Friday, 7 April 2017

Portfolio Strategy: A Manifesto of sorts

The principal reason for undertaking this blog is to share my thoughts and ideas for stock selection while investing my pension portfolio. One of the advantages of being relatively young and having money tied up in a pension wrapper is one cannot take that money out for about 30 years and therefore one can take quite a long term and also quite a risky strategy. I find this time 'lock up' strangely liberating. You know you can stay invested and do not need to address the short term volatility as you can't take the money out anyway.

Seeing as the pot is solely my own and having no outside investors I have zero career risk from disgruntled limited partners. The main risk is permanent loss of capital. The secondary risk is a failure to grow that capital in the long term at a reasonable hurdle rate.

So the plan is to select a series of investments, principally equities, but I will also permit ETFs as required. This is the purpose of my research. To screen markets for stocks trading cheaply (by obvious metrics like low PE, high dividend yield, low price to book, ) and to analyse these both bottom up, top down, qualitatively and quantitatively to see if they add value to the portfolio.


Why not?

I enjoy stock picking and all aspects of investing. This process is something I enjoy doing and have done professionally. 

I agree that passive index investing is probably safer long term as proven by many models and market statisticians. However at present almost all markets and areas look expensive, a function of low rates and a surplus of capital, so I see better medium term opportunities in individual names with their own special drivers. 

Also the weight of money now invested passively is likely to be a problem for efficient markets going forward. We are yet to see a real extended bear market that tests these passive ETFs and their flows. Active managers tend to be more defensive and can outperform at capital protection on the way down. We shall see.

What is the strategy

Defensive value investing. I would define this as seeking companies with a clear margin of safety in valuation and some form of sustainable competitive advantage. 

This basically creates a paradox which is hard to find being undervalued stocks with good prospects. Generally stocks are undervalued due to bad prospects so the key with value is to look through those bad scenarios and search for a baseline valuation that gives a margin of safety even if prospects are bad or impaired for some time.

In a stock specific sense I am looking more for stocks that can and have paid some dividend with reasonable consistency, trade relatively cheaply by common metrics, generate decent cash flow. It will most likely have recently had a downturn in their popularity and price due to macro or structural issues. (Somewhat like a credit analyst; will they survive.)

How many stocks?

I think concentration is important:

"diversification is protection against ignorance. It makes little sense if you know what you are doing." - Warren Buffet
Therefore I believe it is better to build a concentrated portfolio of very strongly held, high conviction ideas rather than a portfolio that replicates closely many small pockets of similar companies. This is especially possible with a small and nimble portfolio where concentration risk related the size and liquidity of the companies is negligible.

Therefore I presently plan to limit the portfolio to 20 stocks / positions with no less than 5 positions at any one time. These limits are arbitrary but provide some framework for a minimum of diversification.

Within this I plan to have no more than 3 stocks from any particular sector globally and no more than 2 stocks from any particular sector in any given country. This is because sometimes a whole sector e.g energy is cheap globally and without a sector view one could end up putting the whole portfolio in energy due to the cheapness of all the stocks.

Position sizes will be discretionary based on my evaluation of risk and reward. I will put a limit on concentration at no one security being > 20% of the portfolio.

Will I be fully invested?

No. I think the present market conditions give a poor risk/reward offering. The US market in particular is trading at very high cyclically adjusted PE levels consistent with poor future returns. Therefore I want to be selectively invested with a substantial amount of cash on hand to take advantage of better price opportunities in the future. One must always try to be somewhat invested because;
'Time in the market is more important than timing the market'

So I think a minimum of 40% invested is fair with a maximum of 100% invested. We can always be invested more defensively whilst not risking the zero returns of cash.

What is the style bias?


The focus will be value stocks, either big or small, which usually means looking at companies going through difficult cyclical downturns, regulatory or political uncertainty, structural issues or just out of favour industries. In essence I am naturally always attracted to value stocks over growth stocks being something of a realist. I would rather buy a slower growing troubled company at a price that ensures a margin of safety than buy a darling growth stock that promises the future.

It is hard to set this out in a really specific way - value for me is just 'what i am attracted to look for' when I am screening and analysing stocks.

What is my benchmark?

tbc; FTSE All world or some such global benchmark.

Where will I be invested?

Everywhere I can be.

Currently I can access UK, US, Canada, Belgium, France, Germany, Hong Kong, Ireland, Italy, Netherlands, Singapore and Spain.

So not a bad basket because the US and the UK have a lot of international exposure especially via ADR/GDRs. 

What would I like to have?

Maybe; Japan the most. Obviously as many other markets as I can get.

Investing globally allows the broadest range of opportunities and also a level of regional and currency diversification. Being based in the UK I want to diversify some of my long term wealth away to other countries and areas - a bit like not investing in one's own employer (beyond those share matching schemes) - because if it goes broke why lose your savings as well as your job.

The issue with global investing is the difference in macroeconomics and local culture. One needs to understand to some extent the individual circumstances of the investment. I consider the UK my home ground, I know the country and have day to day interactions with many businesses here. 

I think I also understand the US and Canada fairly well. I have a less developed knowledge of the European arena more generally but that can be improved. Finally I used to work professionally as an analyst in emerging markets specifically Latam so I feel I have a good base of knowledge there. So my weakest spot is probably Asia. Something to focus on in the future!

How will I be invested?

Mostly stocks. 

That is my background. I am happy to consider bonds, commodities etc via ETFs if a glaring opportunity arises or in the case of bonds or gold these seems more appealing than cash while being defensive. I am also happy to hold a country basket via an ETF where the country generally offers value and local access / stock specific selection is not possible.

All dividends will be reinvested within the portfolio.

The portfolio is tax free in the UK for both gains and dividends (except foreign withholding tax) so taxation is not an issue really for investment decisions.

This is a long only portfolio - there is a possibility of using short ETFs but shorting cannot be performed within the portfolio at this stage. No leverage is available.

No particular currency exposure, positions or hedging. I may retain some FX cash (likely USD) in the portfolio to avoid spreads and fees on foreign exchange. 

(Any mention on my blog of shorting means I am doing this more speculatively via my CFD/Spread betting account)

What are my current positions?

Currently I am building up the new pension portfolio as I have previously been principally invested in other brokerage accounts and an ISA account.

Current positions are:

  • Tullow Oil
  • IG Group 
  • CMC Markets
  • Next 
I have researched these positions in detail and my conclusions are on this site and will be reconsidered periodically. Note that both CMC and IG are in the same sector and the same country, so within my rule of 3 and 2 stocks per sector. Why hold both? Some level of diversification given the varying regulatory risk profiles of the two companies and the fact that CMC is more oriented around equity products.

Stocks I plan to add to this portfolio shortly depending on market conditions and pricing:
  • Diamond Offshore  
Diamond offshore will probably max out my desired exposure to Energy E&P. I may look to add a major oil company to take my total energy stocks to the limit of 3 globally in the medium term.

I am currently looking to add another 5-10 stocks to the portfolio and perhaps a couple of ETF positions; maybe a small holding of gold. 

So the research process continues. Enjoy the updates.

Disclaimer: I have an interest in the shares mentioned in this post at present. These are opinions only, not investment advice. Construct your own portfolios with due care and attention. If in doubt read my disclaimer.


  1. I would like to say that your plan look very sound. I noticed that all dividends will be reinvested. Do you mean the dividend will be reinvested back within the the company itself or will be invested in a different company? As for gold, there is nothing wrong with holding gold (providing it is 1% or maybe 2% of the portfolio) but which position would you use? A ETF or some company like Royal Mint Bullion?

    Good luck with your strategy. :)

  2. Hi

    Thanks - sorry i missed this comment. I plan to reinvest all dividends in the portfolio and where I think it is attractive for UK stocks I can reinvest them in the stock at a low cost - So for example in NXT I will probably reinvest the dividends in the stock. So the answer is a bit of both.

    In terms of Gold I have gone with GBSS physical ETF - currently have taken that to 10% given the market conditions which I see as long term favourable.