Stock in Focus: Does the portfolio contain too many cyclical stocks?

Tuesday, Jun 12 2018 by
Stock in Focus Does the portfolio contain too many cyclical stocks

Is the SIF portfolio too heavily exposed to cyclical stocks? It’s a question I’ve been asking myself more and more often. Of the 18 stocks currently in the portfolio, only two or three can be classified as defensive:

  • Specialty pharmaceutical supplier Alliance Pharma

  • Animal feed and fuel/heating oil group NWF

  • Insurance and employee benefits group Jardine Lloyd Thompson (some elements of this business may be defensive, or at least not linked to standard economic cycles)

This cyclical bias means that the portfolio’s sector weightings are very different to the market average:


In some ways I’m comfortable with this. I don’t think you can outperform unless you take a different position to the wider market. But taking such a divergent position also increases the risk that I will underperform the market at some point. The portfolio’s heavy cyclical bias means that it’s especially exposed to the risk of a UK downturn.

Is it time to turn defensive?

Two years after the portfolio was launched, we’re obviously at a later stage of the current economic cycle. Despite this, most of my cyclical stocks are still performing well:


However, when viewed as a whole, the portfolio doesn’t look quite as cheap or safe as it once did.

SIF portfolio, November 2016 (dark blue line represents SIF):


Back in late 2016, the portfolio seemed to be delivering on its brief of buying affordable growth.

That’s still true today, but the figures are not quite as compelling as they were 19 months ago. Here’s how the portfolio looked at the time of writing:

June 2018


P/E: The portfolio’s aggregate P/E ratio is higher than it was, although it’s still below the market average.

Dividends: The average dividend yield and the level of dividend cover have also worsened, although they remain ahead of the wider market.

Earnings growth: At first glance, the eps growth and PEG ratio scores look poor, with SIF lagging the market on both counts. To address this, I’ve massaged the data and provided some improved alternatives, which are shown in green!

In all seriousness, the reason I’ve calculated alternative figures is to address some anomalies in the Stockopedia data. Forecast eps growth and forecast PEG…

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5 Comments on this Article show/hide all

Techno Trousers 12th Jun '18 1 of 5

Hi Roland
Interesting read, and always enjoy your submissions.

You ask with regard to our approach to portfolio allocation, and similarly to you, I follow a bottom up approach, trusting that a reasonable balance is established, although a quick look would probably reveal this not to be the case. I do not try to 'force' a share into the portfolio, simply because it belongs within an under-allocated sector. If I look at current holdings, like yours, it really is not well balanced at all. Industrials make up 29% of my portfolio, whilst Defensives are only circa 4%. Am I concerned about this? Currently not, but time will tell!
Unlike yourself, I do not hold for a specific length of time, and will sell quickly if I have made a mistake, and determine this solely on performance criteria, with a kind of stop loss, although I rarely place automated stop losses. So, to a certain extent, if there is a market downturn, maybe I am a little covered by this approach, although of course it is important not to get stopped out low and buy back again high. So, not to sell is also a decision that is there to be made.
I like your comment 'economists have predicted nine out of the last five recessions' and likewise, I have no particular view on this and agree fully! I invest across UK and Europe, so maybe geographical spread helps a little, although I remain to be convinced that it will aid me as much as I would like if there is a UK collapse in the wake of some further Brexit type disaster. We seem to be wallowing in a sea of almost total political incompetence IMHO, and this is not aiding the investment climate. The sooner this Brexit calamity is resolved, one way or the other, the sooner we can move forward with greater confidence and a vision that projects beyond the absolutely immediate future.

Good luck with your SIF, and I follow with interest.
Best Regards, TT

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UK Value Investor 12th Jun '18 2 of 5

Hi Roland, here's my take on cyclicals:

As a general rule I try to have at least a third of my portfolio in defensive sector stocks as another way to reduce risk. At the moment this is proving very difficult because defensive dividend-paying stocks are mostly still flavour of the month it seems, with valuations that are too high for me.

I currently have about 72% in cyclical companies, although that may go down a bit if I offload BHP Billiton next month, which I probably will do if its price keeps creeping up.

72% in cyclicals is a bit high for me, so I am trying to bring it down, but so far it isn't keeping me awake at night.

Blog: UK Value Investor
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Roland Head 12th Jun '18 3 of 5

In reply to post #372989

Hi TT,

Thanks for your comments. I agree that being able to sell quickly might be an advantage in a serious downturn. However, in my view it's not always obvious whether we're seeing a minor wobble or a serious downturn. I remember seeing headlines about the market "crashing" earlier this year...

I tend not to try and react too quickly to changing market conditions, because I find it impossible to consistently make the right judgements.

Instead, I tend to do nothing for a while and see what happens. Quite often, things seem to work out okay.



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Roland Head 12th Jun '18 4 of 5

In reply to post #373014

Hi John,

I've followed your blog for years with interest, so I'm encouraged to see that you've had the same problem as I have finding reasonably-priced defensive stocks!

Like you, I'm fairly comfortable with my cyclical weighting at the moment, based on each company's performance. But I'm aware that when the tide does turn, my portfolio will be in uncharted territory (like many post financial crisis portfolios).

In this article I've documented what I hope will happen, so I have a record to refer back to in the future!


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Hot Socks 12th Jun '18 5 of 5

I'm relieved to know I am not the only one having this problem. At the moment I am 34% industrials and 18% consumer cyclicals.

I would like to have more defensives in my portfolio but they all seem too pricey. I have thought about buying anyway given that long term they are likely to pay off but have not done so.

I have started to look for defensive qualities in other ways. For example I recently bought both Babcock and QinetiQ because they had low valuations, defence has defensive qualities (!) and they both benefit from stable long term income streams. They are both up 30% since purchase which I am pretty pleased with although with a slightly guilty feeling that it may be more blind luck than anything else.

I am now thinking about banks with high international exposure. They are generally considered ultra cyclical but if they are following the global cycle and on low valuations they would have defensive qualities as compared to stocks with a UK exposure.

I am also thinking about supermarkets, a sector I have steered clear of in the past but which is generally classed as defensive. I was intrigued by a comment in Investors Chronicle that in the 1980s and 1990s supermarkets were the darlings and consumer goods businesses like Unilever their unloved cousins.

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About Roland Head

Roland Head

I'm a private investor and writer on stock markets, with a particular fondness for free cash flow, dividends and value. I also have an interest in commodity stocks.  I hold the CFA UK Investment Management Certificate (IMC). One of my investment interests is developing rules-based strategies such as my Stock in Focus portfolio. This reflects a significant part of my personal portfolio and is the subject of my weekly column here at Stockopedia. In earlier life, I worked as an engineer in telecoms and IT. The rules-based approach required for this kind of work undoubtedly influenced my investing style. I also learned a lot from seeing the tech bubble deflate in 2000-1, when I was working for a large and now defunct Canadian firm.  more »


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