Damien’s portfolio review May 2017 – Up 19.13%

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 two-fold, 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.

Outperformance

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 a double-digit 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 the portfolio has really kicked on in the last month and has hit an all-time high. The additional risk that has been taken has been rewarded. For some people it may beg the question why change anything? Of course there is no compulsion for members to do anything but I prefer to regularly review my portfolio and make changes via a process which takes the emotion out of investing. So as such I am making a number of changes to my portfolio.

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	1 month return	6 month return	Max weekly fall in last 6 months	Ongoing charge
7IM - Unconstrained	14	Low	Targeted Absolute Return	GB00B75MS619	-0.33	4.79	-1.09	1.29
AXA - Framlington Managed Income	4	Low	Sterling Strategic Bond	GB00B6RPX228	0.99	5.3	-0.54	0.59
BlackRock - US Dynamic	17	Medium	North America	GB00B87XJQ69	-1.2	16.56	-5.97	0.93
Cavendish - AIM	10	High	UK Smaller Companies	GB00B0JX3X39	3.33	23.62	-1.24	1.6
Cavendish - Technology	7	High	Technology & Telecoms	GB00B60SMN24	1.77	18.01	-3.97	1.6
Fidelity - Global High Yield	14	Low	Sterling High Yield	GB00B7K7SQ18	1.02	5.58	-0.88	1.03
JOHCM - UK Equity Income	11	Medium	UK Equity Income	GB00B03KR831	1.41	15.46	-1.91	1.31
M&G - Global Dividend	7	Medium	Global	GB00B46J9127	-1.96	10.76	-4.84	1.16
Man GLG - Japan Core Alpha	6	High	Japan	GB00B3F46Y30	-2.57	8.7	-6.96	1.65
Marlborough - European Multi-Cap	7	High	Europe Excluding UK	GB0001719730	4.18	20	-1.79	1.8
Marlborough - Far East Growth	3	High	Asia Pacific Excluding Japan	GB00B0NVCN62	-2.27	11.64	-5.29	1.88

When I reviewed my portfolio last time I highlighted how there were a number of potential risks worrying investment markets. As such I refrained from making any radical changes to my portfolio, instead preferring to make one minor fund change while putting two funds on my watchlist, with a view to a replacing them once market volatility reduced. That was assuming of course that they didn't suddenly produce a turn-around in performance. My biggest concern was that markets would rebound and I would miss much of that bounce while the transactions completed. That actually turned out to be fairly prophetic as equity markets rallied after the initial round of the French Presidential election.

Political risks have continued to wane and we’ve seen the best US earnings season for years. On top of that the level of fear within markets has eased with the market fear gauge (the VIX) hitting a multi-decade low. Unsurprisingly equity markets globally have been setting new all-time highs. New all-time highs are not characteristics of bear markets which suggests that equity markets remain in the midst of a longer term uptrend. That doesn’t mean that we won’t have a reversal but for the time being holding equities is paying off. That trend is even extending to emerging markets, with the exception of China to a certain extent.

At the time of writing the market has paused for breath, for example the S&P 500 is struggling to close above 2,400 for the first time. While making fund switches in a rising market isn’t ideal (as you miss out on the upside) the brief pause and low market volatility should hopefully mean markets won’t move against me. If they do the odds are that the move will be muted.

With that in mind, I am finally ditching the two funds on last month’s watchlist, namely M&G Global Dividend and 7IM Unconstrained. The former had performed strongly but just after I bought it the performance dipped. That is in part because of the rise in the pound versus the dollar but its performance has still been disappointing versus its peer group. It’s a good example of how you won’t get every call correct. It’s about getting more right than you do wrong.

Those of you who follow my portfolio closely may have noticed that the global fund portion (i.e funds from the global and global equity income sectors) has proved problematic in the last few months. While other funds in my portfolio have cemented their positions funds marketed as ‘global’ have struggled. There is a temptation to replace like-with-like again but instead I’m going to back a winner. As such I plan to switch 100% out of the M&G Global Dividend fund and use the proceeds to bolster my Marlborough European Multi-Cap holding. That will take my European exposure from 7% to 14% which is in line with the latest BOTB asset mix.

While I don’t obsess over matching the asset mix of the BOTB (as outperformance is more about being in the right funds than the right sectors) the rotation from US equities into European equities resonates with the value opportunity identified in my article Finding Value: The cheapest stock markets to invest in now. In addition political risks in Europe have diminished for now.

The 7IM fund has flatlined of late and while you don’t want your low risk funds to be blowing the lights out you want to squeeze as much from them as you can. Therefore I am switching 100% out of the 7IM Unconstrained fund and into the Premier Diversified fund. The latter has been a regular in the BOTB and invests in a range of assets including some equities, bonds and even property. As can be seen from the inclusion of a property fund in this month’s BOTB property is having something of an upturn.

Turning my attention to my exposure to UK equities,  the Cavendish AIM fund has made 9% since I invested into it back in January. While this is a fantastic return in just 4 months it has still slipped out of both the BOTB and BFBS tables. Quite simply, other UK Smaller Companies funds are showing greater momentum right now. As such I will switch this entire holding into the Schroder UK Dynamic Smaller Companies which has been a regular member of the BOTB. If you rank the BOTB table by sector (click on the sector header) and compare the Schroder fund against the other UK Smaller Companies funds it is not only one of the cheapest but the strong performance figures are matched by a relatively low ‘max drawdown figure’.

Meanwhile the JOHCM UK Equity Income fund has been a profitable constituent of my portfolio but it has just slipped out of the BOTB and BFBS tables. So I’m using this as an opportunity to slightly scale back my UK exposure to below 20% to be more in line with the BOTB. To do this I plan to switch all of the proceeds from the sale of JOHCM fund into the Wise Investments TB Wise Income fund. The new fund still has around a 50% exposure to UK equities but a mix across the entire market cap spectrum (i.e large and small businesses). It also invests in private equity, property and a tiny amount in global equities.

Aside from the four funds mentioned so far the only others that are not in either of the BOTB or BFBS tables are Man GLG Japan Core Alpha and Marlborough Far East Growth. Japanese equities have struggled of late and the Man GLG fund is slightly more gung-ho than many of its peers so has suffered a dip in performance. Therefore I plan to sell the fund and split the small amount of proceeds between four existing funds (covering high, medium and low risk) as shown below. I have deliberately excluded investing some of the proceeds in the Blackrock US Dynamic fund as it has a small bid/offer spread on it.

I have decided to switch Marlborough Far East Growth for another Asia equity fund. As the BlackRock Asia Special Situations fund (which is in the BOTB) has a small bid/offer spread I decided to pick one of its peers from the BFBS table which doesn't. So I have gone for Baillie Gifford Pacific.

The above fund switches mean that around 50% of my portfolio will be out of the market. While 50% may seem pretty high if you ignore the low risk 7IM fund switch, because its returns have been akin to cash just lately anyway, then only 36% of my portfolio which is exposed to equities will be in transit. As I pointed out in this month's Chatterbox I tend to steer clear of making large switches but I've not made any significant changes to my portfolio for 3 months so it is time to freshen things up.

I pondered for some time whether to include a hedged global fund in my portfolio but I decided to refrain for the time being. The first reason was as previously mentioned (i.e. not wanting to choose another global fund for now) while the second reason was a result of Thursday’s Bank of England press conference. In that press conference Mark Carney stated that the Bank of England’s positive outlook was based purely on whether Theresa May could secure a smooth Brexit. The fact that this is unlikely sent the pound tumbling through the key support level of $1.29 and threatened a complete reversal of the recent uptrend. If you read my recent article on Technical Analysis May 2017 the pound was poised to potentially rally higher pushing through $1.30. However it had become stuck in a tight range between $1.29 and $1.30. The market had been in search of a catalyst to decide whether the pound would rally or fall. Mark Carney provided that catalyst and until the pound can get back above $1.29 the jury is still out on whether the pound is going to fall back towards $1.25 or ultimately head up towards $1.34. Currency traders are tearing their hair out right now. For me it was such a fine decision ultimately I didn't have room for a global fund in my portfolio.

Fund switches

• 100% out of Cavendish AIM into Schroder UK Dynamic Smaller Companies
• 100% out of JOHCM UK Equity Income into Wise Investments TB Wise Income
• 100% out of 7IM Unconstrained into Premier Diversified
• 100% out of M&G Global Dividend into Marlborough European Multi-Cap
• 100% out of Marlborough Far East Growth into Baillie Gifford Pacific
• 100% out of Man GLG - Japan Core Alpha split equally between Marlborough European Multi-Cap, Cavendish Technology, Wise Investments TB Wise Income and Premier Diversified

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
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

My new asset mix

This means my asset mix is now (numbers in brackets represent the old asset mix):

• UK Equities  19% (23%)
• North American Equities 19%  (21%)
• Global Fixed Interest 12% (13%)
• Japanese Equities 0% (6%)
• Other International Equities 15% (8%)
• Asian equities 3% (3%)
• European Equities 13%  (7%)
• UK Fixed Interest 6% (5%)
• Cash 4% (5%)
• Alternative Investment Strategies 9% (9%)