Q3 portfolio review; it’s been a busy summer.

It’s the end of the third quarter. As the summer comes to an end and we approach harvest season, I am struck by the analogy between farming and portfolio management. I’ve been doing quite a bit of farming in the metaphorical sense:

  • Adjusting my business plan. For my portfolio, a key part of my business plan is my target allocation. As my deleveraging continues, it’s time to revisit my target allocation.  I’ve now reduced the net debt target by 10% of my portfolio value. As I do this I also need a compensating drop in the ‘asset’ part of the balance sheet.  So now I’ve been revisiting the appropriate mix of assets – is the mix of ‘arable’ (equities) and ‘wheat’ (fixed income) still the right mix? Overall as I deleverage, reducing my risk level, I am slightly increasing my target equity exposure. The table below shows the changes, and the resulting new targets are further down this blog post. You can see I’m also, indirectly, increasing my US weighting (to 50%) at the expense of my UK weighting (now 25%).

  • Move one of my ‘mortgages’. I have two portfolio loans, and borrow in both GPB and USD. I only recently noticed that with US interest rates on the rise there is now a significant difference between borrowing costs between GBP and USD. My UK bank charges me around 2.50pc for borrowing GBP; my broker charges less than 1.50pc for GBP, but about 2.5pc for USD. By shifting some USD debt into GBP I save. Hence the business plan’s change on cash is all in the USA column.  I am not a forex trader so this is not a bet either way on GBP or USD – it’s just arbitraging the interest rates. Already, I’ve moved around £100k this way, saving me around £1k pa.
  • Selling a ‘field’. To deleverage I need to sell assets. Normally I hate selling. But if the asset is owned by the bank anyway, and I repay the bank with my proceeds, then my net position doesn’t change – only my risk levels and my exposures. The question is what to sell. I’m mostly selling fixed income holdings, as long term I prefer equities and the fixed income was mainly there to smooth returns.
  • Moving a ‘fruit tree’ away from the ‘taxing squirrels’. Some of the work required to manage my ‘farm’ is to reduce fees and taxes. My main effort here has been to shift assets into Mrs FvL’s name, as well as into my Ltd company. She is a basic rate taxpayer and I am a higher rate one. I’ve moved about £30k around in Q3; not as much as I’d hoped but still useful. If this makes 3.5pc and I’ve saved 20pc tax then this is £200 pa. For one quarter’s work this is OK.
  • Paying down the ‘mortgage’. Deleveraging continues, as repay my portfolio loan. I’ve done pretty well in Q3 on this, and have got my loan-to-value ratio down below 25pc. My farm would have to drop in value an unprecedented amount to trigger foreclosure.
  • Topping up the farmer’s wife’s pension. My own pension is big enough to be on track to exceed the Lifetime Allowance. If my investments do well then the taxman will penalise me. But my wife’s pension still has some way to go. So I’ve topped it up by £5k. In theory, at least ; right now the SIPP provider can’t trace the payment.
  • Off to the market, but to buy not to sell. As usual this little piggy’s assets have been productive, with several of the animals providing me with income. I’ve redeployed these funds into a mixture of ‘arable’ assets (equities such as Disney, WPP, QCom – more details here).

But enough of my farming. How did I finish up in Q3?

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August 2017: Nationalism and the market

I’m a patriot, you’re a nationalist and he’s a xenophobic racist Nazi pig.  We’ve all been conjugating the irregular verbs of narrow mindedness in August.

Having recently read Jodi Picoult’s Small Great Things, I found the Charlottesville incident fascinating.  I was interested afterwards by the political/business angle. Business and the Republican party have just had a wedge driven between them.  It’ll be interesting to see how long and wide the Democrats can make the wedge.  I’m not confident that Bernie Sanders’ party can capitalise on the opportunity, but let’s watch and learn.

Over on this side of the pond the Brexit process is getting stuck in quicksand. Nick Clegg puts it well in the FT:

“Conservative Brexiters and the rightwing press have started to do what they always do when things don’t go their way: whining about how intransigent and slow the EU is (what do they expect? It is a convoy of 27 governments) while throwing insults”

I’ve caught up with two friends who voted for Brexit in the last few weeks.  Trying as I might to be open-minded to their perspective, I find myself reflecting how an underlying dynamic of many Brexit supporters is an inability to consider the world from other countries’ point of view.  This failing is at work whenever you hear Brexit types say they want to be in the single market but retain full sovereignty. This argument doesn’t address the fact that if all the other 27 EU countries had the same objective you’d have 28 countries all railing against the protectionism of each other and with no shared institution for resolving the disagreements.

The link between civilised Brexiteers like Daniel Hannan and the appalling thugs at Charlottesville may not be obvious.  But to my mind the white supremacists’ inability to consider how the world might end up if everybody thought as they did feels worrying similar to the attitudes of many of the Brexiteers – certainly anybody who aspires to ‘take back control’ but remain in the single market (which includes quite a large portion of the 52%).

You can call it patriotism.  You can call it exceptionalism.  But it feels like blinkered supremacist thinking to me.

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War: time to buy or sell?

My generation’s Cuban missile crisis is on the front pages. All manner of existential questions come to mind.  But as a starter, what’s a simple passive-orientated investor supposed to make of armageddon?

Past performance is no guide to future results.  But history rhymes.  What has happened in prior conflicts?

I’ve taken a cursory look at the UK and US equities markets.  Even for these markets, the most mature in the world, data prior to 1950 is pretty thin.  But I’ve found one study on each side of the pond and overlaid them on top of each other – hey, I said ‘cursory’! The background thin graph is Dow Jones; the foreground thick blue line is UK Equities (from a recent Barclays Equities Gilt Study). Both are nominal price indices – i.e. before inflation and without reinvestment.

2017 08 War stock markets graph.png

Here’s what I observe:

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