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Time to make waves in my portfolio


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I wasn’t the only one who snuck off to the beach on Tuesday. The wind was up and blowing from the south-west. A merry band of kiters and wing-boarders we were, with hours blocked-out in our diaries for the same crucial meeting.

It’s the sort of behaviour that gives WFH a bad name. Quite rightly. As an investor in a bank ETF, however, I was pleased. Two blokes on the water were employees of lenders with a lower return on equity than their cost of capital. They would only be destroying value if they worked.

Personally I needed space after being solo with all four of my nippers over the weekend while my wife was clubbing in Ibiza. Indeed. I was also feeling a bit discombobulated by my portfolio to be honest with you. Performance is bleurgh. Retirement as distant as ever.

And I worry I’m letting readers down. My investments were worth £438,000 when I wrote the first column in November. It’s been above £460,000 a few times but is now £455,000. A mere 4 per cent.

With UK inflation up 3 per cent and a bit over the past seven months, that puts me ahead, but only by four grand. Sure, it’s nice that my purchasing power hasn’t eroded, and that I’m outperforming the average manager. But it all just seems a bit, er, slow.

Textbooks urge discipline. Eking out solid risk-adjusted returns is recommended. Let compounding do the rest. Frustration leads to trouble. Yeah, but I turned 50 last year. The clock is ticking. And kids are expensive.

Such were my thoughts between crashing off my foil. And then, suddenly, screw it! I’m going to increase the risk in my portfolio even if it means getting wet through occasionally. Not to an insane degree, but enough to make life interesting.

Having decided on this course of action, it is time to review my holdings and make some big decisions. I’ll do a high-level assessment to begin with, focusing on the funds that bother me as well as some potential changes.

Then over the coming weeks I’ll go into more detail on each ETF based on valuation, outlook and whether anything material has happened which alters my original view. As ever, I won’t instigate any changes before writing about them.

Bond funds first. I purchased them last December for the same reason $113bn flowed into fixed income funds in the first five months of this year, according to Morningstar data. Global interest rates were nearing a top, we believed, and even if they weren’t, fatter yields gave some protection.

But central banks kept hiking. Inflation was stickier than expected. Hence bond returns have been rubbish. My iShares Treasury Bond ETF is down 4.5 per cent. Not a big move for an equity guy but infuriating nevertheless — especially as I still believe it is a good call (obstinate and frustrated, a bad combo).

A similar loss percentage-wise for my Tips fund doesn’t bother me, though. I only put a quarter as much money in it for starters. This was meant to be a hedge in case inflation went berserk as well as punt on the direction of rates.

But even when buying inflation-protected bonds, I knew there was a sexier approach. A commodity fund would give me all the protection should inflation rise, and if it didn’t and interest rates were to decline, equity markets would be supportive anyway.

Therefore I will probably stick with the government bonds and switch from Tips into a high-glam commodity fund. I’ll need to run the numbers on the latter. But valuations should be helped by recent underperformance.

Now to the equity ETFs. I have four of them at the moment, which, like my children bless them, is too many. I want to take bigger, more concentrated bets, especially when there is a compelling valuation case. My sell-discipline has also been poor.

For example, my bank ETF did exactly as I expected it to. Everyone lost their heads on March 24 and the rebound alone was enough to generate a double-digit return. I wrote why I was minded to sell the fund 8 weeks ago and haven’t done it. Too busy at the beach.

Goodbye European banks, then. Should those perennially woeful Asian equities join them? A popular argument for eviction is they are cheap for a reason. There is what professional investors call a valuation mirage. Don’t expect the discount to say, US shares, to close — ever.

I don’t buy this view. Provided the accounting is comparable, valuation spreads between markets tend to rise and fall. It sometimes takes a while, but mean reversion happens. Rather, Asian stocks have been hit by one thing after another, from lockdowns in Hong Kong to Chinese real estate debt.

Higher global interest rates hurt too, as does a strong dollar. The correlation between monthly moves in the MSCI Asia index and the greenback over the past five years is still negative 70 per cent. Even with the Asian index priced in dollars, that’s significant.

Need to think about it. Japan, however, I still like. As for my US and UK equity funds, part of me always thinks I should just own American stocks and be done with it. Long-run returns don’t fib. But where does 6.5 per cent even get me? Still £150,000 short of being a millionaire in ten years.

No, the S&P 500 needs to be traded — likewise the FTSE 100. This can be done, and I’ll explain how in another column. And I don’t care as much as some that UK indices have trailed their overseas cousins of late. That’s because sterling has rallied. But my liabilities are in pounds too.

Whatever happens, let’s have some fun. If the Financial Times wasn’t a global newspaper nowadays I’d switch out of the surfing metaphor and into a cricketing one and conclude by saying Bazball is coming to my portfolio. So I won’t. 

The author is a former portfolio manager. Email: stuart.kirk@ft.com; Twitter: @stuartkirk__





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