Portfolio Reassessment - Critique

MarkCarnage

As of end of May, eg just 3 weeks ago, Tesla was the largest holding at 11.1%.

I stand corrected. I sourced from HL website as I had it open at the time....unless they have sold some and it's more recent.

The general thrust of my comment remains just as intact though. 

mark55man

Sorry OP - a bit off topic, but I think you are done here :-)

I was looking into technology funds, and was a bit spooked by the fall and recovery in SMT.  Now I see it was driven a lot by Tesla then I understand a bit more.  Personally I don't like what I see from Tesla, so I  will steer clear, either going with Polar and/or Henderson after doing a bit more research 

AnotherJoe

mark88man said:

Sorry OP - a bit off topic, but I think you are done here :-)

I was looking into technology funds, and was a bit spooked by the fall and recovery in SMT.  Now I see it was driven a lot by Tesla then I understand a bit more.  Personally I don't like what I see from Tesla, so I  will steer clear, either going with Polar and/or Henderson after doing a bit more research 

Do you mean you dont like what you see from Elon Musk rather than Tesla?? Not sure whats not to like about Tesla, leading edge EVs and solar (home and grid) , prospering as legacy auto craters and likely to gain disproportionately from  EV subsidies in the EU (and UK) and China over the next few years (whilst USA smokes itself into oblivion, but eventually they'll come round)

Fair enough re Musk, but bear in mind what do you know about the execs running the other companies you are invested in? Musk is just one of the very few that makes headlines, the others get on with their dastardly deeds in quiet. While musk was making inane tweets about cave rescuers, other auto execs were getting on secretly poisoning people and monkeys.

SMT also, I believe, invests pre IPO, not sure if the others do, if so i'm glad i picked it as theres no other way to get into Starlink which i'd invest in if i could (and the rumour is its invested).

A quick glance at Henderson and Polar is spooky, they look like the same except Polar is an IT so pick whichever floats your boat. For me that woudl be Polar hands down, much cheaper to hold in my broker long term. Polar also seems to have recovered from the C19 storm much better than Henderson.

 

MichelleN

MarkCarnage said:

As an observation, the 'bar bell' approach above (with most of these funds) will have worked pretty well in the last few months, although if I'm reading it correctly it was liquidated to cash in February. In my own definition of risk (permanent loss or significant diminution of capital), this portfolio isn't that high risk - it's likely to be pretty volatile at times, but provided there are no involuntary milestones along the way where funds need to be realised it's fine in my book. You can always sell from the WP element of it.
If you do want to dial things down a bit, rebalance it towards WP over time as suggested above. 

Most people have posted that the OP’s portfolio is high risk. Please can I ask you why you feel it is not that high risk?

MarkCarnage

Most people have posted that the OP’s portfolio is high risk. Please can I ask you why you feel it is not that high risk?

I think the reason is related to my view on what constitutes risk as outlined in my comment. I take a somewhat different view from the conventional volatility based one, which while mathematically convenient is flawed in a number of ways. You can of course have a portfolio that is high risk under the conventional definition and mine! 

I would also caution that my definition is very conditional on there being no foreseen requirement to liquidate specific assets on a specific date.....however, the good thing about the 'bar bell' structure here is that there is a significant weighting (over 40%) to funds which are best characterised as wealth preservation and would be defined as relatively low risk under either definition, so would be likely to be be realisable both quickly and without material loss in most scenarios. The rest of the portfolio is higher risk in the conventional sense, but has rewarded well over the longer term. That doesn't mean you shouldn't at times review these holdings - I very recently took some profits in SMT after its extremely strong performance this year meant that it was now more than 10% of my portfolio. It has since kept rising and stands at almost the same value again! Worth mentioning also that one of the directors of PNL Trust has stated publicly on more than one occasion that his second largest holding after PNL is SMT - the bar bell approach in action again. 

My scepticism (and some might say cynicism) over conventional risk definition is that it is too narrow, overlooks some seriously material long terms risks, like erosion of real value of capital - a very significant risk for many assets right now, notably cash - and that it can give misleading views. I once encountered a so called 'managed' fund whose main, indeed almost sole 'strategy' was to buy and hold out of the money put options on the S&P US stockmarket index, based on a bearish view of that market. This was in the early 1990s.....it was certainly low volatility, as these options didn't fluctuate much on a daily basis, but their time value just inexorably expired leading to a slow but sure erosion of investor value. It was classified as low risk by some mindless person who ticked boxes, although it was very clear that it was actually a very high risk long term strategy. 

MarkCarnage

Just as an addendum to the comment above, long dated index linked gilts can, and have been pretty volatile, on occasions when real yields have changed markedly. In the 90s when real yield increased quite sharply in 1993-94, IL gilts took a bit of a hammering for a while. Therefore by the 'conventional' definition of risk, they would have been defined as quite high risk. 
However, for about the last 15-20 years, they have effectively been the 'risk free' asset for DB pension funds as they pretty much fully hedge inflation on an uncapped basis, pay real principal back on maturity etc. Unfortunately, they have become a return free asset too, with negative real yields of c2% to redemption baked into the price. However, don't overlook their valuable inflation hedging. 
Hence my view that it's quite dangerous to focus on one narrow definition of risk, which may be mathematically correct, but overlooks a number of factors. Risk can be taken in 5 broad ways - equity risk, duration risk, inflation risk, longevity risk and liquidity risk. Some won't matter to some people, some won't even think or realise they are running it. 

Linton

In the case of the OPs portfolio the "risk" concern I have is not so much the danger of something unpleasant happening but rather a matter of diversification.

Although the sectors are reasonably diversified the equity in the portfolio is strongly biased towards "Growth"  shares where the desirability is based on future prospects as opposed to "Defensive" and "Value" with a desirability based on current financials. In recent times growth shares have outperformed value but it was not always so.   From memory, 20 years ago there were gurus saying that value was the way to go  - slow and steady wins the race, which it did in the .com boom/bust.

Therefore ISTM a portfolio should have a significant % in both types of shares, especially when the investor is drawing down in retirement.

MarkCarnage

Although the sectors are reasonably diversified the equity in the portfolio is strongly biased towards "Growth"  shares where the desirability is based on future prospects as opposed to "Defensive" and "Value" with a desirability based on current financials

That's a reasonable observation. However, my experience has been that value can be a long time waiting....when it does, it often comes in one short burst......

One argument against 'growth' was that an eventual rise in interest rates/discount rate would mitigate against all long duration assets, which may well be true, but that day appears to have been kicked a fair bit down the road. However, one could argue that this is all now priced in anyway. The wider problem is that the whole opportunity set of future returns across asset classes has fallen again in nominal terms. 

Default or inflating away the debt seems the way to go........which won't be nice. 

itwasntme001

With growth stocks, particularly funds like SMT, can have a huge amount of volatility because they are not only sensitive to long term interest rates given long duration cashflows, but they will be very sensitive to even a relatively small change in growth in earnings (and therefore absolute earnings into perpetuity).  Value stocks do not have this problem and are a lot more concerned about the immediate cashflows which has been evidenced by the recent crisis.

No one knows what the future will be like.  If someone asked me if long term rates will remain the same for another 10 years or will start to creep up now, I would say its 50-50 either way.

Expected cashflows for these growth companies are probably more relevant for valuation and more "forecastable" but given they can be so far into the future, there will be a lot of uncertainty around the future path of cashflow generation.  I think it makes sense to be diversified and not have too much into one style of investing.  Holding WP funds for money you need within 10 years or so.

Stargunner

itwasntme001 said:

With growth stocks, particularly funds like SMT, can have a huge amount of volatility because they are not only sensitive to long term interest rates given long duration cashflows, but they will be very sensitive to even a relatively small change in growth in earnings (and therefore absolute earnings into perpetuity).  Value stocks do not have this problem and are a lot more concerned about the immediate cashflows which has been evidenced by the recent crisis.

What value stock funds have performed better through this coronavirus crisis than SMT?