Wednesday, 10 May 2017

Portfolio Strategy: Current Allocation and Thoughts on Risk

I am presently in the process of investing the portfolio but am currently running high levels of cash due in part to valuations and in part to wanting to invest the portfolio relatively slowly to smooth out any (remaining) volatility in the market. I want to have cash on hand for opportunities which arise either from generally falling prices or from specific exciting opportunities identified from research going forward.

The current portfolio looks like this;

Amiable Minotaur Portfolio May 2017

As can be seen I still have 73% of the portfolio is cash and gold. My cash is principally GBP but I have purchased some USD and also Gold to diversify that a bit. With the pound still relatively weak now is not the best time to seek opportunities abroad but some diversification seems like a reasonable idea. I can also use the USD cash to settle trades in USD and thus reduce the exorbitant FX rates my broker charges for transfers.

Amiable Minotaur Portfolio Pie Chart May 2017

I intend to take the equity position up to around 40% in the medium term as I find opportunities and/or increase my allocations to the stocks which I already like. 

Within my Equity portfolio the current allocations look like this:

Amiable Minotaur Equity Pie Chart May 2017
I wanted to give a brief comment on each stock position with a qualitative idea in mind of the risk correlation between them.

  • Next: This stock gives me exposure to the UK economy broadly with an element of Tech/internet retail due to around 50% of sales being online through the directory. 
  • Diamond Offshore: This stock gives me exposure to the Oil E&P cycle which is presently depressed. By proxy it also gives me USD exposure and in a sense exposure to global growth and energy demand dynamics.
  • Bed Bath& Beyond: This stock gives me exposure to US retail but is principally 'bricks and mortar' so this is more a value play and again exposure to the USD but this time US domestic.
  • ENEL Generacion Chile: This position is principally a combination of Chilean domestic demand drivers and potential improvement in margins from a normalisation of Chilean hydro - therefore exposure to the El Nino cycle.
  • IG Group: This position is a combination of being 'long' financial volatility, as trading volumes rise during volatile periods, and a regulatory driver from the various enquiries into the industry at the moment.
  • Bladex: This bank gives exposure to intra-Latam trade which is in part driven by USD liquidity dynamics - most of the lending is short term and commercial in nature.
  • Tullow Oil: More E&P exposure but rather than services like DO this is a producer. I expect TLW to be the proxy in the FTSE 350 for oil price sentiment given its high financial leverage and decent liquidity.
  • Guaranty Trust Bank: This is another position with exposure to oil as the value of the local currency and the economy overall is strengthened by oil exports. The other driver is fundamental domestic demand growth from a rapidly growing population.
Taking these factors in aggregate I feel the portfolio is presently most at risk on the Oil side as DO, TLW and GTB are all effectively long oil positions. The second greatest risk is on the retail side as more retail moves online and retail in general may be undergoing a secular decline in favour of 'experiences.' Otherwise I feel the additions of EOCC, IGG and BLX all add excellent diversified drivers for out performance which are generally uncorrelated.

What I want to avoid is having too many 'plays' on the same macro idea - whilst I am bottom up investing one has to consider that owning say Diamond Offshore and Transocean will add little diversification benefit to what I plan to retain as a concentrated portfolio. For this same reason I have sold my position in CMC Markets to retain IG Group as part of my move into this new consolidated portfolio.

A quick point on Gold. I feel this too adds some diversity by acting as a proxy currency which can't be printed. I have taken gold up to ~10% of the portfolio recently on weakness in the price. I consider this 'central bank insurance' for future falls in the stock market.

At present none of my stock positions or gold are singularly more than 20% of the portfolio. As per my manifesto. But I will consider Gold another 'stock' position and do not plan to take it above 20% either.

From a high level sector perspective the current equity allocations look like this;

Amiable Minotaur Sector Pie Chart May 2017
So I generally have a lot of retail, banks and energy stocks - which funnily enough are the more disliked sectors at the moment. I would like to add some healthcare/pharma, agribusiness/materials and technology stocks to the mix thinking top down about a diversified portfolio. 

An additional consideration is geography - at present I am only invested in the UK, Americas and to a limited extent Africa so finding some other Asia/European stocks could add some benefit where the bottom up fundamentals make sense. 

However finding stocks will take some time - needless to say I will be generally focusing on those sectors to find bottom up opportunities within them.

I am bench-marking the portfolio to the FTSE AW index which is heavily weighted towards the US so at present my investments there do have some bearing on my overall benchmark. However I am only really using the benchmark as as performance guide rather than as a strict measure.

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.

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