Two months since inception, my annual 2020 Triple Net Active Versus Passive Portfolio experiment continues to provide interesting early results (heavy emphasis on the word early). The Active Portfolio, unveiled on October 21st and October 23rd (up 21.7%) is slightly ahead of the Passive Portfolio (up 19%). Those returns, which would be great for an entire year, have been achieved over two months, and both the Russell 2000 Index and Russell 2000 Microcap Index have done slightly better.
Value has roared back to life. Over the past two months, the Russell 2000 Value Index (up 22.4%) is beating the Russell 2000 Index (up 21%), and Russell 2000 Growth Index (up 19.7%), while Russell Microcap Value (up 22.5%) is also ahead of the Russell Microcap Index (up 21.8%) and Russell Microcap Growth (up 21%). Year-to-date, however, the chasm remains wide, especially between growth and value:
--Russell 2000: up 20.1%
--Russell 2000 Growth: up 34.7%
--Russell 2000 Value: up 4.8%
--Russell Microcap: up 21.8%
--Russell Microcap Growth: up 41.4%
--Russell Microcap Value: up 6.9%
Two months in, all eight Active names are in positive territory, led by Haynes International (HAYN) (up 49%). Still down 28% year-to-date, HAYN has been off to the races in the past couple of months, benefitting from better-than-expected fourth-quarter results, and a lower-than-expected loss (-$0.46 versus -$0.70).
Daktronics (DAKT) (up 32%) has also moved higher -- in part, courtesy of better-than-expected fourth-quarter earnings ($0.08 versus $0.04 consensus). Sanmina (SANM) (up 23%), and Culp (CULP) (up 20%) round out the top four.
The remaining Active names are holding their own:
Madison Square Garden Entertainment (MSGE) (up 14%)
REX American Resources (REX) (up 12%)
Weyco Group (WEYS) (up10%)
Argan (AGX) (up 9%)
The standout in the Passive Portfolio (which includes the Active names plus 19 others) is AAR Corp (AIR) (up 73%), which has been a beneficiary of a rising aviation sector, with the prospects that "normal" travel may be back on the horizon with the COVID vaccines.
The idea behind this experiment of mine is the belief that companies trading at relatively low levels of net current asset value or NCAV, have the potential to provide solid returns. Criteria included the following:
- Market capitalization in excess of $100 million
- No financials or development-stage companies
- Trading at between 2 and 3 times NCAV (NCAV is calculated by subtracting a company's total liabilities from current assets)
Twenty-seven names made the cut, and are included in the Active Portfolio. I then selected the eight names that are most interesting to me, which comprise the Active portfolio, and took positions in all eight. My belief is that in this pond, an active approach can outperform passive.
So far, both portfolios have been beneficiaries of the rising tide of the markets, and it is too early to draw any conclusions.