Our reader, who wishes to remain anonymous, is 70 and has been investing for 30 years. He aims to beat the best building society rate and, ideally, inflation, although he says that he will probably leave all of his profits to charity.
Leave profits to charity
Best cash and inflation
He says: "My big and too frequent mistake has been not to cut losses quickly enough. Hence, I have suffered large losses but I believe it too late to sell. Luckily these holdings were small.
"I have now adopted the Bearbull stop-loss method. I have also tried to keep the number of holdings in my portfolio low-ish and to avoid excessive dealing and duplication. My approach has been to have a number of broad, mainly fund investments with a small number of individual stocks as the 'currents in the cake'."
ANONYMOUS PORTFOLIO
Individual savings account | Number of shares/units held | Price | Value |
iShares Emerging Markets Local Government Bond UCITS ETF (SEML) | 174 | £52.61 | £9,154 |
BH Macro (BHMG) | 240 | 2028p | £4,867 |
Schroder Oriental Income (SOI) | 6,632 | 180.25p | £11,954 |
European Assets Trust (EAT) | 1,013 | 966.22p | £9,787 |
Aberdeen Asian Smaller Cos IT (AAS) | 1,036 | 957.5p | £9,919 |
SPDR S&P Emerging Markets Dividend ETF (EMDV) | 597 | £12.67 | £7,563 |
ROYAL BANK OF SCOTLAND PLC PP INF LKD NTS 01/11/22 (RBPI) * | £10,000 | ||
UNITE GROUP PLC 6.125% BDS 12/06/20 (UTG1) * | £6,500 | ||
WORKSPACE GROUP PLC 6.00% STG BDS 09/10/19 (WKP1) * | £5,000 | ||
Global Petroleum (GBP) | 9,258 | 5.38p | £498 |
City of London Group (CIN) | 1,364 | 52p | £709 |
Taxable accounts | |||
Troy Trojan O Acc (GB00B01BP952) | 5,550 | 238.91p | £13,259 |
CF Ruffer Total Return O Acc (GB0009684100) | 3,337 | 365.29p | £12,189 |
Cazenove Absolute UK Dynamic P1 (GB00B3N74T57) | 14,090 | 152p | £21,416 |
Northern Petroleum (NOP) | 4,135 | 33.5p | £1,385 |
Chariot Oil and Gas (CHAR) | 1,483 | 18.5p | £274 |
IGas Energy (IGAS) | 6,982 | 105p | £7,331 |
IQE (IQE) | 16,115 | 23p | £3,706 |
Starwood European Real Estate Finance (SWEF) | 10,000 | 101.25p | £10,125 |
NB Global Floating Rate Income Fund (NBLS) | 10,000 | 103.3p | £10,330 |
Cash | |||
NSI Index Linked | £45,000 | ||
Cash | £98,275 | ||
Halifax Cash Isa 4.2% | £55,200 | ||
TOTAL | £354,441 |
Source: Investors Chronicle & *London Stock Exchange
Price and value as at 13 November 2013
LAST THREE TRADES
IQE (buy), European Assets (buy), Schroder Asian Income (buy)
WATCHLIST
City Natural Resources High Yield, RCM Technology, Middlefield Canadian, Worldwide Healthcare, Finsbury Growth & Income (most of these have risen strongly and so I am awaiting a market fall-back before putting new money in). DGI IRIS Sterling (for £10,000 cash).
Chris Dillow, the Investors Chronicle's economist, says:
This is a nice example of a 'risk barbell' portfolio. It has a heavy weighting in some very safe assets such as cash and index-linked national savings - and to a lesser extent some corporate bonds if you plan on holding these to maturity - and a big weighting in some risky assets such as your emerging markets funds, with not much in between.
Taken as a whole, therefore - which is how we should think about portfolios - this is not especially risky. Sure, there's a chance of big losses in some of your assets, but these would represent only a small loss in your total wealth. This is reasonable for an investor with low-to-middling appetite for risk.
There are, though, a couple of risks to note.
First, your emerging markets funds are exposed to the risk that if or when the Fed stops its quantitative easing (QE), emerging market stocks could fall sharply as the market fears a drying up of capital inflows. Emerging markets have for a long time been a play upon US monetary policy, with loose policy favourable for them and tighter policy not so.
What mitigates this risk is that the circumstances in which the Fed will withdraw QE are likely to be favourable to shares. The Fed will only reduce QE if the economic outlook improves - but in this case, sentiment towards equities generally will improve, which could lift emerging markets.
We can't say which of these countervailing forces will dominate. What we can say, though, is that emerging markets often carry more tail risk than developed markets; in bad times, they are likely to do really badly. If you're happy to take this small risk of big losses, then emerging markets are suitable. If not, you might want to consider shifting towards more developed markets funds.
And there's a good reason why you might want to take such risk. Many investors are loss-averse: the small chance of big losses troubles them more than does a large chance of modest losses even if the expected value of the two is the same. Such investors tend to avoid assets that carry tail risk, with the result that they are on average underpriced and so offer good returns for those brave enough to take such risk. This - rather than the possibility of good long-run growth - is the justification for emerging markets' decent long-run performance.
This, though, raises a paradox. While your emerging markets holdings expose you to downside tail risk, your holdings of small oil stocks exposes you to the opposite sort of tail risk - the small chance of big profits if their exploratory activity pays off.
However, I'm not sure such exposure is wise. There's evidence that investors on average overpay for lottery-type stocks - those that offer a chance of massive returns - and so these do badly on average over the longer run. The fact that Aim has underperformed the main market over the long run is consistent with this. In this sense, investing in Aim stocks is fishing in less fertile waters.
Fortunately, though, your exposure here is quite small, so this is a minor point. This is the virtue of good diversification.
In this sense, this portfolio illustrates an important general point. Some risks - such as the downside tail risk associated with emerging markets - tend to pay off on average over the long-run, while some others do not. The question is: which risks are we taking, and what reason do we have to suppose they will pay off? Sometimes, the answers are not obvious, and conventional stock-picking might not help us.
Ben Yearsley, head of investment research at Charles Stanley Direct, says:
I can see the approach you are trying to take with his portfolio, effectively having the cornerstone of the portfolio as funds and then having satellites around the edge with spicier individual share holdings. Many people do this successfully, it is something I do myself - I have a broad core then buy individual shares to either add spice or take advantage of specific market conditions or opportunities.
Turning to a few of your holdings, European Assets has an odd Dutch domicile, which means it can pay a dividend of 8 per cent of capital as a dividend each year. That is great when markets are up, but bad when they are down. It is a small and mid-cap fund, and I think the JPMorgan European Smaller Companies Trust (JESC) is a better option instead because of the structure. Schroder Oriental Income is run by Matthew Dobbs and is a solid long-term performer and provides a good core holding in the region. Aberdeen Asian Smaller companies is an excellent holding - they are one of the premier teams in the region.
Turning to the fund side, I like Troy Trojan, Ruffer Total Return and Cazenove Absolute UK Dynamic. However, all three are focused as much on capital preservation as actually making money, meaning in a strong bull run they will be left behind. I think you need to diversify these into more 'long only' investments such as Liontrust Special Situations (GB00B0N6YF70) or Henderson European Special Situations (GB00B3W46246) - both funds have long-term managers with a buy and hold philosophy, something that fits nicely with a core and satellite investment approach.
In addition to the funds and shares, you hold an emerging markets bond exchange traded fund (ETF) and an emerging markets income ETF. I'm not a fan of index tracking as a rule, especially in more volatile and less researched markets such as these. I would prefer an active approach, maybe Polar Capital Emerging Markets Income Fund (IE00B4VVWP88) and Investec Emerging Markets Local Currency Debt Fund (GB00B1XDJP05). Index tracking works well in some markets, most notably the US, but less well in others.
Most of the investments on your watchlist are interesting. There's nothing wrong with waiting for a pull-back to buy, but are you sure that it will happen? It is all very well trying to time the markets; however, in the long run you are often better off just finding a good investment, buying it and holding it. Another option would be to decide how much in total you want in a specific investment, say £10,000, buying an opening position of say £3,000, and then adding to it either on dips or as you become more certain of the direction of markets.
Overall, this is an interesting portfolio and I like the core and satellite approach. I think you need to add diversification in the core holdings by adding some 'long only' funds. I also think you need a bit more of a strategy as it seems quite a random collection of investments. I have no particular view on the shares, but you do probably need to add a few more - how about some strong potential dividend growers such as BP (BP.), Persimmon (PSN) and HICL Infrastructure Company (HICL)? I think dividend growth will be highly valued by investors in the coming few years.