- The Project $1M portfolio continued strong performance in May and once again has reached all-time highs.
- MercadoLibre, Atlassian, ServiceNow, and Veeva were all strong performers.
- The delta to the S&P 500 has widened as the flight to quality increased.
- An active approach to portfolio management doesn't have to be in direct conflict with a passive approach for self-directed investors.
- Looking for a helping hand in the market? Members of Sustainable Growth get exclusive ideas and guidance to navigate any climate. Get started today »
Project $1M continued its strong performance in May delivering a return of 9.3% compared to 4.76% from the S&P 500. The portfolio now is once again at all-time highs which were last reached during the middle of February. Performance for the month of May was most notably powered by MercadoLibre (MELI) which was up a stunning 46%. ServiceNow (NOW), Atlassian (TEAM), and Veeva (VEEV) were also other strong contributors each delivering double-digit return contributions for the portfolio for the month. May has seen a continuation of the strong performance in April, which has now powered the year to date performance of the Project $1M portfolio to 12.62% compared to the S&P 500 (SPY) (VOO) which has delivered approximately -5% year to date.
My broad investment focus with the Project $1M portfolio is the purchase and long-term hold of a limited number of high growth, cash-generating businesses that are powered by secular tailwinds. The overall objective of the portfolio is to turn a capital base of $275,000 that was initially deployed in November 2015 into $1 million by November 2025 and outperform the S&P 500 in the process. The process to achieve this objective is just simply to buy a great business at good prices and let compounding and time take care of the rest. The initial $275,000 in the capital has been fully deployed and will not be added to for the rest of the project duration.
Project $1M ended May with a balance of almost $608,000, up $60,000 for the month. This was the highest ending monthly balance for the portfolio since its inception. For the first time in the 4.5 years since the inception of the Project, the difference in annualized performance vs. the S&P 500 has blown out and is now almost 10%, which is largely a reflection of a flight to quality, away from sectors and businesses with a more uncertain outlook. I don't expect this magnitude of annualized difference to persist.
MercadoLibre was a material contributor to May
While most of the Project $1M businesses had very strong earnings results and reported well in Q1, MercadoLibre was a particular standout. MercadoLibre's business benefited from an acceleration of the strong secular tailwinds that it has experienced over the last five years. Panicked Latin American consumers went online in droves to meet their consumption needs via e-commerce and MELI was the destination that they looked to do this. MELI delivered revenue growth of 71% year-over-year on a currency-neutral basis and 38% in the US dollar terms. MELI's coronavirus quarter saw active users increase by 30%, with merchandise volumes up by a similar measure.
While MercadoLibre's payments business saw slightly reduced year-over-year growth, I have every expectation that this will be a monster in years to come and potentially better than MELI's core e-commerce business. With the last few months providing many consumers in Latin America with their first taste of e-commerce, MercadoLibre's business benefited from massive acceleration, something which the market duly appreciated and rewarded merely with a 45% appreciation in its stock price for May.
Veeva, Atlassian, and ServiceNow see strong growth in their businesses
The share price acceleration for Veeva, Atlassian, and ServiceNow in May was, ultimately, a recognition by the market that each of their businesses will, in fact, be benefited by the pandemic and the role they play in solving customer needs. In the case of ServiceNow, the businesses results and strong forward-looking guidance and commentary help the market better appreciate that ServiceNow is playing an even more critical role in having IT be able to productively manage through the unique challenges that a distributed workforce will place on the productivity of IT teams and workflow automation. ServiceNow finished up 10.3% for May.
Veeva's platform and collaboration tools are even more valuable to its life sciences and pharmaceutical customers given that most now have to do critical, time-dependent drug development governed by a strict regulatory approvals process with the majority of teams working remotely. Veeva finished up 14.7% for the month.
Finally, Atlassian's value proposition of enabling productivity and workforce collaboration across technology teams in an economical manner has probably never been any more relevant than what it is during this time of crisis. Each of these businesses was still able to grow revenues at rates in excess of 30% during their 'coronavirus quarter' and provide robust guidance through the balance of the year. Atlassian was up almost 19% for the month.
Comments on performance relative to the S&P 500 and NASDAQ 100
I made it a goal at the inception of Project $1M to outperform the S&P 500 over a 10-year period. The question often comes up from readers of these updates as to why bother trying to take on the S&P 500 when it's so much incremental work to shortlist and pursue an active stock strategy. To be clear, I don't think there's anything wrong with the S&P 500 and only index investing. In fact, I think it's a very good strategy for the majority of people.
My Project $1M approach was inspired by Jack Bogle, arguably the father of index investing and his comments back in 2015 that he didn't believe that the S&P 500 would return any more than several percentage points of annualized return over the next decade. I decided at that point that I wanted better performance. While I'm still a little under half way into the duration of the project, I'd explain the variance of the returns from the S&P 500 thus far as due to not being invested in the wrong things, trying to seek out the right things and entering the right things at the right price.
I deliberately and purposefully avoided a lot of the slower growth, high debt, secularly disadvantaged businesses in the S&P 500. Businesses like Ford (F), Best Buy (BBY), Xerox (XRX), and others that I believed were rowing against the tide. Instead, I sought out businesses like MasterCard (MA), Visa (V), Adobe (ADBE), and Alibaba (BABA) which are either underweighted in the index given relative to their high-quality or simply not represented in the S&P 500 at all. I, then, weighted patiently for these businesses to be offered up at prices that I thought made sense. Alibaba was served up in Q1 of 2016, Facebook was meaningfully strengthened in December 2018, and Adobe was more recently added in March 2020.
Nothing in the current results of Project $1M is necessarily attributable to skillful trading or great market insight on the current conditions. Rather, Project $1M is the deliberate study of an approach to long-term investing and the power of having a long-term mindset. The project is reaping the benefits of decisions that were made months and, in some cases, years ago. It's the reason why position sizes in MercadoLibre and Atlassian are multi-baggers of original investments.
The Nasdaq 100 (QQQ) is another point of comparison that tends to come up fairly frequently. While there are obviously a number of components of Project $1M that are in common with QQQ, I didn't initially want to design something that just replicated the Nasdaq 100. I also didn't want to be as tied into Apple (AAPL) and Microsoft (MSFT), which are more than 20% of QQQ, over a 10-year period (in hindsight, this was probably a mistake, especially regarding Microsoft which will have above-average growth from cloud services for an extended time).
Source: Morningstar.com, Project $1M
I was, and continue to be, very bullish on digital payments, as proxied by Visa and Mastercard, elements that were underrepresented in QQQ. QQQ has performed very well over the same time period, as can be seen in the results. Project $1M has outperformed it since 2017, but the magnitude of the gap is not as meaningful as compared with the S&P 500. At the end of the day, I just wanted the ability to select a set of businesses that were high quality which I liked and understood and could be comfortable holding for an extended period.
There are definite disadvantages to the more concentrated approach that I am pursuing. Given so many of the Project $1M holdings are high-quality businesses which are quasi-monopoly or duopoly positions, there is the constant threat of regulation. Regulators may turn around and lower the interchange that MasterCard or Visa could receive. Facebook's (FB) social media influence makes it a constant target for regulators seeking to limit their influence. Alphabet (GOOG) (GOOGL) is regularly the target of anti-trust concerns. MercadoLibre has very specific and very unique exposure to a precarious economic situation in Latin America and elevated currency risk. Ultimately, I am cognizant and comfortable with these exposures.
However, what makes it easier to pursue a more active investment strategy is the fact that I actually having meaningful underlying exposure to the market via a broad-based index like the S&P 500. I've never shied away from index funds, in fact, they were the core of my investment approach, even though my more active holdings now dominate my portfolio. The knowledge that a self-directed investor has in knowing that at least a portion of their portfolio will actually "meet the market" allows a more targeted and measured approach toward higher risk-adjusted returns in other areas of the portfolio and that's an approach that's worked well for me.
The beauty for self-directed investors is you don't have to choose. Portfolio approaches allow you to blend both. The fact that I have exposure to the S&P 500 allows me to go after a more aggressive component. I know if I fail, I'll at least get the market return on some component of my holdings, that to me is the beauty of this approach. I certainly didn't expect to see annualized returns exceeding the S&P 500 by 10% for Project $1M within 5 years of the journey, and no doubt, it's possible this advantage may get whittled over the next 5 years.
I expect it will be a volatile second half of the year to bring up the halfway point for the Project. In fact, I expect the summer to bring a relatively strong retracement in performance, something which has been lacking and long overdue in the high-quality growth area of the market. With the portfolio already up almost 13% for the year, I expect relatively slow growth between now and year end.
Nonetheless, in spite of a more muted share price outlook, I remain optimistic about the business outlook for each of the components within the Project $1M portfolio. The last few months have shown that if anything, secular trends will continue to accelerate for many of the businesses within the portfolio a number of whom have been able to meaningfully accelerate their penetration due to the pandemic.
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This article was written by
I am an investor who is focused on disruptive businesses that are transforming industries lead by visionary leaders with substantial skin in the game. I have spent nearly 20 years in a formal capacity in various investment banking and corporate advisory roles, having attained my MBA with a concentration in finance. This led me toward a path in Venture Capital and working with entrepreneurs building new technology businesses, and I have had the opportunity to not only invest in a number of amazing privately held businesses, but also play a meaningful role in growing several of these early stage enterprises as well. I am now focused on applying my lens of private market disruption and leveraging secular tail winds to the public markets. This was a journey which I started with my public Project $1M portfolio series and which I have deepened with my marketplace service, Sustainable Growth
Analyst’s Disclosure: I am/we are long GOOG, FB, MELI, MA, V, SPY, NOW, TEAM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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