Analysis by Statpro shows that based on the historic volatility and the weighting of the shares in the JIC Portfolio, that with 95% confidence, you would not expect the portfolio to fall more than 1.2% in any one day. By contrast the FTSE All Share Index would not be expected to fall more than 1.7%. In other words, the JIC Portfolio is expected to be less volatile, or risky, than the Index.
If one drills down it is possible to see the contribution of each holding to the overall risk of the portfolio, which is shown in the "heat map" below. The size of the box represents the percentage exposure of the JIC Portfolio to each stock, whilst the colour represents the contribution to overall risk; the deeper the red, the more risky and the deeper the blue the less risky.
For example, although it is only 2% of the portfolio, French Connection is contributing the most risk whilst Worldwide Healthcare Trust, which is one of the largest holdings, is contributing very little to the overall risk of the portfolio. Cash not surprisingly is contributing no risk.
If I wanted to reduce the risk of the overall portfolio, in simple terms, I would reduce the exposure to the red boxes, (Globo, Agriterra and French Connection for instance) and increase exposure to some of the blue boxes, (Cash, Third Point and Synectics). Whilst this would reduce the "riskiness" of the portfolio it would also most probably reduce its potential returns.
Back to French Connection; I bought the holding in July but initially only felt comfortable buying a 2% holding as it has been a very volatile stock in recent years. I said in a recent "Weekend Roundup" that it felt like a position where, on its next set of trading news, I would either be cutting it or doubling up! If the news is good, I could see the stock having a strong run, however if it is disappointing it could have a sharp fall and be stuck in the doldrums for some time. Some people might not feel comfortable holding French Connection at all, some might think 1% is enough and others more. Ultimately it is a matter of understanding where the risk lies in the portfolio and being happy with it.
Filed Under: Risk,
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