Damien’s September 2017 review – Goodbye old friend

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 65% 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.

August was a tough month for investors as concerns over North Korea rattled markets. As I laid out in September's monthly newsletter a spike in volatility was to be expected at this time of year. If you look at the chart above you can see the increased volatility in the top right hand corner, however the buy-the-dip mentality supported the markets as well as my portfolio. Despite the increased volatility the portfolio inched up again this month and now sits at a profit of 23.21% since March 2015.

A significant part of my portfolio's outperformance over the last few months has been down to my increased exposure to China, Asia and emerging markets. Back in June I published an article titled Should China finally be a staple part of an investor’s portfolio? in which I wrote that

"those who play Chinese equities right will likely outperform those (including professional) fund managers who continue to ignore this asset class. There will be plenty of bumps along the way..."

For now at least the trade is paying off. However since my last update it's not all been a bed of roses. The table below shows the performance of each fund within my portfolio since my last review a month ago.

Fund	1 month performance (%)
Baillie Gifford - Emerging Markets Growth	1.65
TwentyFour - Dynamic Bond	0.3
Baillie Gifford - Greater China	0.11
Premier - Diversified	-0.12
Marlborough - European Multi-Cap	-0.22
Allianz - Total Return Asian Equity	-0.48
Man GLG - Strategic Bond	-0.73
Wise Funds Limited - TB Wise Multi-Asset Income	-1.1
Neptune - Japan Opportunities	-1.13
Baillie Gifford - American	-1.41
Schroder - UK Dynamic Smaller Companies	-1.68

While I don't obsess over 1 month returns it is interesting to see the Wise Income fund and the Schroder fund lagging. Both of these funds have been on my watchlist and have now fallen off the 80-20 Investor BOTB lists, which they've been threatening to do. 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
Allianz - Total Return Asian Equity	5.2	High	Asia Pacific Excluding Japan	GB00B1FRQV53	B1FRQV5	BKB9
Baillie Gifford - American	10.6	Medium	North America	GB0006061963	606196	BQ69
Baillie Gifford - Emerging Markets Growth	6.6	High	Global Emerging Markets	GB0006020647	602064	BG89
Baillie Gifford - Greater China	6.6	High	China/Greater China	GB00B39RMM81	B39RMM8	CSF5
Man GLG - Strategic Bond	13.6	Low	Sterling Strategic Bond	GB00B731HR48	B731HR4	0K5P
Marlborough - European Multi-Cap	10.5	High	Europe Excluding UK	GB0001719730	171973	CA33
Neptune - Japan Opportunities	2.1	Medium	Japan	GB00B3Z0Y815	B3Z0Y81	GQLD
Premier - Diversified	15.6	Low	Mixed Investment 40-85% Shares	GB00B8BJV423	B8BJV42	GH6F
Schroder - UK Dynamic Smaller Companies	10.2	Medium	UK Smaller Companies	GB0007220360	722036	KR20
TwentyFour - Dynamic Bond	7	Low	Sterling Strategic Bond	GB00B5KPRZ34	B5KPRZ3	JZU3
Wise Funds Limited - TB Wise Income	12	Medium	Flexible Investment	GB00B0LJ0160	B0LJ016	TJ63

Looking at the above table there are three funds that have dropped out of both the BFBS and BOTB tables. I discussed the TB Wise Income fund in last month's chatterbox (it's worth a read) after one of the companies the fund invests in issued a profit warning. As mentioned above, the fund was already on my watchlist and so I am now removing it from the portfolio. Back in June I was asked by an 80-20 Investor member whether I would sell the Schroder UK Dynamic Smaller Companies fund, after its fund managers announced their planned September departure. You can read my response in full here. In short I said I'd stick to the 80-20 Investor process and ditch the fund once the performance showed signs of slowing, which it now has. Whether that is a result of the fund manager change is debatable but either way it doesn't matter. The fund has been a stellar performer but all good things come to an end.

On that note it is time to say goodbye (for now anyway) to an old friend in the Marlborough European Multi-Cap fund. This fund has been an incredibly profitable fund for me (and 80-20 Investor members) but its performance has slowed in recent months, just as I've reduced my holding. I have no doubt it will return to the fold but there is no emotion in investing and right now there are better opportunities. The fund's most recent stint in my portfolio started over a year ago (in August 2016). The chart below shows the fund's performance (in green) versus its peer group (in red) and it's been an incredibly profitable ride. Click to enlarge.

All three of these fund switches provide good case studies of when to sell a fund. I didn't panic in light of a fund manager change or a profit warning in a fund's underlying holding. In addition I am not afraid to bank some profits and sell one of the most profitable funds I've ever invested in. In each case I will not have got the timings perfectly right, that's just not feasible, but by having a process I can take the emotion out of my investing decisions. In the long run that is how you outperform the market.

The fourth fund I am switching out of is Neptune Japan Opportunities. This fund entered August's BOTB (the only Japan fund to do so) and then swiftly disappeared out of the BOTB and BFBS tables. It has since returned to the latter but no other Japan fund has. The angst caused by the North Korea tensions drove money into haven assets such as gold and the yen. Interestingly when the yen rallies the export heavy Japanese stock market slumps (this is because exporters struggle to sell as much of their goods because they are now more expensive for overseas buyers). Neptune Japan Opportunities hedges out much of the exposure to the yen which means you are just exposed to the moves in the price of the Japanese stock market. Consequently the fund performed badly in September as shown in the chart above but fortunately (and deliberately) I only had a small holding in the fund (around 2% of the portfolio). The yen strength was compounded by the dollar weakness. While this trend may reverse in future, given the absence of any Japanese exposure in the BOTB I am going to switch out of the fund.

Fund switches

• 100% out of Marlborough European Multi-Cap and 100% into CF Miton European Opportunities fund in a like-for-like swap. The CF Miton fund has been a regular in the BOTB and of the European funds listed in the BOTB it doesn't have a bid/offer spread. It also has the strongest performance and also has the smallest max weekly fall value which should bode well if we suffer a market correction.
• 100% out of Schroder UK Dynamic Smaller Companies and 100% into TM Cavendish AIM in another like-for-like swap. The Cavendish Aim fund was a regular in my portfolio earlier in the year, in fact the Schroder fund replaced it. The fund's stellar recent performance has seen it regain its place. It also has the lowest max weekly fall figure of all the UK Smaller Companies funds that make it into this month's BOTB.
• 100% out of Neptune Japan Opportunities and into 100% Aberdeen Emerging Markets Bond fund. The Aberdeen fund has been a regular in recent BOTB's and I've been looking for a way to introduce some emerging market debt into my portfolio for a while. The weak dollar (strong yen) has hampered the Neptune fund since I've held it. But conversely emerging market debt tends to fare better as the dollar weakens.
• 100% out of Wise Funds Limited TB Wise Income into 25% Premier Diversified, 25% Cavendish Aim, 10% Aberdeen Emerging Markets Bond, 30% F&C Property Growth and Income and 10% Twentyfour Dynamic Bond. The Wise Income fund was a fairly well diversified fund. When replacing it I needed to choose a range of funds, because there are few multi-asset funds in the BOTB, in order to keep my overall asset mix in line with that of the BOTB. The easiest way I found to do this was to use the asset allocation tool as I could see the overall mix of the Wise fund (around 50% in equities) which gave me a good starting point as to where to invest the proceeds (i.e. put 50% into the two funds I already hold that provide UK exposure). I also used the proceeds to bump up my emerging market bond exposure to around 3% (the same as the BOTB) but also to invest into the low risk Twentyfour Dynamic fund. The Wise income fund was a medium risk fund so I was looking to counter the increased risk that the exposure to Cavendish Aim presented. Finally I invested in the F&C Property Growth and Income fund. It has been a regular of the BOTB (flitting between medium and low risk) and helps diversify my portfolio into another low risk asset class (around a third of the fund invests in actual buildings).

Overall I am only switching about 35% of my overall portfolio. My new portfolio mix is even more diversified than before.

My new portfolio will look like this:

Name	Allocation % (rounded)	Risk	ISIN Code	SEDOL Code
Aberdeen - Emerging Markets Bond	3.4	Medium	GB00B5L9HN22	B5L9HN2
Allianz - Total Return Asian Equity	5.1	High	GB00B1FRQV53	B1FRQV5
Baillie Gifford - American	10.6	Medium	GB0006061963	606196
Baillie Gifford - Emerging Markets Growth	6.6	High	GB0006020647	602064
Baillie Gifford - Greater China	6.5	High	GB00B39RMM81	B39RMM8
CF - Miton European Opportunities	10.5	High	GB00BZ2K2M84	BZ2K2M8
F&C - Property Growth and Income	3.6	Medium	GB00BQWJ8687	BQWJ868
Man GLG - Strategic Bond	13.6	Low	GB00B731HR48	B731HR4
Premier - Diversified	18.6	Low	GB00B8BJV423	B8BJV42
TM - Cavendish AIM	13.2	High	GB00B0JX3X39	B0JX3X3
TwentyFour - Dynamic Bond	8.3	Low	GB00B5KPRZ34	B5KPRZ3

My new asset mix

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

• UK Equities 19% (19%)
• North American Equities 14% (11%)
• Global Fixed Interest 17% (16%)
• Japanese Equities 0% (3%)
• Other International Equities 3% (0%)
• Asian equities 3% (3%)
• European Equities 12% (10%)
• UK Fixed Interest 6% (5%)
• Cash 0% (5%)
• Alternative Investment Strategies (including property) 9% (16%)
• Emerging Asia equities 15% (12%)
• Emerging Market Fixed Interest 2% (0%)