Damien’s September 2018 review – Small changes

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

As is usual in my portfolio reviews, the chart below shows how my portfolio has outperformed since I started the challenge in March 2015, three years ago. The green line is the performance of my portfolio while the red 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 blue line shows what the average multi-asset fund with comparable equity content achieved. In other words, the red 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 blue 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.

August was a great month for my £50,000 portfolio as shown in the chart below. The chart shows its performance versus the average Mixed Investment 40-85% Shares fund (an equivalent sector for managed portfolios similar to mine).

As we've gone into September markets have taken a dip which is shown on the right-hand side of the chart, yet the relative outperformance remains. In fact, it is quite humbling to note that my £50,000 portfolio has outperformed 90% of the funds within the Mixed Investment 40-85% Shares sector since I started running it. Of the 15 that have outperformed my portfolio, most have up to 85% invested in equities (as they are allowed to) versus my average of around 55-60%. Obviously, I am very pleased with that outcome given that when I started my portfolio on the 2nd March 2015 all 165 managers and I were on the same starting block. Of course, while fund managers will claim their genius is behind any outperformance I believe it is sensible to be more humble. Sticking to a process, managing risk and a fair wind are why I have performed so well. Investing involves doses of good and bad luck along the way. Only the arrogant will tell you otherwise. Remember, markets have a wonderful way of humbling investors so while it is nice to acknowledge successes we shouldn't laud them, unless of course you have cashed out and crystallised your profits.

During last month's review I removed any exposure to bricks and mortar property funds and decreased my bond exposure in favour of cash and absolute return strategies. The changes meant that I had a temporary cash weighting of 19-23% with a view to reinvest this when low-risk opportunities arise. The large cash weighting clearly didn't hamper the portfolio's performance. With my portfolio extending its lead over its benchmarks there is little desire to change the portfolio radically this month

Looking at my portfolio as a whole, the table below shows my current allocation, 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, any funds in red have dropped out of both shortlists.

Fund	Allocation	Risk	Sector	ISIN Code	SEDOL Code	Citicode / TIDM
AXA Framlington American Growth	12.8	High	North America	GB00B5LXGG05	B5LXGG0	03TF
Baillie Gifford Positive Change	5.8	High	Global	GB00BYVGKV59	BYVGKV5	NGPB
BlackRock European Absolute Alpha	4.4	Low	Targeted Absolute Return	GB00B4Y62W78	B4Y62W7	EYN0
CFP SDL UK Buffettology	7	Medium	UK All Companies	GB00B3QQFJ66	B3QQFJ6	MJZ1
Jupiter Japan Income	6.2	Medium	Japan	GB00B0HZTZ55	B0HZTZ5	JV63
Jupiter UK Smaller Companies	7.75	Medium	UK Smaller Companies	GB0004911870	491187	JU20
LF Miton European Opportunities	7.4	Medium	Europe Excluding UK	GB00BZ2K2M84	BZ2K2M8	MSED
Liontrust Sustainable Future Absolute Growth	9.25	Medium	Flexible Investment	GB0030029622	3002962	CU94
Newton Real Return	6.5	Low	Targeted Absolute Return	GB0001642635	164263	BS97
Premier Diversified	9.6	Medium	Mixed Investment 40-85% Shares	GB00B8BJV423	B8BJV42	GH6F
Standard Life Investments Global Smaller Companies	5	Medium	Global	GB00B7KVX245	B7KVX24	10FZ
Cash	18.3	Low	N/A	N/A	N/A	N/A

Looking at the table above there are only three funds that are flashing red. The AXA Framlington American Growth fund is an interesting one. The fund has blown the doors off in terms of performance versus its US equity peers. The chart below shows how the fund has performed against its sector average since I've held it. It also tops the charts over any recent performance period. Interestingly it has dropped out of the BOTB and BFBS lists, not due to a lack of momentum (its momentum is clearly upwards) but due to the risk screens that we apply. Regular 80-20 Investor members will recall that I had a similar situation with the Baillie Gifford Global Discovery recently. I ultimately put the fund on my watchlist and eventually replaced it. I will take the same approach with the AXA Framlington American Growth fund. I am conscious of the AXA fund's exposure to technology stocks, which was an extremely profitable position during the summer, but it does make the fund susceptible to a pullback if the sector takes a hit. Having looked at the alternative US options within the BOTB and BFBS tables most are also technology-heavy. Indeed most don't fare any better in the technology sell-off stress-test within the 80-20 Investor stress-test tool. Perhaps the best alternative from a diversification perspective would have been Neptune US Income (from the current BFBS). I considered moving perhaps 50% of my AXA holding into the fund, however, the downside protection would be still minimal. So I will keep an eye on things in the coming weeks and months. While the risks have risen in this part of my portfolio my increased cash position does offer a downside buffer to my portfolio as a whole.

The next fund is Jupiter Japan Income. It performed well in my portfolio for a time but recently has gone off the boil, underperforming its peers. In addition, I want to reduce my Japanese exposure to bring it more in line with the BOTB. While Asian stocks have fallen into a bear market in 2018 (meaning they've fallen more than 20% from recent highs) Japanese stocks have fared better, although made little headway. So I plan to move out of the Jupiter Japan Income fund and put 50% of the proceeds into JPM Japan (which has been a regular in the BOTB) and 50% into my existing European equity fund (LF Miton European Opportunities) to nudge up my European exposure to be more in line with the BOTB.

(NOTE: It is interesting that a stop loss alert for JPM Japan was triggered this morning. My decision regarding my Japanese exposure was made prior to this. However, as this chart of performance so far this month shows the fall is symptomatic of investing in Japanese equities and the fund has still outperformed my existing Japanese holding. So I would not have changed my decision in any event).

Finally, that leaves Premier Diversified as the only other fund coloured red. It is a fund that has formed part of my portfolio since May 2017. The first chart below shows how much the fund has outperformed its peers over that time.

However, the second chart shows that the fund has largely tracked its peers over the last six months. Basically, it has become pretty average. I have been slowly moving out of the fund in the last couple of months and will now remove my final exposure.

When looking at alternatives, again it was a tricky task. Most bond/equity managed funds have struggled and there are few that have performed well recently. So I decided to double-down on my existing holdings which have been successful. In a reflection of my wider lack of bond exposure at the moment I opted to put part of the proceeds into the BlackRock European Absolute Alpha fund to try and provide some downside protection. This fund has produced a positive return during the recent equity market weakness. The rest of the proceeds I planned to put into a fund with equity exposure in order to maintain my portfolio's equity percentage. Ideally, I wanted to buy the McInroy & Wood Smaller Companies fund from this month's BOTB. It is a global equity fund that has fared well during rising trade war tensions and has a lower max weekly fall figure when compared to other global equity funds. In particular, it has no exposure to Chinese stocks which my existing and equivalent, holding in Standard Life Investments Global Smaller Companies does. Unfortunately, the platform I use (Fidelity) does not have the fund available. This is one of the frustrations of DIY investing sometimes. However I decided to seek alternatives and decided to split the proceeds from the Premier Diversified switch equally between:

• Liontrust Sustainable Future Absolute Growth
• CFP SDL UK Buffettology
• BlackRock European Absolute Alpha

In doing so I maintain my UK equity exposure (via the Buffettology fund) because Premier Diversified did account for some of my portfolio's UK equity exposure. While the Buffettology fund has fallen out of the BOTB it remains in the BFBS tables and has held up very well during the recent bout of UK equity weakness, as shown in the chart below.

Interestingly the BlackRock European Absolute Alpha does have a small bid/offer spread and generally, I look to avoid such funds. However, the spread is 0.07%, so almost negligible and not enough to worry about.

Below I list the switches I am making:

Fund switches

• 100% out of Premier Diversified and 33.4% into BlackRock European Absolute Alpha, 33.3% into Liontrust Sustainable Future Absolute Growth and 33% into CFP SDL UK Buffettology
• 100% out of Jupiter Japan Income and 50% into JPM Japan and 50% into LF Miton European Opportunities

I have not chosen to tweak my cash position for the same reasons as last time. It's a temporary position awaiting better opportunities in the low-risk area. After a bit of a summer rally, global bond funds are once again on the back foot having fallen, on average, 1.13% in the last month.

Overall I am switching only about 16% of my portfolio. My new portfolio will look as shown in the table below and still has an equity exposure of around 60%. The number of fund holdings will go back to 10, down from 11.

My new portfolio looks like this:

Fund	Allocation	Risk	Sector	ISIN Code	SEDOL Code	Citicode / TIDM
AXA Framlington American Growth	12.9	High	North America	GB00B5LXGG05	B5LXGG0	03TF
Baillie Gifford Positive Change	5.8	High	Global	GB00BYVGKV59	BYVGKV5	NGPB
BlackRock European Absolute Alpha	7.5	Low	Targeted Absolute Return	GB00B4Y62W78	B4Y62W7	EYN0
CFP SDL UK Buffettology	10.25	Medium	UK All Companies	GB00B3QQFJ66	B3QQFJ6	MJZ1
JPM Japan	3	High	Japan	GB0030879471	3087947	RT06
Jupiter UK Smaller Companies	7.75	Medium	UK Smaller Companies	GB0004911870	491187	JU20
LF Miton European Opportunities	10.5	High	Europe Excluding UK	GB00BZ2K2M84	BZ2K2M8	MSED
Liontrust Sustainable Future Absolute Growth	12.5	Medium	Flexible Investment	GB0030029622	3002962	CU94
Newton Real Return	6.5	Low	Targeted Absolute Return	GB0001642635	164263	BS97
Standard Life Investments Global Smaller Companies	5	High	Global	GB00B7KVX245	B7KVX24	10FZ
Cash	18.3	Low	N/A	N/A	N/A	N/A

My new asset mix

This means my new asset mix is (previous asset mix is in brackets):

• • UK Equities 18% (19%)
  • North American Equities 23% (21%)
  • Global Fixed Interest 2% (2%)
  • Japanese Equities 4% (8%)
  • Other International Equities 0% (0%)
  • Asian equities 1% (0%)
  • European Equities 15% (11%)
  • UK Fixed Interest 0% (0%)
  • Cash 23% (23%)
  • Alternative Investment Strategies 14% (16%)
  • Emerging Asia equities 0% (0%)
  • Emerging Market Fixed Interest 0% (0%)
  • Property 0% (0%)

Damien's higher risk and low risk portfolios

Using the logic described in my post New: Damien’s Higher Risk Portfolio the higher and lower risk versions of my portfolio would like as follows:

Higher risk

Fund	Allocation %
AXA Framlington American Growth	19.1
Baillie Gifford Positive Change	8.6
CFP SDL UK Buffettology	15.1
JPM Japan	4.4
Jupiter UK Smaller Companies	11.4
LF Miton European Opportunities	15.5
Liontrust Sustainable Future Absolute Growth	18.5
Standard Life Investments Global Smaller Companies	7.4

Lower risk

Fund	Allocation %
BlackRock European Absolute Alpha	12.0
CFP SDL UK Buffettology	16.3
Jupiter UK Smaller Companies	12.3
Liontrust Sustainable Future Absolute Growth	19.9
Newton Real Return	10.4
Cash	29.1