Q3 portfolio review; it’s been a busy summer.Posted: 2017-10-12
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?
Looking back at Q3 the most obvious market developments felt currency-related. But it is noticeable how equities – particularly US and European equities – rose significantly. Being long global equities and hedged on the the pound has felt like the right strategy throughout.
In September in particular we saw a big jump in the value of the pound. At the same time, and unrelated (unlike FTSE movements), US/European equities rose significantly too. Fixed income fell slightly – the more so in the UK where foreign investors presumably marked prices down as the currency rose.
Sure enough, my investment portfolio lost 1.2% in September. This was roughly in line with my market exposure.
In terms of my three financial goals for 2017. I had a very similar Q3 to Q2. I was pretty successful in sticking to my target allocation, though with the recent update to it I am +/- 1-2% on several cells again. I haven’t tracked my spending/cashflow properly but my earned income remains unusually high at the moment and I am pretty confident I am living within my means. And I have fallen further behind on my objective of moving £200k this year into Mrs FvL’s name. Overall I would say I got a PASS, PASS, FAIL again.
Q2 saw the portfolio grow by 2.2%. This is close to the long run average. So while the farm feels in many weeks like a hive of activity, in reality it’s just business as usual.