Help me rebalance my failing S&S ISAs Portfolio - Sept 2011

jabbahut40

Hi All,


Wow. That’s certainly a lot of feedback to consider! This was enlightening and has helped me immensely. Upon reflection I believe that I have three lessons of financial investing to swallow.


1. The first one is a hard pill to swallow and I agree with dunstonh and admit that I have been a victim of “fashion investing” over the years. Most of my research has been done using the Hargreaves (Select 150) and Fidelity websites (Select Funds). Whilst these provide good basic information I find myself easily swayed by the market fashions and headline stories. More recently I have become more sceptical of these firms and have broadened my research to include Morningstar, Citywire and TrustNet.


2. The second pill is a recognition that I have buying at the high points and switching/selling at the low points. I recognise that this is a classic beginner behaviour which was confirmed by my own recent analysis. Based on my fund switches over the last few years I recognised that I would have been better off NOT switching in 70% of the cases after reviewing performance of both funds a year after the switch. This suggests to me that I am showing signs of nativity in both fund selection and timing. A classic example was my decision to buy into Gartmore China Opps during the rise at the end of 2007, another was buying Allianz RCM BRIC Stars at a similar height only to switch out during the crash a year later. Potentially another example would be selling/switching out of Jupiter Financial Opportunities now at a 25% loss. Upon reflection I will probably retain this fund for now.


To address this problem I am finding myself agreeing with the feedback provided by heathcote123 to “sell out your well performing funds” particularly as are also my two highest holdings (JPM Natural Resources and First State Asia Pacific Leaders). Emotionally this feels difficult to do as these funds have provided most of my gains over the last few years however reducing my portfolio % against these two funds would help me realise these gains and the opportunity to balance my portfolio into other geographical areas and sectors.


3. The last pill is a lack balance within my portfolio as per the comments from arkwelder and jedersmart. A breakdown of geographical and sector analysis of my portfolio revealed:


Greater Europe 31.16%
United Kingdom 11.45
Western Europe - Euro 8.74
Western Europe - Non Euro 5.4
Emerging Europe 4.07
Middle East / Africa 1.51

Americas 23.76%
United States 12.87
Canada 7.54
Central & Latin America 3.35

Greater Asia 45.08%
Japan 0.19
Australasia 9.2
Emerging 4 Tigers 17.73
Emerging Asia - Ex 4 Tiger s 17.96

Information 13.95%
Software 2.07
Hardware 4.13
Media 1.02
Telecommunications 6.73

Service 35.28%
Healthcare 4.15
Consumer Services 5.04
Business Services 2.63
Financial Services 23.46

Manufacturing 50.77%
Consumer Goods 6.97
Industrial Materials 28.56
Energy 13.2
Utilities 2.03

My initial reaction to this breakdown is that I am WAY TOO heavy on Greater Asia (particularly emerging asis ex 4 tigers) and Manufacturing (particularly industrial goods). I also agree with Jamesd comment that “There's no rule that says someone with a high risk tolerance has to use that high risk tolerance all the time”. With this in mind I will consider some of the ideas above to reduce the short term risk on my portfolio.


Many thanks for all your comments to date. I have enjoyed reading them all immensely and would welcome any further comments from the forum members on how best to balance my portfolio.


Jabba

dunstonh

I had expected the OP's portfolio to be quite risky, but when I fed it into Trustnet (with nominal numbers of units to return the approximate percentages held) I was surprised that it had a risk score of 99 - 100 being the FTSE 100. JPM NR is the highest at 138, so reducing this would bring it down a tad. Substituting for either of the global income funds also brought the risk score down: 98 with M&G (and slightly higher volatility) and 96 with Threadneedle (slightly lower volatility).

There are some flaws in the risk scoring of FE. It's a good system but you have to remember that it takes the funds last reported position on assets. So, a high risk fund with a higher cash holding at that last snapshot can make it appear lower risk than it is (more of an issue with active managed funds that have an open investment strategy). Plus, remember that the FTSE100 has crept up in risk in the last year (FE themselves verified that). On our own scale it would be 7/10. The diversification would knock the portfolio down in risk on the one hand but the niche areas knock it up but the "general" holdings within those higher risk funds would pull it back down a bit. Plus, remember that the highest risk UT/OEIC is around 150.

1. The first one is a hard pill to swallow and I agree with dunstonh and admit that I have been a victim of “fashion investing” over the years. Most of my research has been done using the Hargreaves (Select 150) and Fidelity websites (Select Funds). Whilst these provide good basic information I find myself easily swayed by the market fashions and headline stories. More recently I have become more sceptical of these firms and have broadened my research to include Morningstar, Citywire and TrustNet.

HL's list is a marketing list. Always remember to treat bundled platforms in the same way you would a mailshot from Aviva. They are paid to market funds. There is not one nil commissing paying fund in that list. Yet there are nil commission paying funds which would be in the 150 list if HL were not being paid. Some decisions to put a fund in the 150 list are strange. That isnt to say that it contains bad funds. Many of the funds in the list are obvious choices and you would expect them to be there.

Ark_Welder

dunstonh wrote: »

Plus, remember that the FTSE100 has crept up in risk in the last year (FE themselves verified that).

I think it strange that the FTSE 100 is used at all. It is concentrated too much to the financials and commodities sectors for me. Perhaps the maths is easier than banchmarking against the All Share

I haven't tried my own partfolio against it yet. Perhaps that will be a fun personal exercise at some point!

IronWolf

Wow trustnet is actually pretty sweet for analysing equities, it gives you a full 10 year financials history, although some of the EPS figures look wrong

atush

[My initial reaction to this breakdown is that I am WAY TOO heavy on Greater Asia (particularly emerging asis ex 4 tigers) and Manufacturing (particularly industrial goods). I also agree with Jamesd comment that “There's no rule that says someone with a high risk tolerance has to use that high risk tolerance all the time”. With this in mind I will consider some of the ideas above to reduce the short term risk on my portfolio.

/QUOTE]

I am not entirely sure it is time to get out of Asia myself, and think Europe is still a bit risky (unless your fund is mainly France/Germany).

I am not a Fashionista myself, more of a contrarian. Unlike you, when markets fall I have no inclintaion to sell all my holdings (and thus chrystalise any losses), I am then in more of a buying mode. That could be where you made your mistake and not in your allocations?

bendix

OK . I'll play.

Here is the weighting of my top 20 funds of my 'invested' money (excluduing pension fund, cash reserves, property etc).

Inv Perp High Income 12.2%
Aberdeen Emerging Markets 8.1%
Inv Perp Monthly Income Plus 7.7%
FS Asia Pacific Leaders 6.7%
GLG Technology Equity 6.6%
Artemis Strategic Assets 6.3%
Old Mutual UK Dyamic Equity 5.4%
Inv Perp Latin American 5.3%
Insynergy Odey Class 5.0%
Blackrock Gold and General 4.7%
Investec Monthly High Income 4.1%
FS Greater China 3.7%
FS Indian Subcon 3.6%
JPM Global Equity Income 3.6%
FS Global Emergy Market Leaders 3.2%
Inv Perp US Equity 2.6%
FS Global Resources 2.5%
Ignis Argonuat Euro income 2.5%
Investec Emerging Market Local Currency Debt 1.9
Allianz RCM Bric 1.4%


In addition to those above, I have heavy exposure (amounting to around 40% of the total sum invested above) in two managed funds in NZ, one geared towards NZ equities and one to Australian equities. To a degree, that's a result of laziness of having invested there when I lved there a decade ago, and I've never got round to addressing it. In hindsight, my laziness was good luck, not because the funds have been particularly spectacular (they're ok) but because they've ridden the Aussie and Kiwi currency surge.

Jegersmart

jabbahut40 wrote: »

Hi All,


Wow. That’s certainly a lot of feedback to consider! This was enlightening and has helped me immensely. Upon reflection I believe that I have three lessons of financial investing to swallow.


1. The first one is a hard pill to swallow and I agree with dunstonh and admit that I have been a victim of “fashion investing” over the years. Most of my research has been done using the Hargreaves (Select 150) and Fidelity websites (Select Funds). Whilst these provide good basic information I find myself easily swayed by the market fashions and headline stories. More recently I have become more sceptical of these firms and have broadened my research to include Morningstar, Citywire and TrustNet.


2. The second pill is a recognition that I have buying at the high points and switching/selling at the low points. I recognise that this is a classic beginner behaviour which was confirmed by my own recent analysis. Based on my fund switches over the last few years I recognised that I would have been better off NOT switching in 70% of the cases after reviewing performance of both funds a year after the switch. This suggests to me that I am showing signs of nativity in both fund selection and timing. A classic example was my decision to buy into Gartmore China Opps during the rise at the end of 2007, another was buying Allianz RCM BRIC Stars at a similar height only to switch out during the crash a year later. Potentially another example would be selling/switching out of Jupiter Financial Opportunities now at a 25% loss. Upon reflection I will probably retain this fund for now.


To address this problem I am finding myself agreeing with the feedback provided by heathcote123 to “sell out your well performing funds” particularly as are also my two highest holdings (JPM Natural Resources and First State Asia Pacific Leaders). Emotionally this feels difficult to do as these funds have provided most of my gains over the last few years however reducing my portfolio % against these two funds would help me realise these gains and the opportunity to balance my portfolio into other geographical areas and sectors.


3. The last pill is a lack balance within my portfolio as per the comments from arkwelder and jedersmart. A breakdown of geographical and sector analysis of my portfolio revealed:


Greater Europe 31.16%
United Kingdom 11.45
Western Europe - Euro 8.74
Western Europe - Non Euro 5.4
Emerging Europe 4.07
Middle East / Africa 1.51

Americas 23.76%
United States 12.87
Canada 7.54
Central & Latin America 3.35

Greater Asia 45.08%
Japan 0.19
Australasia 9.2
Emerging 4 Tigers 17.73
Emerging Asia - Ex 4 Tiger s 17.96

Information 13.95%
Software 2.07
Hardware 4.13
Media 1.02
Telecommunications 6.73

Service 35.28%
Healthcare 4.15
Consumer Services 5.04
Business Services 2.63
Financial Services 23.46

Manufacturing 50.77%
Consumer Goods 6.97
Industrial Materials 28.56
Energy 13.2
Utilities 2.03

My initial reaction to this breakdown is that I am WAY TOO heavy on Greater Asia (particularly emerging asis ex 4 tigers) and Manufacturing (particularly industrial goods). I also agree with Jamesd comment that “There's no rule that says someone with a high risk tolerance has to use that high risk tolerance all the time”. With this in mind I will consider some of the ideas above to reduce the short term risk on my portfolio.


Many thanks for all your comments to date. I have enjoyed reading them all immensely and would welcome any further comments from the forum members on how best to balance my portfolio.


Jabba

Jabba

There are some points I was trying to make which I would like to reiterate:

There is nothing wrong with *imbalance* as long as you are clear on it and what it means to your exposure. There is nothing to say that a portfolio has to be balanced. Many UK equity funds up until 2 months ago have returned 35-60% per annum for the last year or two. That is some imbalance I would like to have as long as I appreciate what it means to my overall position. I don't have a problem with being 65% in Asia if my research and experience tells me that is where I should be.

The second point is that there are rarely absolutes in investing. When you have funds that have performed very well you do *not* need to sell out completely - merely do your research and start to rotate parts out - that way you limit your downside risk but stay in with part of it to see if further gains are on the cards. I often do this where I start to rotate 10, 20, 40% of the mega performing funds out either to cash, or to some other geography or asset class or income fund to de-risk or whatever - the point is that you don't need to sell or buy complete holding as soon as they reach whatever level - but it depends on your style of course.

Switching out of losing funds should be done with caution. I woudl prefer to look at why they are not performing as a starting point. Is it because the fund is performing poorly compared to peers or is it because I have invested in the wrong sector/geography/asset calss etc - i.e. is it my fault or is the fund a bad one? This is key to my approach because it focusses on understanding why something has gone wrong and what I need to learn from it. Only after careful consideration do I plot a course of action according to what I find has gone wrong. As others have said, sometimes the best thing is to do nothing - but at the same time you should be ready to act with commitment and speed when *necessary*. Easy it is not!

After almost 20 years of investing and trading I learn all the time.

HTH

IMHO, DYOR

J

gadgetmind

bendix wrote: »

Inv Perp High Income 12.2%
Inv Perp Monthly Income Plus 7.7%
Investec Monthly High Income 4.1%
JPM Global Equity Income 3.6%
Ignis Argonuat Euro income 2.5%

What's the strategy behind holding five different income funds? I can see that you might want to have some global and Euro in there, but the Invesco and Investec funds will probably hold companies with heavy non-UK exposure anyway. How do you find their performances differ on income and capital?

I bet they all have "all the usual suspects" as their top 50-60% of holdings. I'm now tending towards holding these suspects directly (avoiding the 1.5 - 2% fee drag) and then using investment trusts and some funds to get exposure to other territories and small/mid caps.

The "usual suspects" will be Glaxo and/or AstraZeneca and/or Roche, BP and/or Shell, Reynolds and/or BAT and/or Imperial Tobacco, BT and/or Vodafone, Reckitt Benckiser and/or Unilever and/or Diageo, and then a smattering of utilities such as Centrica, Scottish and Southern, National Grid, and BG Group.

[later]

Ah, I have actually looked at the Investec fund now and see it's mainly (90%+) in high yield bonds, which does help justify its place in your portfolio.

Ark_Welder

Invesco Perpetual Monthly Income Plus is about 80% bonds (mostly high-yield) and the rest in higher-yielding equities. It can move between the then as the manager sees fit. About half is non-UK. (As of the last time I updated my records, which was about six weeks ago so time I did so again...)

[edit]

And it provides a monthly income for those that wish to take it

jon3001

OP: you're right to be concerned that your portfolio is unbalanced. Balance means that risk in one area of the portfolio is offset by risk in another area. That's primarily achieved by uncorrelated assets. I.e. assets whose performance has little relation on another asset in your portfolio.

Without analysing too deeply, your portfolio looks like a punt on emerging markets and mining funds which are highly correlated. They'll go up and down together. The US-midcap fund sticks out like an anomoly but ironically it's probably a good way of offsetting risk; it's less likely that the fortunes of a domestically-focused US stock would be directly affected by what's happening in China. Not so for a global mining stocks who are responding to demand for raw materials in China.

Q: For instance, while stocks have been tanking, do you know which asset has been a strong performer?
A: Gold!



Okay - I only allocate about 4% of my portfolio directly to precious metals myself. A higher allocation is made to diversified commodity futures (NB: mining stocks don't cut it since they're significantly correlated to the stock markets). Some example funds to consider:

• ETFS FAIG
• Marlborough ETF Commodity Fund

Even a high-risk portfolio should have at least 20% in bonds. Such an allocation has historically had a negligible on returns while greatly reducing risk. You need to rebalance annually to take the greatest advantage. When stocks (or other risky assets) tank - the bonds provide a reserve from which you can buy cheaply. When stocks rise, you can sell some of the profits to buy bonds and lock in the gains. Overall this will give you a much smoother ride.



If you're serious about balancing across a range of risky assets a model portfolio might look something like this:

• 20% bonds
• 20% Domestic Stocks (including small-caps)
• 20% International Stocks (including small-caps, developed and emerging markets)
• 20% Commodity Futures
• 20% Commerical Property

Do some reading. I recommend:

• Asset Allocation, Roger Gibson
• The Four Pillars of Investing, William Bernstein (a lighter read).

That way, you'll know from first principals what it takes to build a balanced portfolio to suit your risk level. I'm not sure how reading a list of two dozen funds in someone else's portfolio is particularly helpful.