I recently made three trades, so it's time for a blog post and an update to My Portfolio.
On October 26, I sold my whole position in Invesco DB Commodity ETF DBC at $17.45 per share. From my initial purchase date, the investment was a slight loser, but it had been one of my better-performing holdings during the last year. Indications that commodity prices, especially in oil, might be poised to fall had a small influence on my decision, but the trade was mostly driven by my desire to raise cash and take advantage of the recent equity selloff (sell high, buy low).
My evolution as an investor also played a role. There’s a common logic behind investing in commodities: They possess a powerful inflation hedge, and, often, exhibit strongly cyclical returns to the advantage of investors. However, I have no idea how to judge the relative value of commodities and I have no desire to learn how. I don't want to own something that I have so little interest in. I've also tried to reduce (or at least limit) my total number of investments. My current hurdle for making an investment is much higher than it was years ago when I bought DBC.
The proceeds from the sale were used to fund two purchases in names that I already own: Enbridge ENB and Artisan Thematic ARTTX.
Buy Enbridge
During October's volatile equity markets, ENB dropped below my initial purchase price. Since I continue to think it's one of the most attractively valued stocks today, I jumped on it, buying on October 31 at roughly $30.80 per share.
Enbridge is a midstream company, which means it transports and stores oil and natural gas. Midstream companies are generally protected from the wild swings in oil and gas prices because they aren't doing any of the exploration or extraction. Rather, they simply charge tolls to transport the materials. They often have strong “moats” around their business, since pipelines are expensive to build and, once built, are highly unlikely to see competition along the same route. As a result, midstream companies are generally stable, boring investments that pay an attractive dividend.
However, various issues have weighed on the stock price of ENB, including regulatory resistance to upgrading/replacing one of its largest pipelines. The company is also in the process of rolling up its numerous subsidiaries, after recent tax and regulation changes made operating the subsidiaries less attractive. These are meaningful challenges to both management and shareholders.
I view these issues as short term and used them as an opportunity to buy, with the understanding that it might take until 2019 or 2020 for things to turn around. When I made my initial purchase in April 2018, I expected this would be at least a five-year trade. In the meantime, ENB pays a very attractive 6-percent dividend, so I am getting paid to wait. Morningstar’s equity analysts have a fair-value estimate of $47 on the company, and assign it a “wide” moat rating. This indicates that Enbridge has a defensible business and should be able to generate excess returns for many years.
The Texas State Capitol in Austin.
Buy Artisan Thematic
The other purchase I made was an addition to Artisan Thematic ARTTX. This is a new mutual fund that was launched in April 2017, and I first purchased it in October 2017. The fund does not fit the normal criteria I would require for an investment. The strategy didn’t have any other vehicles or backtests where I could observe its performance; the manager is young and unknown; and its fees are above average.
I was willing to make the purchase for two reasons. First, and most importantly, I have a lot of respect for Artisan as a firm. While I was not able to do the usual level of due diligence on the manager and strategy, I trusted that they did. Launching a new investment team at Artisan is not a small thing, in part because managers are very aligned with their business and are often required to give two or three years’ notice if they plan to leave or retire. Artisan rarely launches new strategies and frequently closes funds to new investment, which protects existing shareholders. The simple fact that the firm launched Artisan Thematic was a signal that the fund was likely to succeed.
The second reason is that, at the time, I was explicitly looking for a riskier, out-of-character investment. My 401(k) has all the core options I could ever need, so I wanted to add something unique. I will eventually add a longer explanation of the strategy under the My Portfolio section, but the quick-and-dirty is the fund is highly concentrated with high turnover, and often uses options to hedge or add exposure. The same team also runs a private long/short equity strategy.
I made the add-on purchase on October 31, the same day as my ENB add-on. From my initial purchase through September 2018, I had been very happy with the fund’s performance – but it was the performance during a volatile October that convinced me to add to the fund. It landed in the top 1 percent that month, losing 4 percent while the average large growth peer lost 9 percent and the S&P 500 lost 6.8 percent. It’s impressive to see a growth-oriented manager hold up so well during a selloff in growth stocks; part of that is due to the team’s use of options to hedge downside risk.
Wrapping Up
Despite the recent market volatility, I only made two purchases in names I already own. I’m actively resisting adding new investments just because I feel they are cheap. And, to be honest, the market didn’t get cheap enough for me to start a position in a new name, and I haven’t had the time to do the necessary due diligence. However, there are two names on my short list for future buys: AB InBev (BUD) and Artisan High Income (ARTFX).