How I manage my portfolio
I have been asked by another Stockopede about how I manage my portfolio. As the length of my reply to the query grew, I thought I may as well turn my response into an article which may be of interest (or a source of amusement!) for other readers. Here it is.
It is a long time since I published anything detailed about my investment approach. This 2006 post from TMF and the older one it links to set out the principles, however. The fundamental principles remain unchanged, though many of the details and (I hope!) my analytical skills have improved – with the benefit of experience of full-time investing (I had been full-time for two years in 2006, after 20 years of "amateur investing") and the help of other experienced investors, many of whom now post here. I feel that the principles have been proven to my satisfaction, having come through the GFC with a below-market loss (-27% in 2008) and very strong gains since (+50% in 2009 and +42% in 2010). I have now extended my asset allocation policy to cover my ISA as well as my SIPP and nearly all my investments are now spread across my SIPP and my ISA - I am almost embarrassed by the tax protection this provides (so no need for me to indulge in spread-betting as a tax shelter).
To reflect my views on the global economy, as well as a need to focus more on income, my asset allocation currently stands as follows:
|
Fixed Interest |
15.0% |
|
High yield |
17.0% |
|
Real estate |
7.0% |
|
Natural resources |
16.0% |
|
International with EM focus |
16.0% |
|
Misc |
20.0% |
|
Cash |
9.0% |
If the markets surge in Feb, March, or April, I will increase the proportion of cash and trim back some holdings, as I suspect we'd then be at around a short term peak and likely to suffer a market correction. If not, I expect I'll just ride out whatever comes. I am currently underweight my target allocation in "Misc". That's fine because "Misc" is entirely discretionary and an overweight position elsewhere can be regarded as part of "Misc"; and am overweight cash and "International". There has been a signficiant pullback in Brazil and India on interest rate/inflation fears which I feel are overstated, so I've gone overweight those regions, for now. I note that Brazil currently trades on a lower P/E than the UK market, which makes little sense to me, given relative growth prospects - though I also note continuing very high interest rates in Brazil, around 11%, which are a more or less permanent feature of that economy.
You may be surprised that my cash target weighting is so low (compared to some other investors’ views). However, I very much see £sterling as a depreciating asset, with negligible yield - so I'm using high yielding investments (both fixed-interest and high-yielding equities) as a proxy for cash and actual cash is just a quick reserve for seizing market opportuntiies should they arise.
I would like to write a more detailed article about this - but have a number of others that I would also like to write and am wary of getting onto a treadmill of having to provide portfolio updates. There are limits to how much time I can spend on writing!
Regards,
Mark
Disclaimer
This is not financial advice. Our content is intended to be used and must be used for information and education purposes only. Please read our disclaimer and terms and conditions to understand our obligations.
25 comments
ee quite likes Reckitt Benckiser ...
I do too. EPS 1999 was 29.0p. EPS 2009 194.7p.
Dividend per share was 25.5p (1999) v. 100p (2009)
Products include Dettol, Harpic and Disprin.
Source: Annual reports for 2000 and 2009 available at http://www.rb.com/Investors-media/Investor-information and well worth a glance.
http://www.reuters.com/finance/stocks/overview?symbol=RB.L says current P/E is 15.32 ... which is very close to what Ben Graham recommended (15) in The Intelligent Investor.
Dave
(disclosure - don't own ... but talking myself into buying some)
Danone could be seen as a part substitute for a general emerging markets investment trust - it might be at about that level of sexiness. How does everyone think £2k in Danone would perform over five or ten years compared to say a combination of £1k in Tesco (equivalent of Danone's European business) and £1k in Templeton Emerging Mkts IT?
Tesco have a fair bit of EM exposure themselves in Asia and Eastern Europe.
I'd see Danone as interesting in terms of being a global brand but my main concern would be over margins and/or volumes in core products like bottled water and yoghurt. In difficult times I'd be thinking that people will be being less "aspirational" (as marketeers like to put it) about the basics and they may see some loss of share (or margin) in their core markets that would offset their ability to penetrate new markets.
Think I'd rather have the Tesco+Templeton alternative on balance, but they are all very well managed companies.
ee
ee,
Yes, of course Tesco do have their own EM exposure - I've shopped in the Tesco Lotus chain in Thailand (50% owned by T?) and I remember they have chains in other countries. I was just suggesting some rough replication of Danone's European business, and of course Tesco isn't exact.
Of course in difficult times margins and volumes will struggle as EM consumers struggle to afford aspirational lifestyles. I guess the whole EM investment thesis though is founded upon a belief that in the long term growth in EM will exceed developed markets and there'll be more growth than difficult times.
Re margins and volumes, I was thinking globally - not just EM. I've got no doubt you are right that long term growth prospects in EM will outweigh the short term occasional difficulties - but companies attempting to grow businesses geographically when they are simultaneously under margin/volume pressure in core established markets may find things tougher.
I don't struggle to think that the European markets are now pretty saturated ex-growth situations for eg water and yoghurt. Recent growth in the former has been enormously (and surprisingly) impressive in the last 5 years....but if you check here for example you'll see that Danone brands Evian and Volvic are both still at a big price premium to the own labels - even the Nestle product is cheaper. I suspect there is a limit to how much punters will pay to be "seen with the right bottle" at the gym..... or even at the dinner table (though most of the UK still uses the highly-commendable TAP brand for such purposes ;-))
Similarly with yoghurt - an absolutely enormous growth market for the last three decades....but with so many products in the segment that it now needs a whole aisle to itself in supermarkets. The (defensive) marketing spend of the big brands must take a fair chunk of the gross margin these days - and again I worry above consumer resistance to premium pricing (though Danone has products at a range of price points).
In terms of portfolio preferences (away from the energy sector), I'd be very concerned to buy earnings fairly cheaply - though I do think that Reckitt Benckiser may be worth a look after moving sideways for a while.....as a pretty defensive long-term growth story I quite like it. I'd personally prefer Nestle to Danone though - I think they have a better spread of products.
I'll get round to all this one day fairly soon.....
cheers
ee
Looking for emerging market investments managed to developed market standards of corporate governance, has anyone any thoughts on Danone as a play on emerging markets consumer demand? Results out yesterday http://phx.corporate-ir.net/phoenix.zhtml?c=95168&p=irol-newsArticle&ID=1528869 .
No doubt roughly fairly valued now, but as an analyst says "Danone is the only global FMCG company that has a 100% weighting into health and wellness. Long term we believe this is a significant competitive advantage as health is one of the few genuine long term growth engines in the global food industry. We like Danone’s focused exposure to 5 exciting growth engines: US & Russian dairy, Chinese and Indonesian water and the large and booming Chinese babyfood market. It is virtually impossible to get this exposure to genuine growth segments from any other quoted food stock". Apparently "The group forecasts “double-digit” sales growth in these EMs, the US included."" http://blogs.ft.com/beyond-brics/2011/02/15/danone-russia-gets-the-cream
Not as sexy as some suggestions, of course, but a well-managed company in attractive sectors playing EM consumer demand? Any thoughts on investing in "International with EM focus" by buying well-managed western multinationals with plenty of business in EM?
Hi SirL,
Certainly one for me to put on my research list. I agree that it could fit well in the "International" category.
Thanks,
Mark
Thanks for your comments Marb.
Whilst I will contribute in a small way to any Fixed Income thread that is eventually set up, it's out of my comfort area to be honest so wont be starting one myself.It's not an area I have really looked at throughout my investing career and whilst I have a basic understanding of the theory behind Bonds don't feel I am equipped to discuss the investment merits of one investment viz another.
GSK was on a very high rating & a low yield 10 years ago due to Biotech and Tech boom. I would'nt have bought GSK if it was at the price it was trading at 10 years ago. Just like currently I am not interested in the likes of BHP / RIO both of which are on a high rating and the share price in 10 years for both could be below what it is trading at today.
Today GSK is on a PE of 10, 5.5% dividend which is growing and a million shares are being bought back daily.
Strong presence in emerging markets, 30 drugs in phase 3 a handful could be blockbusters. Strong consumer division. Recent director buying of 40k shares at £11.80
GSK has been at the heart of FTSE100 underperformance, at somepoint that will have to change. If your expecting a higher FTSE 100 then GSK will be a beneficiary.
I'd rather own a strong quality business like GSK then a FTSE 250 stock hitting all time highs.
For the time being though I've parked my money here as I see it low risk with a decent dividend. I'm looking for £13+ or a better opportunity to put my money.
Markets have had a good 5 months, GSK is defensive, at somepoint markets will correct & people will want to buy GSK. I think it pays to be proactive in this game.
Interesting read Mark,
Would be grateful for a bit more of an oversight into your "Fixed Interest" section. Do you mainly hold your exposure here through Fixed Income Investment Trusts, or say a smattering of Corporate Bonds, (eg Aviva 8.5%) or a mixture of the two.
Fixed interest is still an area where I am underweight, hence my questions... mucho gratias.
Hi Fangorn,
The largest component in my fixed interest subportfolio is currently UK 2030 4.125% Index Linked Gilts. Next I have quite a few NWBD 9% prefs and GACA 8.75% prefs. I also hold a small number of the £ISXF corporate bond ETF (but the yield on that isn't so attractive, esp considering likely interest rate rises) and a small number of LLPC prefs - their dividend is suspended until at least May 2012, however (it's the rump of a holding bought during the GFC at way below par and mostly since sold).
The gilts I regard as the safest holding in my porty, barring deflation - but theey don't yield much (nonetheless, better than just cash: around RPI+ 0..9% redemption yield, equivalent to nearly 6% nominal interest, at present). The NWBD and GACA both currently yield around 8% and seem pretty safe to me - if they managed to continue paying out during the GFC, I can't see them defaulting now.
Cheers,
Mark
Hi Mark,
Thanks for your response on NWBD 9% prefs, and Gaca 8,75% prefs. I see NWBD trades at 107.25, a significant premium to par. General Accident Cum prefs 8.75% similarly quoted above par, 112.5.
Any thoughts on the likes of
Aviva 8.75%
Lloyds 9.25%
BP 9%
I was also looking at :
GBP11 Feb 2011 Aviva Plc XS0138717441 6.125% 16 Nov 2026 15 yrs 9 mths 87.51 Yield: 7.36%
Which looks pretty good imv, nice yield, trading significantly below par. Am already invested in Aviva from 300p/sh equity side.
What attracted you to those prefs you mentioned? The better yield compares to investing in the underlying equity? Would you say investing now, in NWBD or Gaca is probably not a good idea given how they are at a substantial premium to par?
Hi fangorn,
The NWBD and GACA are irredeemable, so relationship to par is fairly irrelevant. Yields for both at current pricing are around the 8% mark.
Might be a good idea for you to start a "Fixed Interest" thread to discuss the others and the topic in general.
This website is an excellent resource. Please support the author. I have, as I think he deseves it for all the hard work he's put in! [I have no other connection with him].
Best,
Mark
Thanks Mark
I'm off to the airport but i will ponder your thread further when I get a chance. Good stuff
S
Thanks for starting this Mark.
Perhaps more people can give a brief outline of what they do for comparison?
I'll start ...
Note: All my money is in a SIPP which I have been investing for 2 years and 2 months now. The CAGR is 18.75%, which I find rather disappointing, but there is no-one to blame but me :-)
Asset allocation is not something I do. Indeed there is no discernible strategy involved, what I try to focus on is finding companies that I can really "believe" in. These will always be in the natural resources space, since I don't like having to worry about a business having competition.
I employ a rather stupid method to work out which companies I am comfortable with. This involves buying them, and then seeing if I can hold on to them. I am subject to frequent paranoid "twitches", both on the macro economic and individual company level. If I do sell out as a result of one of these attacks, then I wait to see if I feel like buying in again later. This cycle may repeat several times before I eventually stop fretting and make a permanent hold.
A tad bi-polar perhaps, but this "madness" only affects my stock investments. In real life I am boringly stable.
Interactive Brokers ultra-low trading costs help with this way of doing things. If I had to pay £10 a trade and eat the spread I would probably be down by now.
If anyone is interested I have thus far only managed 3 permanent holds. These are:-
The obvious easy ways into Brasil are
(a) UK-quoted ITs like http://www.trustnet.com/Factsheets/Factsheet.aspx?fundCode=IWFD4&univ=T and http://www.trustnet.com/Factsheets/Factsheet.aspx?fundCode=FJF26A&univ=T
(b) ETFs like http://www.trustnet.com/Factsheets/Factsheet.aspx?fundCode=B4FS1&univ=E and no doubt many others, especially US-quoted
(c) ADRs of the larger Brasilian companies quoted in New York. I prefer this route, though I admit Brasilian medium-size companies may well be more attractive.
Mark,
What sort of companies are you referring to in "International with EM focus"? Can you give examples?
Hi SirL,
Primarily international investment trusts & ETFs. At the moment I hold:
Best,
Mark
Mark interesting that you have HGT, have you considered HGTS (I have a few hence the interest) & if so any reason for not holding?
More interestingly I run a much more concentrated portfolio (I have about 12 positions at present which is at the high end of where I am comfortable) with no strong view on asset allocation (just whatever I think is likely to rise) and have similar returns to you over a similar time frame (albeit I guess more volatile). It's interesting to see how different strategies can produce similar returns. My main issue is cutting losses on losers or winners that have stopped growing. Do you have a specific approach to this?
I have some £HGTS , acquired when they were issued to HGT shareholders originally. Effectively they're a geared play on HGT (but with controlled downside risk). Personally, I don't feel a need to gear up here - esp if the Euro gets into trouble later this year which could (at least temporarily) upset the applecart. I haven't checked them properly as an arb. opportunity against the underlyings, though...
Yes. I don't. What I look at is newsflow. If my view on a stock (and its value for money) deteriorates, then I will reduce or sell. If the SP declines, I will consider whether there is any rational reason for this. If I can't see one, or think the reasoning is flawed, then I would generally buy more of the cheaper stock. Conversely, If the price of a stock rises, I will generally sell some of it (maintaining portfolio balance), unless I have good reason to believe that the "intrinsic value" has improved. I am instintively contrarian. Sometimes I am right, but sometimes I am wrong. Overall, it works for me!
Cheers,
Mark
Good post Mark, thanks.
I would appreciate it if you could answer a few questions please.
a) Would you be able to tell us the top 5 components you have for each category please?
b) Would you be able to provide an insight as to why your portfolio is structured like this? I'm guessing you have Fixed Interest, High Yield & property 39% for Income as you Invest full time? Aswell as diversity.
c) What has the long term performance been with this strucutre?
d) How comes you have Natural Resources as well as International with EM focus? Given the different risks of the latter, its it not better to have just natural resources?
e)How do youi manage the high yield component of your portfolio? I'm assuming you actively manage this and sell when the price rises and yield declines?
f)very strong gains since (+50% in 2009 and +42% in 2010). Very good performance. Was that across the portfolio or just equities?
I appreciate your responses, thanks very much!
Hi Isaac,
Sorry - but answering all those Q's fully would take more effort than I have time for at present. I hope my response to Siesta has given some clues.
My ISA, started in 1997 has produced an IRR of just over 12% at present. The SIPP, started in late 2002, has produced an IRR of over 16%. The SIPP is signficiantly larger than the ISA and only this year have I started applying the asset allocation policy to the iSA too, as I was so satisfied with the result in the SIPP.
The returns in 2009 and 2010 were for the SIPP in total, including fixed income and cash (even some of the fixed income instruments like NWBD produced exceptional capital gains, as well as income). Those returns are probably exceptional - market conditions certainly were, IMO. To what extent they were due to luck, we'll never know. I do not expect to repeat them but rather use the long term ISA level of performance as my benchmark. Anything over that and I'll be very happy. Ben Graham stresses the importance of being realistic in your investment aims, or you may feel forced to take risks that turn you into a gambler rather than an investor. I agree.
The generic risk, as I see it, in natural resources investments is short-term commodity price volatility. We saw the effect of that in 2008/9. The whole point of the asset allocation strategy is to try avoid having all your eggs in one basket - though I acknowlege that there may be more correlation than I would like, ideally.
The high yield component of my porty is new (as a discrete component, though some of the high yelding investments were formerly amongst "Misc"). I will manage it the same way I do the rest of my porty. I.E. trim back holdings if they become overweight (so there will be an automatic reduction if the price rises and yield falls as a result). Beyond that, I monitor comparative yields and take account of my view of the safety of the dividend. I.e. I wouldn't have too large a weighting in an exceptionally high yielding stock, unless I felt confident that the market had overestimated the risk and would prefer a larger weighting in an average yielding stock where I was more confident of the security of the dividend.
I may come back to some of the other Q's you ask on another occasion.
Best,
Mark
Thanks Mark.
I think 12%/Annual return is very good. What I don't understand is why quite a few people on these boards so readily dismiss dividends?
I've just run my dividend screener and based on Friday's close prices I have found the following yield for top quality companies :
Seven Trent 5.02%
Aviva 5.25%
Astrazeneca 5.28%
GlaxoSmithkline 5.53%
RSA 5.89%
Scottish & Southern Energy 5.93%
National Grid 6.72%
Man Group 8.9%
So my thinking is by holding these companies & getting a 7% capital growth per annum one can meet the 12% return you have recieved on your ISA incl dividends.
Is it really unreasonable to expect the likes of Glaxo which is yielding 5.53% and trading on a fwd PE of 10 to not go up by 10% in the coming year as well as collecting 5.53% dividends? I personally don't think it is, I think it is very possible.
There are people who take small stakes in more higher risk plays that go up 30-40%+ but overall on a portfolio wide basis it really is'nt that much especially when taking into account the losers.
How comes your shifting your focus more towards income over capital growth?
I would agree that it is very possible. Indeed there are many thousands of GSK investors (of whom I am not one) who have been expecting it for years, see below. But surely you want 'very likely' rather than'very possible' as your decision making metric?
db
Hi marben
I salute you for putting your head over the parapet!
I was hoping from the title of the post "How I manage my portfolio" that it might cover some tricks of the trade beyond having a clear Asset Allocation position. Asset Allocation is of course a big driver of performance so no complaint.
But
How did you arrive at this allocation? Do you argue from some thematic world view or is this allocation "received wisdom" from a broker or pundit?
How often do you review the allocation? Annually? When the market goes outside preset parameters? When the fear of losses becomes unbearable?
I understand your point about Brazil. How do you get exposure here, a difficulty discussed elsewhere on this site? An ETF is going to get you a big slug of Petrobras and Vale both of which overlap with your Resources allocation.
Enjoy the tax protection that ISA and SIPPs give you and spare a thought for those of us living in the Channel Islands where we don't have such luxuries :)
Siesta
Hi Siesta,
The allocation is entirely my own decision - but obviously influenced by what I read and experience. Two main factors drove it.
When deciding the allocation, I made the following notes (they are very rough):
Objectives:
Economic background:
Implications:
Since I wrote that I have become more bullish on the US market in the short term and running up to the presidential election - but very nervous thereafter (I remain bearish on the US currency). However, this hasn't caused me to make any changes to my porty, as I already have exposure to that theme via Rit Capital Partners (LON:RCP) , which has quite heavy US exposure currently but hedges currency risks as it sees appropriate (and I'd trust RCP's economic and market judgements more than my own!).
I generally aim to "tweak" it every 6 months (if necessary) - but if something happens that alters my view on the outlook significantly, I will revise. I'm unlikely to radically alter it (hence "tweak") and didn't change it too much during the GFC. The GFC affected my outlook on individual investments more than on the overall allocation. I can live with temporary losses (when I'm not smart enough to avoid them) and that is not something that will suit everybody. 2008 was very tough - but hanging on to those investments I remained confident of in the long run did me proud in 2009 and 2010.
Good point. The diveristy of my exposure to Brazil is not as broad as it should be, ideally. To some extent this is dictated by the absolute scale of my portfolio - which, though decent for me, is nowhere near as large as for some posters here, who are in the multi-million pound bracket. Frictional costs would be too large for very fine granularity. So, my Brazil investment is through 3 instruments: Ocean Wilsons (LON:OCN) , Rit Capital Partners (LON:RCP) - which is investing in Brazilian agriculture amongst many other things - and £IBZL . I acknoweldge the overlap with natural resources IBZL implies but can live with it.
Yeah, right. :0)
Best,
Mark