

The appreciation of the $A did have a negative impact of about 2.4% on the portfolio. Over the last few years, that has been a modest positive spread out over a few years, but the run from 65c to 69c was a significant negative occurring all in one year. My view on FX is that it is a risk to be borne, hedging is expensive, and my experiences with hedging have been unsatisfactory; that is, the cost of hedging is a serious impost (rolling and spreads). Stock decisions over time are much more important, and the growth and diversification benefits and risk reduction away from the $A is a position I want to have exposure to. An ongoing huge rally in the $A is the risk which I will bear. If there is any compromise, it is that I want the overseas exposures to have exceptional expected returns and not just place takers.

What can be clearly seen below is that almost all of the underperformance came from core long-term holdings which retreated over the year, but I am still a holder and still hold a positive view of each. All of these are still in profit on cost prices. That indicates that the losses may have come from high valuations rather than thesis breaches or buying expensive stocks. That is the positive.

Here I address the activity in my core positions, and having collated the data, I can say that I am very surprised, because there is a clear lack of activity when the stocks were overpriced, which does not accord with my memories. I was sure I had sold more, but the trading tickets prove otherwise.  Certainly for RMD, NCK and REA, I thought I had sold down; it didn't happen. For PNI I certainly, at least contemplated it. The table below shows the core positions, the amount of the holding that was sold, eg 10% for CAR and the price above the closing price that the sales took place, eg 63% above the closing price for CAR.

My basic plan is to sell 10-30% of the position when the stock is very overvalued according to my valuations. Those percentages are a compromise between excessive valuations promising lower returns, an ongoing LT positive thesis and paying less tax. That process did not take place. There were a few weighty influences that prevented me from acting.

The first is tax; many positions are well in the money, especially with FIFO inventory, the low cost (high realised profit) goes first. When there is a wide performance spread amongst the stocks, with some doing really well while others lag, the process runs smoothly when there is wholesale overvaluation or undervaluation; there is pressure not to realise enormous profits across several holdings in the same tax year. That is the first concern: the bias is not to act.

The second is holding cash; I like to stay, more or less fully invested; market timing is notoriously difficult, and holding cash can become open-ended. Of course, taxes are payable without doubt while waiting for a market correction; in specific stocks is more variable. Again, the bias is not to act.

The third influence is that finding great stocks to hold over the longer term is difficult. When you find them, you should hold them; selling out could cause you to maybe never get back in or buy lesser quality businesses that cause you trouble down the track.

Fourthly, with the new CGT regime, selling loses the grandfathering protection, so it becomes even harder.

All of these promote holding, not selling.

Buffett, who is a great believer in the value of the deferred tax liability, can also be a seller and payer of taxes when the situation warrants, that is, stark overvaluation. Buffett is hardly overactive, but he is active.

We can clearly see in this situation that all the stocks sold, being LOV, HUB and CAR, were sold well above closing prices, so the sales were warranted, even after paying taxes on the profits. Maybe that's not always the case, but across the board, sales into overvaluation would have paid off big time, and maybe if I was concerned with having market exposure, I could have covered with index funds until the opportunities arrived. Certainly, being hit by a style shift, where almost every stock is heavily sold off in a short timeframe, is a difficult phenomenon to navigate.

COMMENTS ON COMPS AND STYLE IMPACTS

The following are other fund managers I follow and track. There are several reasons for this: firstly, as a potential source of new ideas; secondly, result comparison in a broader sense since they have a similar broad style to me. The main reasons that I include these fund managers are, firstly, I think I can understand their investment approach and it is similar to mine, they do not trade that much and are, from what I can see, longer-term investors so their calls have some longevity which is similar to me and finally, they disclose enough that I have a good idea what they are up to and can verify the process and similarities. If they are too different in risk/reward, churn too much or don’t disclose enough, they are of little use to me.

The analysis now extends over a few years. When I look at their performance, my thinking is that they should do better than me in strong markets and worse in tougher markets, as they are more concentrated and run portfolios for clients that comprise part of the total investment, whereas my portfolio is the major part of my wealth, so is more conservative and diversified. That conclusion is reasonable but may not always hold.

Style, being quality growth in this case, can come into and out of favour. With a largely momentum-driven market, interest comes in waves; part of this analysis is to see how my performance holds against some reasonable comps, who largely follow a similar style. As opposed to my benchmark, which has a much broader style perspective, with profitability being the biggest driver, rather than quality or growth. So it is a look at how much style helped or hindered my performance over the period(s).

The other aspect about the comparison is that my numbers are after tax on the SMSF and company, but not the trust. I address the issues with tax impacting returns in another section, but the following does favour those that have realised profits, as no tax is paid by the FM’s. That is, the FM’s figures are all pre-tax, and after fees, I believe.

Conclusions from above. Very much in accord with the previous analysis of the benchmark, we can see those results consistently in the above numbers. The domestic growth managers have had a very hard time as Australian growth came off, maybe from high valuations, but also lost interest as money migrated out of the style. The average Aussie manager was -15% for the year! The international managers were -3%. That is a huge difference. To be clear, the Australian quality growth universes contained some big losers, being a mix of falling valuations (style rotation/mean reversion) and poor stock choices.

Overall, I am happy that I am not an outlier from the group and appear to be holding my own against some very well-respected managers. There does appear to be a serious style rotation, and how long and how far that goes, no one knows.

My investment philosophy is that over the longer term share prices follow earnings, and buying companies that can grow their earnings over the long term (not easy) and buying them when they are not expensive (a little easier) is the correct strategy instead of chasing style churn or momentum, which I have no advantage in doing, IMO.

HOW IS QUALITY GROWTH CURRENTLY PRICED

The below charts are my measure of apparent value on offer in the Australian and International quality growth universe. The numbers are median, not average, because it eliminates where I have made a large error on a single stock valuation that undermines the whole data series. The median is much harder to move up or down. The series extends over a few years now. There are a few things to point out here. Firstly, taken at face value, there is good value, especially in the Australian market, which has seen the worst performance over the last year. Both charts show an upward trend, indicating better returns, although the trend is more pronounced for Australia. That aligns with the performance outcomes discussed in the review.

The second question is whether this indeed is an indication of value or is it based on false premises. The whole series is driven by 5-year earnings growth and an exit PE, so the errors can only come from two areas: the earnings estimates are too high, or the exit multiples are too high. Earnings errors get solved fairly quickly; either they are on track or have downgrades. The PE exit is more tricky, and depends on interest rate expectations, inflation, LT growth and uncertainty over the longer-term outlook. This is especially the case when we look at businesses that rely on longer-term earnings growth as opposed to low PE stocks, which have a shorter duration.

The main assumption is that a 20X multiple will hold for the market and individual stocks are priced at a premium to that given longer-term growth prospects and quality. There is a chance that PE compression will continue and undermine the base case of a 20X exit multiple. If that is true over the longer term, the returns may prove illusory. What we can clearly conclude is that, given the prevailing valuation averages over the last several years, these stocks are now undervalued.

Most of my errors and successes come from stock-specific calls. Market valuations are implicit, not explicitly made, so I take the analysis at face value; the valuations are indeed cheaper than at almost any time over the length of the analysis, although to some extent that is warranted if interest rates and inflation continue to go higher.

THE IMPACT OF INVESTING AROUND TAX

My philosophy here is that, like Buffett, I see deferred tax liabilities as an asset to be owned for as long as possible. The upshot of that is if you have holdings that are working out broadly in line with their thesis, but are currently overvalued, you do not sell them. I have aimed to sell 10-30% of the holding when excessively valued and buy back in when the valuations become attractive again, sometimes years later. In the past, realised profits have come about in a smoothed manner, making tax management not too difficult. When overvaluation is more widespread, then there are big decisions to be made; high taxes will be paid if you undertake wholesale selling. One reality that prevents realising profits and paying taxes is that tax is 100% certain while future stock price fluctuations and opportunities are not. That is, if we sell at an overvalued price, the tax is payable, but the likelihood of buying in at an attractive price is not a 100% outcome; it is below that.

Another positive of trying to manage tax exposure and maximising after-tax results is that taking losses on thesis breaches becomes much easier; I see them as offsetting tax payable, which is a good thing. However, that strategy ran into trouble this year.

The incoming CGT changes to non-super, non-company structures are a huge impost that hits on the reinvestment of funds when grandfathering is lost. That is when you sell an old investment, the old regime holds, but the reinvested amounts will feel the full force of the new CGT tax. The only real way around this is to structure your holdings in these vehicles to be longer term and low churn. Trade, if possible, in the lower tax super fund. The company makes no difference; it's 30% tax anyway. Of course, the best of plans can come undone as the future is unpredictable.

The table below is what I should have been paying much more attention to make the decision and assessment a rational one. The conclusion is whether the breakeven after-tax price makes the stock a buy or still a sell. If it is still a sell, then sell. If not, then hold or sell some; if the stock is a buy at this level, then most likely hold, or be a reluctant seller. Putting a framework around the decisions improves the outcomes.

LESSONS LEARNT

There is a mixed bag here; I will start with the things I was happy about.

1.      I thought that I had lost a large amount of money buying into stocks with deteriorating fundamentals. There was some of that, but what I did was relatively small. My plan going forward is not to engage in this risky investing strategy. That’s the plan, anyway.

2.      My performance against the peer group was reasonable. IMO, the outcomes for the peer group also point to style rotation playing a big part; my stock picks, within my style, were not too bad.

3.      Most of my losses were not poor companies suffering a broken thesis. Most of the decline came from overvaluation returning to average valuation or lower.

4.      My thesis breach sales and losses were much smaller than the stocks I still see a positive future in but retreated a lot this year. That outcome points to a different error.

The things I didn’t like, and what to do about them.

1.      The whole approach to tax neutrality was shown up this year. It is hard to determine whether that was some kind of freak event, or I should be more active on tax and just wear the cost if overvaluation occurs. The new tax regime clearly incentivises you to hold; that could mean more of the same holding through drawdowns. Putting this to one side, clearly I was nowhere near active enough in selling the stocks out and did not follow my 10-30% rule in too many instances. Following the capital protection/tax drag framework more closely should help.

2.      Although I didn’t lose that much buying into deteriorating fundamentals, I did lose by buying into share price declines where the fundamentals were sound, but there were other more hidden issues. I can improve the due diligence on these stocks in this category or be careful scaling them up. I am fully aware that a great hit rate is 6/10, so taking risk entails losses at times. Fully understand the bear thesis for stocks you are buying; no shortcuts.

3.      My international returns are much better than my domestic returns. I wonder whether part of that is that I am much more circumspect with international; I do not have to have exposure and am more careful. The field is large, and there is less feeling of missing out or forced buying. While in Australia, quality growth is less common and the universe much smaller, which means that you are more likely to buy a poor outcome due to lack of choice. That is one lesson to take away: be patient and be very selective; your capital is always precious. No local compromises.

That’s it; it took a while to compile all the info. Hopefully the lessons learned help going forward.