The first year

First of all we wish you a happy 2011!

At this time of year investment managers usually look back at what the previous year has brought and make predictions about the performance of stocks, bonds, real estate, and the latest hype – gold – in the year to come. We are not very good at predicting, so for now we will focus on looking back. We might be slightly biased here, but we think 2010 was a momentous year as it saw the birth of Triple Partners and the implementation of the Investment Solution. Many of you have joined us as partners and we are excited to have you on board.

Performance Although we don’t like to talk about short term performance, it seems odd not to discuss our results at least once a year, so here it goes: since the inception of Triple Partners in August 2010 the stock markets have been benign to investors. As a result our Core Portfolio went up 8.8%. If we include the performance of the ‘informal family office’ that most founding partners were invested in since mid 2007, the return was 14.5% over 2010 as a whole.

In order to make any judgment about this performance it is standard practice to look at what the benchmark has done. For the Triple Partners Core Portfolio we use a benchmark that consists for 80% of the MSCI All Country World Index (including Emerging Markets and reinvested net dividends) and for 20% of the Citigroup World Government Bond Index 1-5 years (hedged in Euros). This benchmark went up by 9.3% over the same five-month period, as illustrated by the following graph:

Although the overall return looks more than satisfactory, you might be slightly disappointed that the performance managed to slip just behind the benchmark in the last month. However, very few managers outperform an honest benchmark over the long run and practically matching the benchmark secures your place with the best. That said, deviations from the benchmark, either above or below, are something you may need to get used to. The benchmark is made up of indices, which are not available for direct investment. An index merely shows the performance of a list of securities and therefore does not reflect the costs associated with investing in an actual portfolio. No one can invest without incurring costs. To clarify what this means for the Triple Partners portfolio, we have listed all the costs of investing in the year-end statements that each partner has received. We have split these costs as follows:

1.One-off transaction costs for new investments consisting of:
  • A fixed administration fee of €50, which is paid to Intertrust, the administrator of the funds, each time you make an investment in a Triple Partners portfolio.
  • A variable transaction cost of 0.10% of your investment, associated with the cost of purchasing the underlying investments in exchange for your deposit.
2.Recurring costs, consisting of:
  • Management fees for Triple Partners, which includes all our operational and other costs.
  • Management fees and operational expenses for the underlying investment funds, together called the Total Expense Ratio of these funds.
  • A rough estimate of the transaction costs in the underlying investments. These transaction costs are not published, but we have estimated the amount based on a range of academic research on this topic.
As a long-term investor your main concern should be the recurring costs, which currently stand at around 1.4%. Does this mean you should expect the Triple Partners performance to equal the benchmark return minus 1.4%? If it were purely an MSCI AC World and government bond index fund this would be a good assumption. However, as we have described in our investment letter of October 2010, this is not how our portfolio is structured. First of all our equity investments are more diversified towards small and value stocks. These stocks have historically shown higher long-term returns than the large cap stocks, which are part of the MSCI world index. However in the short term small and value stocks can be more volatile: show higher increases when the markets in general go up, but also more losses when markets go down. This small and value effect is balanced through our exposure to GMO, a disciplined investment manager, that aims to avoid exposure to markets and asset classes which show excessively optimistic valuations compared to their long-term historical average. This part of the portfolio should decrease the overall volatility. We also hold some exposure to listed real estate investments and precious metals to further improve the risk-adjusted profile of the portfolio. On the fixed income side, our investments have exposure to both high quality government and corporate bonds, whereas the Citigroup World Government Bond index, as the name suggests, only tracks the performance of government bonds. Bond markets were sluggish in general as a result of increasing interest rates, with the short-term government bond index losing 0.5% in value over the last four months. Corporate bonds lagged government bonds and as a result our Fixed Income Portfolio underperformed its benchmark, showing a loss of 1.6% (see graph below).

This also had an impact on the performance of the Core Portfolio, as it has a 20% fixed income component. We feel comfortable with our decision to include high quality corporate bonds though. The primary objective of our fixed income exposure is stability and long-term capital retention. Given the fiscal challenges of governments on both sides of the Atlantic, not to mention those around the Mediterranean Sea, it makes sense to diversify to strong corporations.

Conclusion So, what does all this mean? Since we are not very good at predicting we are not sure how we will perform relative to the benchmark in the short term. It depends on the relative performance of small caps, value stocks, gold and real estate versus large caps amongst others. We can say that it is likely that our performance will be different than the benchmark. It might be better, but could be worse. The benchmark serves as a guide to confirm we are on the right track with respect to the risk taken in each portfolio.

Over the long run however, we believe that we should be able to show net returns after costs that are close to the benchmark before costs. Not because we have found the magic formula to pick stocks and time the market to compensate for our investment expenses. But because historically, a well diversified and cost effective global portfolio that includes small caps, value stocks has outperformed a global index of large cap companies (see graph below).

In fact, we believe that our disciplined approach and focus on risk management should ensure that on a risk-adjusted basis our returns will actually be more attractive than the benchmark index. In other words, we expect to see similar returns, but with lower volatility.

We can point you to academic research that supports our investment philosophy worked for the last 85 years during which the world suffered through a depression, a world war and encountered many other serious and unforeseen events. But how will you really know if this ‘prediction’ is correct and that it will also work in the future? The only way to find out is to stick around for the long run. We usually define the long run as at least seven years, which incidentally is also the investment horizon for our Core Portfolio.

Have a great year,

Marius and Jolmer