Damien’s portfolio review June 2017 – Up 20.86%

The background to my portfolio

Back in March 2015 I decided to invest £50,000 of my own money using 80-20 Investor. The purpose was twofold, firstly to show how you can use 80-20 Investor to invest and outperform the market with only a few minutes effort every now and then. Secondly, no other investment commentator, journalist or research provider invests their own money for fear of failing. This is a sorry state of affairs and is precisely why I committed to openly running my own portfolio for 80-20 Investor members to see.

Since then I have periodically changed my portfolio using the fund suggestions provided by the 80-20 Investor algorithm and associated research. I always disclose the changes at the time they are made.

Performance update

My portfolio has continued to perform extremely well while not taking excessive risks, typically around 50-60% equities. At present it has approximately 70% of the portfolio invested in equities which is the highest level for quite some time. I have produced over 20% profit despite the various crises we have experienced including a Greek crisis, a Chinese economic slowdown, a commodity crisis, Brexit vote and Donald Trump's surprise election win.

The chart below shows how my portfolio has outperformed since I started the challenge in March 2015. The green line is the performance of my portfolio while the blue line is the benchmark showing the average return achieved by professional fund managers given the same asset mix. To accurately calculate this I have used the average return for each sector in which my portfolio invested. The red line shows what the average multi-asset fund with comparable equity content achieved. In other words the blue line would show the extra performance added by just the asset mix of my portfolio (where I was invested i.e European equities etc) over picking a typical multi-asset fund (the red line). While the green line (which is my actual performance) shows the impact of being in the right funds at the right time, as identified by the 80-20 Investor algorithm.

As you can see from the chart above my portfolio has continued to ride the market momentum and has continued to set its own all-time highs. At the time of writing the portfolio is up 20.68% in little over two years. Obviously I am very pleased with that result especially when compared to the aforementioned benchmarks.

The table below shows my current portfolio, with those funds in green still in the BOTB while those in yellow are not in the BOTB but remain in the BFBS list. Meanwhile the funds in red have dropped out of both shortlists.

Name	Allocation %	Risk	Sector	ISIN Code	SEDOL Code	Citicode / TIDM	Sector
AXA - Framlington Managed Income	4.5	Low	Sterling Strategic Bond	GB00B6RPX228	B6RPX22	11VN	Sterling Strategic Bond
Baillie Gifford - Pacific	3.0	High	Asia Pacific Excluding Japan Ret	GB0006063233	606323	BE80	Asia Pacific Excluding Japan Ret
BlackRock - US Dynamic	16.0	Medium	North America	GB00B87XJQ69	B87XJQ6	GTZX	North America
Fidelity - Global High Yield	14.5	Low	Sterling High Yield	GB00B7K7SQ18	B7K7SQ1	0Z51	Sterling High Yield
Marlborough - European Multi-Cap	15.5	High	Europe Excluding UK	GB0001719730	171973	CA33	Europe Excluding UK
Premier - Diversified	15.5	Low	Mixed Investment 40%-85% Shares	GB00B8BJV423	B8BJV42	GH6F	Mixed Investment 40%-85% Shares
Schroder - UK Dynamic Smaller Companies	10.5	High	UK Smaller Companies	GB0007220360	722036	KR20	UK Smaller Companies
TM - Cavendish Technology	8.0	High	Technology & Telecommunications	GB00B60SMN24	B60SMN2	ETX0	Technology & Telecommunications
Wise Investments - TB Wise Income	12.5	Medium	Flexible Investment	GB00B0LJ0160	B0LJ016	TJ63	Flexible Investment

In June's monthly newsletter I stated that I planned to leave the portfolio alone until after the dust has settled on the UK election. Having said that, I plan to make one minor fund switch in the interim. After reviewing the table above only three funds are now on my watchlist for potentially being replaced.

The two non-US focused funds are new to the portfolio so I'm not in a rush to change them just yet. However, more importantly with the UK election just days away I would rather wait for the dust to settle before making any potential changes to my portfolio's UK equity exposure. As I discussed in my recent piece titled What the UK general election means for your investments & how to play it I don't want to increase my exposure right now to UK equities. In addition I am happy with the market cap mix as I have a fund with a small cap focus and more large cap exposure via the Wise Income fund. Diversification was the message from my research piece and my current UK exposure is well diversified. Once the election is over and I can see the lie of the land then I may well make some changes to this part of my portfolio.

In this month's Chatterbox I was actually asked a very interesting question regarding the Schroder UK Dynamic Smaller Companies fund that I hold. Because it requires a longer explanation I have decided to answer the question here.

Damien, you have said that you will not change your portfolio selections for this month of June, but I just read that the manager of fund Schroder UK Dynamic Smaller Companies has left and the fund is undergoing a sell off. Shall I sell it before it appears on your Stop Loss list?

Now as you know I can not give advice as to whether someone sells a fund or not. That is a personal question. Furthermore as the fund has dropped off of all the 80-20 Investor lists I no longer track the fund price and so will not issue stop loss alerts. However, the question does raise an interesting point regarding the notion of fund manager changes. For those of you who don't know the two managers that run the Schroder fund are well-known and highly regarded. I have met both a number of times. The managers have just announced that they plan to leave Schroders and set up their own fund management firm. Hargreaves Lansdown immediately responded by dropping the fund from its best-buy list. The first thing to point out is that they technically are not leaving the fund until September so for now nothing has changed. What has changed is that Hargreaves is no longer promoting the fund which will inevitably lead to outflows from the fund as some investors bail ship.

If there was a significant exodus then it could cause the performance of the fund to be hampered as assets might have to be sold at reduced valuations in order to meet redemptions. The fund will take measures to reduce the likelihood of this happening of course and it may lead to a higher than normal cash position, which itself is a drag on performance unless the markets crashes.

The bigger question is whether a fund manager exit should ever be a cause for alarm? If you read my research piece on 'Is fund manager performance purely down to luck?' then the evidence suggests that it should not be a major concern. I will likely look into this specific issue in more detail in the future but I've yet to see evidence to warrant following fund managers from fund to fund. I also don't recommend that anyone invests in a fund indefinitely, instead they should regularly review whether each fund in their portfolio warrants inclusion. The name of the fund manager is irrelevant.

As I mentioned earlier the Schroder UK Dynamic fund is now on my watchlist. The performance of the fund has been exceptional, with the exception of the last few weeks. A cynical part of me did ponder whether institutional investors had been given the heads up on this departure and pulled money from the fund en-masse, so impacting performance. However when I've analysed the fund flows the Schroder UK Smaller Companies fund is still the most widely bought UK smaller companies fund and had a net positive inflow of new money in the last month

Fund Name	Underlying approx. in/out (£m)
Schroder UK Dynamic Smaller Companies	24.28
Marlborough UK Micro Cap Growth	20.63
Marlborough Special Situations	14.89
Aberforth UK Small Companies	13.36
Old Mutual UK Smaller Companies	12.91
CF Miton UK Smaller Companies	11.64
TB TB Amati UK Smaller Companies	8.54
Liontrust UK Smaller Companies	7.13

So for me the Schroder fund was already on my watchlist as of 1st June (so not impacted by the fund manager news that broke on 2nd June). It is rare for me to hold a fund for more than a few months anyway so the chances are unless there is a turnaround in performance the Schroder fund will no longer be in my portfolio by the time the current managers leave. However, it has absolutely no bearing on my decision.

Turning my attention to the only other fund within my portfolio that is no longer in the 80-20 Investor BOTB or BFBS lists I have decided to switch out of the Blackrock US Dynamic fund. The fund has been a strong performer for me since I first bought it back in December (up 7.78%) as shown in the chart below. However until March it had comfortably outperformed its sector average but since then has struggled and even triggered an 80-20 Investor stop loss alert. While the fund may well pick up there are other opportunities that are more appealing. After nearly 6 months in the portfolio, and after riding the Trump trade which has now tempered, it is time to freshen things up. In the same chart I have marked its replacement (namely the Baillie Gifford American fund which has been in the BOTB for the last two months) which has had an incredible couple of months. While I don't expect that to continue it is interesting to note that the downside risk of this fund has recently been much lower than that of the Blackrock fund. The current max weekly fall in the last 6 months for the Blackrock fund is -6.51 versus -3.4 for the Baillie Gifford fund.

So it is a simple like-for-like switch which hasn't impacted the overall portfolio asset mix. The reason I feel comfortable making the switch now is that the UK election is likely to have minimal impact on the performance of US equities (save for a very unexpected outcome in Westminster and fluctuations in the value of the pound). All the other funds marked in red in the above table have exposure to UK equities.

Fund switches

• 100% out of Blackrock US Dynamic into Baillie Gifford American

My new portfolio

My new portfolio will look like this:

Name	Allocation %	Risk	Sector	ISIN Code	SEDOL Code	Citicode / TIDM	Sector
AXA - Framlington Managed Income	4.5	Low	Sterling Strategic Bond	GB00B6RPX228	B6RPX22	11VN	Sterling Strategic Bond
Baillie Gifford - Pacific	3.0	High	Asia Pacific Excluding Japan Ret	GB0006063233	606323	BE80	Asia Pacific Excluding Japan Ret
Baillie Gifford American	16.0	Medium	North America	GB0006061963	0606196	BQ69	North America
Fidelity - Global High Yield	14.5	Low	Sterling High Yield	GB00B7K7SQ18	B7K7SQ1	0Z51	Sterling High Yield
Marlborough - European Multi-Cap	15.5	High	Europe Excluding UK	GB0001719730	171973	CA33	Europe Excluding UK
Premier - Diversified	15.5	Low	Mixed Investment 40%-85% Shares	GB00B8BJV423	B8BJV42	GH6F	Mixed Investment 40%-85% Shares
Schroder - UK Dynamic Smaller Companies	10.5	High	UK Smaller Companies	GB0007220360	722036	KR20	UK Smaller Companies
TM - Cavendish Technology	8.0	High	Technology & Telecommunications	GB00B60SMN24	B60SMN2	ETX0	Technology & Telecommunications
Wise Investments - TB Wise Income	12.5	Medium	Flexible Investment	GB00B0LJ0160	B0LJ016	TJ63	Flexible Investment

My new asset mix

This means my asset mix remains:

• UK Equities  19%
• North American Equities 19%
• Global Fixed Interest 12%
• Japanese Equities 0%
• Other International Equities 15%
• Asian equities 3%
• European Equities 13%
• UK Fixed Interest 6%
• Cash 4%
• Alternative Investment Strategies 9%