Towards a Balanced Portfolio
This coming weekend I will be launching the ISA01 real money portfolio to coincide with the new ISA tax year. I will also publish and track the holdings for each of my three investment strategies; Focused Income, Compound Growth and Special Situations.
Context and Goals
I am in my early 50s (as is my wife) and we plan to retire before we are 60. We have a focus on capital appreciation over these years and our equity portfolio is one aspect of achieving this. My employment involves much international travel and busy days, therefore, I need to have a portfolio that is low on maintenance and low on surprises. I am looking for a high level of predictability in our portfolio performance. Moreover, I am looking to hone my investment strategy and skills to provide even more predictability in our retirement. To this end, I am looking to gradually move from a growth oriented strategy to an income oriented one over the next 5-8 years.
Overall, my aim is to outperform the FTSE All Share Index on a consistent basis (otherwise I should just invest in funds) and deliver an average total return of at least 10% per annum – in reality I am looking to exceed this level of return because inevitably, there will be the odd bad year, especially when markets are in decline.
Focused Income Strategy
I am still refining this strategy as part of my medium term strategy to move towards income orientation. Therefore, the overall weighting of stocks that fall into this category is currently the lowest of all three strategies and I am looking to build up these holdings over time. My decision making incorporates several criteria; yield percentage, dividend cover, dividend policy, dividend track record, sector diversification and my assessment of the overall business prospects. Realistically, I would be happy if this category returned total annual returns of 10% (split between dividend and capital appreciation) and I know in advance that these holdings are unlikely to ever deliver spectacular growth. I don’t operate a stop loss with this category – it is a change of dividend/dividend policy that will dictate sell decisions while any share price dips enable me to accumulate income units at a lower price.
Compound Growth Strategy
This strategy is the core of my portfolio and an area I am very comfortable investing in. Again, I have several factors that drive my selections; PER, PEG, EV/EBITDA, StockRank, rising EPS, paying a dividend (normally between 1 and 5%) and sector diversification. Essentially, I am looking to invest in companies that are already profitable, are priced reasonably and have a fighting chance of growing profits over the next 12-18 months. Of course, there will be companies where trading results disappoint and others that exceed expectations but essentially, I am looking to include companies where I believe 10-20% total return is a reasonable expectation (I have a bias towards smallcaps in this category). I believe it is important to take a “basket” approach to this type of investing because none of us have a crystal ball when it comes to business performance. By having a basket of 10-15 stocks in this category and operating a largely mechanical stop loss, it should be possible to even out the returns and deliver a consistent performance overall. Generally, I buy into these holdings in a small way at first and add to my holdings as I become more confident that the company is delivering results and progressing in the right direction. The most important elements of this strategy are dividend reinvestment and regular rebalancing in order to compound returns over time. I don’t necessarily reinvest the dividends in the company that delivers it but rather, I tend to allow total dividends to accumulate for six month periods and then decide which companies to reinvest in based on my buying criteria. I also take this opportunity to review existing holdings and cut those which are no longer a good fit for the strategy.
Special Situations
This category is the higher risk portion of my portfolio. Generally, these companies are either pre-profitability or recovery situations. In the ideal sequence of events, I would buy a company in this category and see it become a compound growth stock before holding it for the long-term as an income stock. It rarely works out quite that way of course! This is not a criteria based strategy and I am relying on my own assessment of the business prospects and management’s ability to deliver. As such, I normally research these companies very deeply before investing. Only a small number of my holdings are in this category and overall, I am looking for a 20-50% return but also, I accept that some years this category will not deliver and inevitably, some companies in this category will never succeed and/or will involve dilution along the way. I believe the phrase is “not for widows and orphans”.
You can track my fortunes via the Current Holdings and Portfolio sections of this site where I will aim to update on a regular basis, time permitting of course.
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12 comments
Hi Simon
Thanks for the detailed write ups , just a small point Cape (LON:CIU) is Jersey incorporated and UK domiciled, not Singapore,
Incidentally there's an excellent presentation on their website http://www.capeplc.com/media/368814/2015-prelims-results-presentation.pdf which makes me very comfortable to have it as a major holding, the key attraction for me is that market overestimates it's sensitivity to oil price,most ofl its services are non discretionary for customers and the order book is up c. 20% iirc
One of my major themes is trying to get good income whilst maintaining exposure to a bounce back in resources and oil, Cape is one element of this.
Re Berkeley I like it also but chose Galliford Try (LON:GFRD) as it is a blend of Housebuilder, affordable home specialist and major contractor and thus less dependent on HPI but either looks a good play.
I don't do financials because they are generally prone to unknown risks emerging..
I'll sign off for now as I'm being glared at...
For those interested, I have added a third commentary for the higher risk components of my portfolio:
http://share-knowledge.org.uk/2016/04/10/portfolio-commentary-part-three-special-situations/
Cheers
Simon
It normally takes a few days before articles from my blog get picked up by the Stocko team and posted here (no complaints, I'm happy for the exposure). I have posted two commentaries today on the Focused Income and Compound Growth strategies:
http://share-knowledge.org.uk/2016/04/08/portfolio-commentary-part-one-focused-income-strategy/
http://share-knowledge.org.uk/2016/04/08/portfolio-commentary-part-two-compound-growth-strategy/
I thought I'd post the links now as they are relevant to this discussion. I've still got the write up for the Special Situations to do which I might get round to over the weekend but if not, I'll try to get to it on Monday (these are the more flighty holdings though so probably not of so much interest to folk here).
Cheers
Simon
Morning Crazycoops.
I am new to your blog so thanks for posting here with the link. I have a similar segmented portfolio approach with different cash pockets invested to satisfy different financial objectives and indeed an interest in enjoying the challenge of being a bit of a (hopefully successful) contrarian. I am probably ahead of you in your life plan in that I have already downshifted and am living off investment income pending being old enough to draw the pension.
My generic pots are: (1) about 25 funds (Oeics, ITs, UTs etc.); (2) a recently set up NAPS portfolio with 25 factor picked investments using Stockopedia metrics (10 of which are also in your portfolio); (3) a "sensible" FTSE 350 portfolio of about 40-50 stocks - mainly decent dividend payers in a quasi-UK tracker portfolio; (4) a long term "special situations" holding of about 15 stocks that have a story behind them which will hopefully work out over a period of 3-5 years (or longer); (5) a short term (1 week to 1 year) mad money portfolio where I am happy to take a punt on some of the riskier positions with the intention of taking a view on short term news/turnaround etc..
Overall I have about individual 100 stocks at any time with 15-20 representing about 60% of the value of the share portfolio and a long tail of smaller holdings behind. It sounds a lot but the Internet has really enhanced my ability to keep track of news and events and research ideas time effectively. I am (stating the obvious) quite keen on diversification. I probably spend a couple of hours a day reviewing things but am happy to back off and let things run if I am away. Losing my internet service for 10 days in early March was quite an interesting test.
The funds/share split is about 60:40 funds:shares. Fortunately over time I have been able to build up quite a decent tax shelter through Peps and ISAs so about 40% of my holdings are tax shielded (without having to call on the services of any Panamanian lawyers!). In addition I retain a position in cash, not so much as an investment, as a simple hedge against falling markets. Like you I don't take short positions or use derivatives etc., to hedge. Cash is currently about 15% of the total, but I am considering taking this up a bit given a few concerns about where we are in the investment cycle.
I think your 10% pa return is achievable. I've been actively managing my own assets since about 2008 (once the mortgage was paid off!) and reckon to have achieved compound growth across the whole portfolio of about 9.5%. Obviously some years are better than others and it is quite hard sometimes to keep perspective on the day to day supermarket run when you're either £20k up or down on a morning's market movements.
Good luck with your holdings and I look forward to further updates.
Best,
Gus.
Hi Herbie47
On Petards (LON:PEG) I agree, for me it is the classic cookie jar trap, ie. You get in easily enough, but exiting is problematic , I took a 1% of portfolio stake but it took a little while. The attraction is that even allowing for the convertible dilution it is silly cheap , cash rich and most importantly for me they have sorted out distributable reserves so will IMHO return to dividend paying shortly. That will be the catalyst for a re rating in my view.
Cheers
I did look at Petards (LON:PEG) but for me its too small Market cap and the spreads a bit wide, really going away from those type of shares.
I was in Iofina (LON:IOF) as well, lost a bit of money, IC mag kept tipping it, anyway it was a lesson for me.
Oh its £.
OK I must learn to do that hyperlink thingy with the company named. Is it a £ or $ prefix or does use a .L suffix?
Herbie, I would love to chat about our crossovers too but that will have to wait until tomorrow or the weekend. But as for Iofina, I am carrying a painful paper loss. It was a 10 bag for me at one point but I didn't spot the warning signs or the impact of the hype (I was in very early and thought much of the positive hype was justified but then a whole sequence of events meant the company did not deliver. Underneath the hype there is a cracking chemicals business but whether that business can sustain the $17m debt, that was raised for growing the iodine production business, remains to be seen. If the iodine price recovers in time, that would change the game but they are definitely on a knife edge and are very high risk. Mentally, I've written the money off, so will hold the paper and see if they make it or not.
More on the others tomorrow and yes, the Winning Growth and Income screen is one of my favourites. I also like looking at the two rank combinations and of course, the overall QVM rank.
I've moved from 15 holdings last year to 24 currently (in years gone by I have typically run with 5-10 holdings) and am a little bit concerned about keeping on top of that many holdings alongside my day job - I am totally in awe of Paul Scott following 500 companies and delivering the top quality analysis that he does. The reason I have increased my holdings and focus is to manage risk while providing more consistent and predictable returns - 25 max holdings seems about right for now
It has also helped my thinking to have 3 separate strategies. CIU is my newest income holding and I'm still figuring out whether ithat is the right way to look at it because I believe it has both growth and recovery elements too. BMS is a purchase from Dec/Jan which I've added to recently as I think the dividend will be quite reliable.
WTM and ZYT are 2nd year holdings for me and are both moving in the right direction. I have added to both this year. The margins at WTM are wafer thin and I feel this is a share I would want to be out of sharpish at any hint of trouble. If they get to 120/130p I'll be looking to top slice to lock in profits. I really like ZYT and would like to buy even more but I am concerned that the valuation is a little frothy - I'm looking to buy the dips.
PEG is a small punt. I came across it because of it having a StockRank of 100 and saw that a couple of others here had spotted it as well (probably yourself included) . I saw the market cap and other metrics and thought it was an interesting punt. Let's see.
I would be interested to hear your view on any or all of these companies if and when you get time.
?Yes I hold 7 of those, Air Partner (LON:AIR), Berkeley Group (LON:BKG), Bioventix (LON:BVXP), Empresaria (LON:EMR), Novae (LON:NVA), Waterman (LON:WTM), Zytronic (LON:ZYT), so maybe similar approach, recently sold Hydro International (LON:HYD).
The only one that concerns me is Iofina (LON:IOF), looks too risky to me, I would consider Metal Tiger (LON:MTR) instead.
I have noticed that the Winning Growth & Income screen on Stockopedia is one of the most successful and consistent.
Incidentally I should have said I hold 5 of your stocks in my 35 stock portfolio, Zytronic (LON:ZYT) Cape (LON:CIU) Waterman (LON:WTM) Petards (LON:PEG) Braemar Shipping Services (LON:BMS), a few others are on my watch list but not currently holding so I don't think our approaches can be too radically different . Cape and Waterman are in my top 5 holdings fwiw.
I'll keep watching with interest !
Thanks rhomboid,
I think you are right and as a result I have had some big winners and some big losers. Over the past couple of years I have been trying to address that and bring about more consistency and predictability, especially with regards to running a more balanced portfolio. This is a transition I probably should have made a while ago considering how many quality investors/posters I have been following over the years. Still, better late than never I suppose!
I'll let you know how it goes via the blog (which gets picked up and posted here by the Stockopedia team).
Fascinating, can't wait to hear more especially as over the years you've had a very idiosyncratic approach to investments, at least that is my perception from your postings over the last decade or so.!
Good luck