The results are in for last year's Triple Net Active vs. Passive Portfolio experiment, and I am both surprised and pleased by the results.
My plan was to identify a group of companies trading at a relatively low level of net current asset value, to see if they could outperform selected benchmarks as a group -- the "Passive Portfolio" group. The idea was also to see whether a hand-selected subset -- the "Active Portfolio" group -- could outperform the Passive one. In this case, the level of net current asset value was between 2-times and 3-times -- I call these "triple-nets."
Both portfolios exceeded my initial expectations, but the Active one won by a landslide, going up 37.2%. Still, even the Passive Portfolio was up 20.3%, which was well ahead of the benchmarks I've used:
Russell 2000 Index: up 6.9%
Russell 2000 Value Index: down 9.3%
Russell Microcap Index: up 11.3%
Russell Microcap Value Index: down 5.3%
Six of the eight names in the Active Portfolio were in positive territory, led by Fitbit (FIT) (up 105%). Early on, FIT was doing all of the heavy lifting in terms of returns, but in the end, Astec Industries (ASTE) (up 87%), MarineMax (HZO) (up 84%), Johnson Outdoors (JOUT) (up 48%) and LiveRamp Holdings (RAMP) (up 45%) all made significant contributions. National Presto (NPK) (up 8%) managed to limp into positive territory. The laggards were Crimson Wine Group (CWGL) (down 33%) and Dril-Quip (DRQ) (down 51%). I still own the disappointing (CWGL) , which now trades at just 1.51-times net current asset value, but sold FIT when Alphabet (GOOGL) made its offer to acquire the company last November. This year, I will own all names in the Active Portfolio, which will be rolled out on Wednesday and Friday.
In the Passive Portfolio, 29 names were in positive territory, led in order by Cyberoptics (CYBE) (+160%), American Semiconductor (AMSC) (up 113%), and the top three names in the Active Portfolio, FIT, ASTE and HZO. That I ended up picking three of the top five overall performers for the Active Portfolio was, in my view, mitigated by picking two of the bottom five, CWGL and DRQ, the worst overall performer.
Still, this was a worthy pursuit, and may provide some small evidence that there are still areas of the market where active management can outperform passive. In a way, even the Passive Portfolio in this endeavor has some active qualities; namely that triple-nets are a subset of the small and microcap universes.
In late 2018, in a less formal Active vs Passive triple-net experiment -- in which I did not provide monthly updates -- the Passive approach ended up winning. That year, those singled out as my favorites were dominated by retailers, and underperformed. Last year's Active Portfolio was a bit more balanced in terms of sector/industry representation, and I expect that this year's will be as well.
The performance of "triple-nets" overall in the past year was stellar, and whether that was luck, or whether there is actually something to the concept is up for debate.
