First trade of the year on the main Obliquity Portfolio has been to exit Dignity, the undertaker consolidation firm, and double down on Tesco.
Too shady in the cemetery
Dignity is a business that is natural fit for the obliquity strategy: stable, boring, hard to like. But, and it’s something I had not understood well enough when I took the position, it’s designed more as a financial derivative than a business. Heavily leveraged and constantly adding to debt to maintain the high leverage, via copious dividends and capital returns (which produce an administratively annoying share split every year). With ever decreasing interest rates this works well, but could become a bit risky in any credit contraction cycle. Besides the management seems more interested in financial trickery than the underlying business. As they buy stable small/family firms that do something pretty predictable, it’s hard to cock up in the short term, but I expect long term neglect to lead to loss of market share and customers. Investment bankers just rarely make good businessmen. The position has been quite profitable (more than doubled) so seems a good time to exit, and it also now doesn’t pass the obliquity criteria any longer, via 4 criteria fails: management (I don’t trust them), balance sheet (too leveraged), diversification (none) and price action (too much momentum).
Tesco woes are well known, and to some extent it was an error to buy in when they had fraudulent management and the wrong priorities in customer service (trying to outwit people with clubcard tricks), though it’s also a natural match for the portfolio and even with imperfect product and a fail for management it would pass. I believe that they’ve now got the right management and understand what they got wrong. It will take a while.
I doubled the position which takes it back to a full large cap position (it had almost halved since inception).
Loews: quirky conglomerate
An earlier acquisition, funded by accumulated dividends, during the autumn was Loews, a baroque US family conglomerate doing hotels, insurance, and energy exploration, that is managed in a Buffett-style kind of way. Not the best timing just before the energy prices crash but I trust they will survive it. It’s sort of a miniature obliquity portfolio on its own, and should make a fair long term holding that is structurally unglamorous and thus discounted.