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Help! I have 125 holdings

We help a 39-year-old investor tidy up his massive number of investments with a six-point plan

Tim is 39 and has been investing for six years. During that relatively short period of time he has managed to accumulate a massive 125 holdings across his £35,000 portfolio, making this possibly the worst case of 'diworsification' that we have seen yet.

His holdings span direct shares in UK, US, Canadian and European companies, plus investment trusts and exchange traded funds (ETFs).

If Tim carries on accumulating investments at this rate, he'll have more than 500 holdings by the time he's 60. So we were very happy to hear him say: "I wish to tidy up this portfolio."

"I invest in what I have some understanding of," he explains. "I try to find companies at the right price that offer potential for growth. I like solid companies that offer a long-term yield with some growth, with an emphasis on companies which are either dominant in their profession or hold some type of monopoly.

"However, there is risk in this, as shown by the cases of Volkswagen (Ger: VOW3), which was recently accused of cheating on US emission tests, and BP (BP.), forced on the cost-cutting front in the wake of the Deepwater Horizon disaster. Investing in a country or region also carries risk.

"My attitude to risk is not as brave since I lost £21,300 on a leveraged fund. I would say my attitude to risk is low to medium.

"In order to minimise risks, I intend to 'play the field more than the player'. So I place more emphasis on funds, ETFs and investment trusts to reduce hassle and risk. Other problems with directly-held company shares surface when it is time to sell or take gains.

"I would like to diversify into other global regions and possibly bonds."

Reader Portfolio
Tim 39
Description

Direct equities and funds

Objectives

Growth

 

TIM'S PORTFOLIO

UK HOLDINGS
4imprint Group (FOUR)iShares MSCI USA UCITS ETF (CU1)
Aberdeen Asian Smaller Companies IT (AAS)Jupiter European Opportunities (JEO)
Acorn Income Fund (AIF)KBC Advanced Technologies (KBC)
Adept Telecom (ADT)Kerry Group (KYGA)
Allianz Technology Trust (ATT)KSK Power Ventur (KSK)
Altona Energy (ANR)Lok'n Store Group (LOK)
Ambrian (AMBR)Nanoco Group (NANO)
Amino Technologies (AMO)National Grid (NG.)
Ashmore Group (ASHM)Nighthawk Energy (HAWK)
Asian Citrus Holdings (ACHL)OPG Power Ventures (OPG)
BlackRock Smaller Companies Trust (BRSC)Osram Licht (0QFR)
Blur Group (BLUR)Petro Matad (MATD)
Bowleven (BLVN)Plant Impact (PIM)
BP (BP.)Plexus Holdings (POS)
Braemar Shipping Services (BMS)Polo Resources (POL)
City Merchants High Yield (CHY)Pressure Technologies (PRES)
Clinigen Group (CLIN)Providence Resources (PVR)
CSF Group (CSFG)Public Service Properties Investments (PSPI)
City of London Investment Group (CLIG)PureCircle (PURE)
Db WTI Crude Oil Booster ETC (XCT9)PV Crystalox Solar (PVCS)
Db X-Trackers FTSE Vietnam UCITS ETF 1C (XFVT)Quadrise Fuels International (QFI)
Equatorial Palm Oil (PAL)Randall & Quilter (RQIH)
ETFS 2x Daily Long Gold ETC (LBUL)Renew Holdings (RNWH)
ETFS Physical Gold (PHGP)Renewable Energy Holdings (REH)
ETFS Crude Oil ETC (CRUD)Restore (RST)
Flotech Fluidpower (FLO)Rio Tinto (RIO)
Geiger counter (GCL)Rockhopper Exploration (RKH)
GlaxoSmithKline (GSK)Rolls-Royce Holdings (RR.)
Goldenport Holdings (GPRT)Rose Petroleum (ROSE)
Grafenia (GRA)Royal Dutch Shell (RDSA)
Graphene Nanochem (GRPH)Sanderson Group (SND)
Graphite Enterprise Trust (GPE)Schroder Oriental Income Fund (SOI)
Greka Engineering & Technology (GEL)Scottish Mortgage Investment Trust (SMT)
Green Dragon Gas (GDG)Serica Energy (SQZ)
Greenko Group (GKO)Shire (SHP)
GW Pharmaceuticals (GWP)Siemens (0P6M)
Hayward Tyler Group (HAYT)SkyePharma (SKP)
Herald Investment Trust (HRI)Solid State (SOLI)
Hutchison China MediTech (HCM)Stanley Gibbons (SGI)
Igas Energy (IGAS)Templeton Emerging Markets (TEM)
Indus Gas (INDI)Trifast (TRI)
Infrastrata (INFA)Tristel (TSTL)
Infrastructure India (IIP)Tullow Oil (TLW)
ISG (ISG)Unilever (ULVR)
iShares Bric 50 UCITS ETF (Bric)Urban&Civic (UANC)
iShares MSCI Emerging Markets UCITS ETF Dist (IEEM)Versarien (VRS)
iShares S&P SmallCap 600 UCITS ETF (ISP6)VinaCapital Vietnam Opportunity Fund (VOF)
iShares Physical Silver ETC (SSLN)Zytronic (ZYT)
US HOLDINGS
3D Systems IncMarket Vectors Coal ETF USD
Adept TechnologyNiska Gas Sotrage
AppleOrbital ATK
Capine CorpPlug Power
Cheniere EnergyTeucrium Commodity Corn
Global X Lithium ETFUS Energy Corp
Hydrogenics CorpWestport Innovation
CANADA HOLDINGS
Alternative EarthFission Uranium
Cameco CorpForum Uranium
Denison Mines CorpKivalliq Energy
European UraniumSouthgobi Resource
Fission 3.0 CorpWestern Lithium
EUROPE HOLDINGS
Daimler

Total investments: £23,729
Green effects fund: £5,000
Innovator fund:£5,000
Cash: £1,000
TOTAL PORTFOLIO: £34,729

 

THE BIG PICTURE

Chris Dillow, the Investors Chronicle's economist, says:

You say you invest in what you have some understanding of. You don't. There are 125 different assets in this portfolio. Nobody can possibly have sufficient understanding of so many.

Stockpicking, like many things, is prone to the law of diminishing returns. It might be possible to find one or two genuinely underpriced stocks. But beyond these, you are guessing. Christopher Polk at the LSE has shown that even average fund managers have a few market-beating ideas. But after their first dozen stock picks, they don't know much. There isn't that much low-hanging fruit to pick.

Worse still, when you add so many average stocks you are diluting away the contribution of your few good ideas. Your average holding accounts for only 0.8 per cent of your portfolio. That means that even if it were to double in price over a year, it would add only 0.4 per cent to your annual returns. This is less than the difference between a good day and an average one.

You are therefore right to say that you need to tidy up this portfolio.

Here's how I would go about it.

First, imagine you knew nothing at all about the markets. What would you do? You would, I think, put all your equity money into a global tracker fund. After all, if you don't know more than the average investor, you should simply do what the average investor does. And the average investor - by definition - holds a global tracker. This should be your default position.

In holding so many stocks, you are diversifying away stock-specific risk. What's left is exposure to market risk. In this sense, you are in effect holding something like a global tracker fund - just an unwieldy high-cost one.

From this starting position, ask: what else do I want? You might reasonably want other asset classes to spread risk, such as cash, bonds or commodities. Or you might want exposure to different risk factors: these might include emerging markets, commodity stocks, high-yielders or momentum. But you don't need to buy individual stocks to get such exposure. You can do so through ETFs.

If you must hold individual stocks, raise the bar for what you think of as a good stock. Remember that genuinely good stocks are rare, and your ability to pick them is limited.

 

Rosie Bullard, CFA, portfolio manager, James Hambro & Partners:

Your investment strategy appears sensible, looking for companies with specific characteristics and adding funds to spread risk. As you acknowledge, the portfolio could be tidied up; too many holdings are difficult to monitor and can lead to performance reverting to the mean, defeating the objective of active portfolio management.

Cut the number of holdings to around 50 with half in direct holdings and half in funds. Thereafter, be conscious of not trading too much, as transaction costs can detract from long-term performance.

 

Paul B Derrien, investment director, Canaccord Genuity Wealth Management, says:

Wow Tim, how do you find the time to monitor all of those holdings? It is a very unusual portfolio from the ones I encounter daily. There are a number of companies that I have never looked at so could not possibly comment on and a number I hold myself so you are clearly doing something right.

But the overall size of many of the holdings you have prevents them from benefiting - or perhaps harming - your overall returns. This is the primary issue that I would address first.

Attitude to risk is a personal thing. It should be assessed in conjunction with your overall wealth, rather than as a snapshot of a portfolio.

However, you have presented us with a portfolio of mostly equities, many of which are small-caps, and a modest amount of direct commodity exposure. This is a high-risk portfolio and not in keeping with your stated attitude to risk of low to medium.

Either you need to accept the level of risk that you are taking and the volatility this entails, or the portfolio needs some fairly drastic restructuring. I sense that you are willing to accept the risk associated with a 100 per cent equity portfolio, but it could be structured more effectively to provide you with better, more consistent returns.

I agree with using ETFs and funds to gain thematic and regional exposure. You should also consider setting out an asset allocation framework and build the portfolio around this. Look at how much you are willing to invest in each asset class (bonds, equity, commodities, alternatives, cash), each region, each theme. Also consider the market cap of your investments - e.g. how much are you willing to risk on small-cap companies? You have considerable small-cap exposure, but lack conviction with your investing.

 

HOW TO TIDY THE PORTFOLIO

1. Re-examine your holdings

Chris Dillow says: I'd ask of each asset: what is this doing that my other holdings aren't? For example, you hold an emerging market ETF. What do, say, Ashmore or Schroder Oriental add to this? Given the strong correlation between commodity stocks and emerging markets, what does Rio Tinto add? Similarly, you're holding several smaller oil and gas stocks. This diversifies stock-specific risk, but leaves you exposed to oil price risk. So why not hold just an oil ETF?

2. Cut losers

Chris Dillow says: I'd cut losers and run winners; doing so allows you to profit from momentum. The caveat to this, though, is that emerging markets and commodity stocks tend to be highly seasonal and so the losses in the last six months on these might be reversed; this argues for maintaining your asset allocation while reducing individual shareholdings, perhaps by increasing your weight in emerging market ETFs.

3. Focus on large-caps

Rosie Bullard says: Think about selling some of the smaller and more esoteric names and instead focus on larger-cap companies, selecting long-term growth compounders and niche market players; companies that have historically exhibited these characteristics include Reckitt Benckiser (RB.) and Booker (BOK) in the UK, Walt Disney (US: DIS) in the US or Givaudan (CH:GIVN) and Eurofins (FR:ERF) in Europe.

When looking for new ideas, focus on the UK, US and Europe, where investors typically have access to a wider range of information and where companies operate under strong corporate governance and accounting regulations. Liquidity also tends to be higher than in other regions, making trading positions easier.

4. Limit direct share holdings to 20

Paul B Derrien says: Build the foundations of the portfolio with good quality funds; a number of these exist in your portfolio already. Eighty per cent of your investible assets should be structured in this way.

You like to research and follow individual companies, so continue to do this. However, restrict the number of companies that you invest directly in to no more than 20. Have conviction with your investing and use that extra research time that only 20 holdings will give you to follow those companies more closely. Remember to take profits, and to cut your losses when company news changes.

If you find that your direct investments don't beat the funds that you have selected, perhaps it is time to ditch that strategy. However, if you are consistently more successful then increase your direct equity exposure from 20 per cent - but ensure you keep the same number of holdings and be very disciplined in sticking with your asset allocation framework to avoid any undue risk.

5. Swap small-caps for small-cap funds

Paul B Derrien says: Your strategy will be giving you market returns at best, so switch a large proportion of your small-cap investments into good quality small- and mid-cap investment trusts - e.g. Gervais Williams' Diverse Income Trust (DIVI) or Aberforth Smaller Companies (ASL). Both are very consistent performers and offer an alternative to the multitude of small-cap companies you hold.

Rosie Bullard says: We have a positive outlook on the sustained recovery of the UK domestic economy, so would look to add funds that provide exposure to UK mid and small-caps.

6. Consider active funds in key areas

Rosie Bullard says: Add some technology exposure. Companies across the sector are making significant leaps forward and are now focusing on financial discipline and shareholder returns. Fund options include the AXA Framlington UK Mid Cap Fund (GB00B64W4Q70) and the Polar Capital Global Technology Fund (IE00BW9HD621).

Use ETFs in markets such as the US, where it can be hard to find funds that consistently outperform the index. However, in less well-researched markets, such as parts of Asia and emerging markets, actively-managed funds can be worth paying for; we would consider the Hermes Asia ex Japan Fund (IE00BBL4VQ02). We would also urge caution around holding commodity ETFs, as the exposure to the underlying commodity may not always be exact.

As your attitude to risk is low to medium, the portfolio may benefit from diversification into certain parts of the fixed interest market and alternatives, to dampen the equity volatility. We have been allocating a greater proportion of portfolios to absolute return vehicles, such as the Kames UK Equity Absolute Return Fund (GB00B8H6BD66).

*None of the above should be regarded as advice. It is general information based on a snapshot of the reader's circumstances.