Marek Sevcik: My Best Performing Stock Is BAE Systems
By Marek Ševčík
Published:
What is your background?
I graduated from the Prague University of Economics and Business in 2018. It took me a little longer than my classmates as I had already started working in J&T Finance Group in 2014. I was very lucky that I met and was mentored by one of the best asset management professionals in the country. As a financial trainee in 2015, I was part of Milan Vanicek´s Research team. There, I started to learn how to evaluate companies. Later, in 2017, I was given an opportunity to help Martin Kujal and Michal Semotan to search investment opportunities as a junior portfolio manager. In 2019, I was already managing three fixed-income funds (one was later delegated to a colleague) and we also opened a balanced fund – J&T Rentier. Today, I have c. CZK 4 billion in assets under management.
When did you start investing?
I have studied the markets since high school. I was never a good student during my school years and I would spend time (and money) reading about trading, and later about investing. I remember telling everybody what I wanted to do for a living. So the path was quite straightforward for me, at least in my head.
What was your biggest investment mistake you have made? And what did you learn from it?
My biggest mistake so far was a trading mistake at the very beginning of my trading attempts. However, I would not call it an investment mistake because the whole process took less than 12 hours. It was in November 2016, when I was trading my personal portfolio as a student.
I became a millionaire at the age of 24 for a few hours and 3 hours later, I went bankrupt.
It was on the night Donald Trump was elected US President. I had my positions opened on the volatile FX market (long USD). Then Trump won in the switch state of Florida and I realized this could mean he was going to win the race. I opened safe heaven bets (long Yen, short stocks). It worked just for a while. Then the positive narrative of a business guy in White House kicked in and stocks started to rally. Today, it is just a funny story but you can imagine that at that time, I was not the funniest guy to be around.
The greed took over and my risk management was non-existent that night. But I think this was an easy lesson. It is not very hard just to check your exposure. The hard lesson for me at that time was that not everything you hear on TV or not every conclusion from market analysts is right. You have to think for yourself. Everything around you is just advice and you have to take it with a pinch of salt and question others’ opinions. Since then, I have proactively sought counter arguments for each investment idea and every time the consensus shifts too much in the same direction, I see a big red flag.
Who are the best investors you follow?/What investors do you admire most?
Of course, there are some must-read names like Benjamin Graham and Warren Buffett if you are a value investor. But from my point of view, Berkshire Hathaway is a too concentrated portfolio. Given the strict regulation on UCITS funds, I could not follow Warren Buffett’s strategy even if I wanted to. Ray Dalio (in his book Principles) with his methodical approach towards the portfolio or Andre Kostolany’s (Kostolanys Börsenseminar) contrarian point of view are a much greater inspiration to me.
Where do you get your investment ideas? (Describe your process, sources, …)
I spend most of my work days reading or looking at macro charts. (I will get to my investment process and why I have a top-down approach later.) So, at the beginning, I study the macroeconomic situation and try to assess the future path of monetary policies in different areas/countries – this is crucial when you invest in bonds as the macro situation and the next steps of central banks are what determine the interest rates and prices of bonds. When you have formed your opinion on the future monetary policy, you are just a step away from having an opinion on the stock market – these two simply cannot exist separately as interest rates and liquidity affect each other.
Besides that, I’m grateful to the guys I work with. Often, I have exhausting discussions with my colleagues as we are trying to look at our ideas from a different point of view. Like every human, I have my blind spots and suffer from a confirmation bias. The team I work with is a big part of the fund’s results.
What is your investment strategy? And has your investment strategy changed from now and a few years back?
Back in 2017, I was a bottom-up investor. But that changed quite quickly as I found it more practical (as a mainly bond investor at that time) to start with the macro picture first. Generally, for fixed-income portfolios, we study economies of different countries and try to estimate the future path of monetary policy there. You don’t necessarily need to know exactly where the interest rates will be one year from now. The trend is more important – whether the monetary policy will be looser, tighter or stable. Then, you go deeper into different sectors and do your research on the companies. As bond investors, we do not need a spectacular story. We just take the financials of a company, make the bear case with them and if we find the solvency of the company still acceptable, the company will be among the names we can choose from.
For more efficiency, when analysing the stock market, I just use the macro insights we have from fixed-income asset management. That makes me naturally a top-down investor. At the level of single companies, we try to fulfill the mandate to invest mainly in dividend stocks. In almost all cases, the cash flow statement tells you if the company has a sustainable dividend or not, at least looking a few years back. Then, we try to evaluate the business model of the company, which should tell you whether you can expect the trend to continue in the future. This basic investment philosophy very often disqualifies growth stocks from the selection and makes you a value-based investor.
How concentrated is your portfolio? How many stocks do you have in your portfolio?
It depends on the mandate. J&T Money II is a fixed-income portfolio with UCITS regulation for the general public. I keep most of the positions at around 1% in the case of a foreign investment. When it comes to local bonds, we are a bit more aggressive. The second fixed-income portfolio is much more concentrated since it is a fund for qualified investors.
In the balanced portfolio, I apply the same strategy to fixed income as with Money II, with positions of around 1%. In the more dynamic part – stocks make up about 50% of the portfolio most of the time – I keep a limit of up to about 10% per sector with a standard single weight of 2.5%. This results in 20-25 stocks in the dynamic part.
Do you invest only in stocks?
I manage three funds. Two are fixed-income portfolios. The third consists of dividend stocks and bonds (corporate and government) with flexible weights, where the neutral allocation is 50% of stocks.
Last decade, there was not much to find in government bonds as the yields were extremely low, even negative. The situation is different now, of course, and not only from the yield-to-maturity point of view. The volatility on the longer end of the yield curve has increased significantly and even more active strategies can find the movements in price attractive. Still, the core of my fixed-income portfolios consists of high-yield corporate bonds.
Tell us your 2023 outlook. What do you expect?
Firstly, I am in the camp „Inflation is heading lower“. However, I am also in the camp „Not so fast“. At the moment (January 2023), I expect the central banks to continue with the monetary tightening, whether by shrinking the balance sheets or hiking interest rates. Despite their efforts, they have seen effective loosening of monetary conditions in the market – the market does not believe them. But I think they are serious and they are willing to take the risk of causing a recession in their fight against inflation. Therefore, we could see one more jump up in long market rates, causing risk assets to reprice lower. I can imagine adding some risk there, but not now. The outlook seems too optimistic and by nature, I am a little of a contrarian.
What were the biggest/most significant changes in your portfolio this year?
We did not make major changes in January. The main topic was CEZ and I do not trust the Czech government in this matter. There are many companies in the market and, simply put, I do not want to add a political risk with CEZ. We have sold half of our position and we will seek opportunities elsewhere. Now, 50% of our portfolio is made up of mainly dividend stocks (Check out our “Stocks that pay dividends” Screener ), 29% of corporate bonds, 5% of Czech government bonds, 4% of gold ETF and 12% of cash.
In the fixed-income part, the plan is to add duration, especially in the US and Czech Republic. In the stock part, the Tech sector is what we are looking at. However, strong free cash flow generation will probably continue to be the main part of our investment philosophy.
What is your ROI YTD? And what is your ROI since the foundation of your fund?
The J&T Rentier balanced fund has added 4.6 YTD and 6.1% p.a. since the inception of the fund in March 2019. The more conservative portfolios, J&T Money II and High Yield CZK, have added 3.7% p.a. and 4.5% p.a. since inception, respectively.
What is the best performing stock in your portfolio currently?
Definitely BAE Systems. We’ve had a long position since March/April 2019. Since then, it has added over 70% in capital gains plus about 20% in dividends. It is one of the largest suppliers of defence equipment to NATO countries. It is a typical dividend stock with great pricing power, long term contracts, solid capital allocation and a long-term track record. Three to four years ago, we found British stocks cheaper compared to other European countries, undeniably because of the Brexit chaos. After looking at the numbers, of course, we told ourselves – it is extremely hard to exclude BAE Systems from military spending, so this is a great opportunity.
What is the worst performing stock in your portfolio currently?
I must admit, we had a position in Russian stocks – Gazprom and Norilsk Nickel. The result is obvious – minus 100%. It cost us 4% of the AUM. Nothing to be proud of, but nothing critical. The losses are within our risk management rules.
Which stock do you believe has the biggest potential in your portfolio and why?
European real estate in the short term (Vonovia, CTP). Naturally, higher interest rates are negative for the sector. They can dampen the valuations. However, we probably won’t see house prices go down 50%. These companies provide something essential to people and in big cities, the demand is higher than the supply. In some cases, a few months back, we saw real estate stocks down as much as 70% from their local highs. Many of them have sustainable leverage and healthy cash flow. So we made a European real estate bet with a 5% weight of the portfolio.
In the long run, it could be the defence stocks.
We see a structural shift here – some NATO countries will double military expenses and we believe this is not something to fade out in two, three years. And obviously, they have enormous pricing power. In many cases, there is simply no other company to deliver the contract.
We have accumulated the sector since the inception of the Rentier fund in 2019, and so we were already there when the war in the Ukraine started (BAE Systems). Then, we added Colt and Lockheed Martin. At the current price levels, it is hard for me to buy and we just continue holding the stocks.
Which sectors do you believe will outperform in 2023 and 2024?
I think that there are big opportunities in the European real estate market.
Of course, there is a probability of some defaults. Higher interest rates naturally increase the risk for highly levered sectors. However, the sector as a whole will survive and we see multiple opportunities there, whether in the stock or the bond market. One can never be precise with timing and maybe it will be the story of 2024. Nevertheless, we see a value there.
Which stock(s) do you believe will double in 2023?
As a dividend investor, I do not target a 100% gain within one year.
What do you believe will be the next black swan event in 2023?
I’ve already mentioned one of them – inflation will stay elevated longer than the market anticipates. This will have negative implications for the stock market (probably) as the Fed will have to keep the rates higher for longer.
From the geopolitical point of view, we can see further escalation of the war in Ukraine. If the Ukrainians start an offensive in Crimea, it could trigger an escalation from Russia. The situation is highly unstable and fluid there, of course. But I feel that investors are getting a little bit complacent about the conflict. Nevertheless, it is a war and anything can happen.
What is the best stock for the long-term to buy?
It always depends on the price. At the moment (January 2023), I do not see a screaming buy. Your readers can view my portfolios at jtis.cz, updated monthly. However, almost any stock mentioned there was bought lower – the NAV of the fund is at all-time highs now.
