[Opinion/Update] General Commentary - Portfolio
AMZN, MCO, ADB.KL
Well, we couldn’t have started this year anymore differently than we did last year.
As I tried to communicate in my 2024 Annual Letter, I’m looking for less conventional value. I’m doing this less so out of any absolute orientation (I’m no stickler for rigidly identifying with a certain market capitalisation or geography for example), but out of a desire to identify more of the great opportunities I was able to, with the help of many friends, in 2024. I don’t, however, expect to replicate that year’s performance anytime soon.
I’m going to take a stab at a few themes despite the fact that my predictions at the macro level haven’t been as good as anyone else’s - although I’ll say with some pride that I have been successfully intellectually long rates while having a considerable short rate exposure in the portfolio
It seems that many of last year’s trends are continuing unabated into this year. Bucking this generally has been the recent rally in Chinese equities and ADRs. No comment on this specifically (*wink*). Keep in mind when you’re reading the filings of your favourite Chinaco that this is a country that habitually lies about its own population count and GDP growth rates. Most pressingly, you might want to ask why your favourite large corporates are returning incredibly modest capital to shareholders despite requiring modest capital investments. Discount accordingly, friends.
Certainly the recent developments in AI - the DeepSeek affair specifically - has only confirmed my working theory that more and more of the returns in the economy will accrue to equity going forward, as they have been for the better part of four decades! On a broader level, I think this is a very good thing for the holders of revenue royalties and those companies that have some kind of franchise. It’s decidedly less good for those who rely primarily on their own salaried labour to put food on the table.
Where a corporate holds a institutionalised edge, or owns some kind of valuable intangible asset, the future looks decidedly brighter than it could have been otherwise. As an example, I’m imagining companies like Moody’s and S&P Global emulating margin structures of pure royalties. If labour costs, of any description frankly, are your largest expense item, very interesting times are on the horizon for you. Speaking of Moody’s…
Moody’s
I’ve maintained a small position in Moody’s from about this time last year (time is really flying). Moody’s is of course a wonderful business but it is at a far more mature stage of its development than other companies in my opportunity set. The start of last year presented an interesting situation for investors to take a fairly opportunistic stab at the company while it was reporting material improvements in its operations (debt maturities were shortening across the gamut of corporate issues, and a significant amount of demand pull forward materialised before the US Presidential election). As someone who has based their entire investment approach off of the example of a company like Moody’s, it spoke to me on a spiritual level.
One of the great tragedies of modern finance has been Moody’s Analytics (MA). Springing forth from the various passion projects of the Moody’s executives of old, MA has been an flagrant episode in arson a la shareholder capital. This is, of course, evidenced by the fact that the original MA business lines advertised to shareholders in 2007 are, for the most part, non-existent. You know what still exists today, and what existed 50 years ago, and what will likely exist 50 years from now? You’ve got it - the Moody’s credit ratings business (MIS).
My recent interest was piqued when management low-key (am I using that right?) committed to a general cessation in corporate development activity at the start of last year. You can imagine my dismay, although not surprise, when Moody’s announced relatively small acquisitions in both Q3 and Q4. To be sure, the company has always committed to returning 80% of free cashflow to shareholders in the form of share repurchases - but I long for that other 20%.
Moody’s, along with their friends at SPGI, exercises remarkable modesty with their pricing lever, and perhaps that’s just as well. They commit to a very reasonable(?) GPD + 1% or 2% growth algorithm in their rating’s business which is fine but it doesn’t necessarily stir the (investing) loins. My practice has always been to use these smaller positions as a source of funds for when better opportunities avail themselves - and I stated as much when I took this position.
Honestly I’d love to own the company again, and I am sure there will be future opportunities to do so. Fluctuations in the underlying markets for corporate debt issuance, pricing power changes, asset divestments, and a levered recapitalisation could be good catalysts to keep an eye out for.
Amazon
I think Amazon is one of the best businesses in the world. It also has the long term vision to match its incredible business lines. As I have posted about at some length, the certainty of Amazon’s path forward has become hazier and hazier as of late. There are capital expenditure considerations, capital allocation questions, and of course long term growth considerations. I am not negative at all on the company but I simply feel that the bet today is at least a little less clear than it was 3 years ago, and it trades at much closer to what might be called fair value. I believe the company will continue to do great things - but I am trimming the position again to free up cash for other opportunities.