Damien’s November 2018 review – Putting a little cash to work

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 and a half 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.

The good news is that the portfolio has outperformed its benchmarks since last month's changes, in the aftermath of October's market crash, as shown below.

More importantly, the chart below shows how the portfolio prior to last month's changes would have performed versus the portfolio after the fund changes. Or in other words, what would have happened had I done nothing.

That is a big difference. Equity markets have continued to deteriorate and had I not made the changes then my portfolio would be 2% lower in value. So obviously I am very pleased with the result. It is worth going back and reading the reasons behind the fund switches I made last time. I increased my cash position, built hedges (I even shorted European equity stocks), sold losers, trimmed winners and reduced my equity exposure.

Given that markets are still in a high state of volatility with momentum still tending towards the downside I have no desire to change any existing funds in my portfolio at this time. The G20, the ongoing trade war angst, the Brexit deal saga and the Federal Reserve's resolve to raise rates being tested has meant that the market has struggled to establish a trend (up or down). At the moment the market is floundering but hopefully we will shortly have more clarity especially as we are due crucial updates on all of the aforementioned issues next week. Furthermore, it is less than two weeks until we get a new BOTB selection, which I will review alongside my portfolio at that time. Of course, while I accept that 'taking my foot off the gas' has so far proved successful should the market suddenly rally into the year-end, meaning that I won't enjoy as much of the upside, from a risk management standpoint I am comfortable with that. The possibility of a more severe market crash still remains on the table for now.

For the sake of consistency, 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
BlackRock European Absolute Alpha	8	Low	Targeted Absolute Return	GB00B4Y62W78	B4Y62W7	EYN0
CFP SDL UK Buffettology	12.6	Medium	UK All Companies	GB00B3QQFJ66	B3QQFJ6	MJZ1
JPM Japan	3.2	High	Japan	GB0030879471	3087947	RT06
FP - Octopus UK Micro Cap Growth	5	High	UK Smaller Companies	GB00BYQ7HN43	BYQ7HN4	NFZH
LF Miton European Opportunities	4	High	Europe Excluding UK	GB00BZ2K2M84	BZ2K2M8	MSED
Newton Real Return	6.8	Low	Targeted Absolute Return	GB0001642635	164263	BS97
Thesis TM Sanditon European Select	6	Medium	Targeted Absolute Return	GB00BNY7Y722	BNY7Y72	KMPQ
Man GLG Corporate Bond	12.3	Low	Global Bonds	GB00B0118B85	B0118B8	AX76
LF Canlife North American	12.6	High	North America	GB00B73N3278	B73N327	0YMD
Cash	29.5	Low	N/A	N/A	N/A	N/A

For the reasons explained above I am not looking to make any changes to my current holdings, especially as those funds in red only account for 19% of my portfolio and the Newton Return fund is down only around 2% since the beginning of the equity market sell-off.

However, as I mentioned in last week's newsletter the value of the pound is having a disproportionate effect on investors' portfolios right now because of the ongoing Brexit saga. Most multi-asset managed funds are either betting on the pound collapsing (and so presumably Brexit failing) or simply have a lot of assets (with overseas exposure) that would benefit more if the pound fell than if it rose. Looking at my portfolio, in its current state the funds which would benefit from a collapse in the pound are LF Canlife North America, LF Miton European Opportunities, JPM Japan and Man GLG Corporate Bond because they all hold overseas assets. To a lesser extent, CFP SDL UK Buffettology would get a boost because it is invested in large-cap UK equities (some of which are in the FTSE 100).

The other positions I hold won't benefit from the pound falling, especially my cash holding. When I looked at my portfolio I would say that probably around 40% to 45% of my portfolio would benefit from a crash in the pound. So I've decided to increase this to closer to 50-50 otherwise I am taking the bold bet on Theresa May securing a Brexit deal imminently. As I mentioned in last week's newsletter I'd rather take a neutral position as, quite frankly, anything could happen with regards to Brexit.

So I've decided to reduce my cash holding from 30% to 20%. I don't want to increase my equity weighting right now so I am using the cash to boost my global bond exposure, more in line with that of the BOTB. Bonds have struggled at times in recent months, hence my higher cash position, but with signs of global economic growth slowing and the weaker pound providing a currency boost they have started to provide some form of return. As an aside, I have often been asked one of the best ways to play the GBP/Dollar exchange rate  (i.e. bet that the pound will fall) aside from a currency ETF. As the chart below shows, one of the best ways is via selected global bond funds. As you can see, while the performance of the underlying bonds impact returns, in the case of Newton International Bond it is almost a GBY/USD proxy, even more so than my existing Man GLG Corporate Bond holding.

Therefore I have decided to make the small adjustment to my portfolio by moving 10% into Newton International Bond. It maintains the low-risk tilt of my portfolio but is starting to put some of the cash to work while having the added benefit of balancing my exposure to the pound's fortunes.

I will, of course, review the portfolio fully at the start of December.

Fund switches

To summarise, I have taken the decision to make the following fund switch:

• 33% out of my Cash holding and into Newton International Bond (which is in both the BOTB and BFBS tables)

My new portfolio

My new portfolio looks like this:

Fund	Allocation %	Risk	Sector	ISIN Code	SEDOL Code	Citicode / TIDM
BlackRock European Absolute Alpha	8	Low	Targeted Absolute Return	GB00B4Y62W78	B4Y62W7	EYN0
CFP SDL UK Buffettology	12.5	Medium	UK All Companies	GB00B3QQFJ66	B3QQFJ6	MJZ1
JPM Japan	3	High	Japan	GB0030879471	3087947	RT06
FP - Octopus UK Micro Cap Growth	5	High	UK Smaller Companies	GB00BYQ7HN43	BYQ7HN4	NFZH
LF Miton European Opportunities	4	High	Europe Excluding UK	GB00BZ2K2M84	BZ2K2M8	MSED
Newton Real Return	6.8	Low	Targeted Absolute Return	GB0001642635	164263	BS97
Thesis TM Sanditon European Select	6	Medium	Targeted Absolute Return	GB00BNY7Y722	BNY7Y72	KMPQ
Man GLG Corporate Bond	12.6	Low	Global Bonds	GB00B0118B85	B0118B8	AX76
LF Canlife North American	12.6	High	North America	GB00B73N3278	B73N327	0YMD
Newton International Bond	10	Low	Global Bonds	GB0006779655	677965	RZ04
Cash	19.5	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 17% (17%)
  • North American Equities 14% (14%)
  • Global Fixed Interest 22% (14%)
  • Japanese Equities 3% (4%)
  • Other International Equities 0% (0%)
  • Asian equities 1% (1%)
  • European Equities 5% (5%)
  • UK Fixed Interest 0% (0%)
  • Cash 23% (33%)
  • Alternative Investment Strategies 15% (12%)
  • Emerging Asia equities 0% (0%)
  • Emerging Market Fixed Interest 0% (0%)
  • Property 0% (0%)

If you are looking for the notional high and low-risk versions of my £50k portfolio which are often published with these updates then see the question and answer (regarding their omission) in this month's Chatterbox.