Category: Investment returns

(Republishing an old post which I somehow accidentally deleted)

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. Let’s take a look.

• 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 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.

Continue reading “Q3 portfolio review; it’s been a busy summer.” →

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.

Continue reading “August 2017: Nationalism and the market” →

July saw a hotchpotch of news of all shapes and sizes.

Poor baby Charlie Gard caught the world’s attention.  I feel terrible for the parents, and also somewhat indignant about the hysterical coverage of the doctors and judges involved.  But from this blog’s point of view none of this is relevant so I will move on.

In the UK, pay was high on the agenda.  First of all with the post-election focus on the 1% public sector pay cap, now well below inflation.  Later in the month the BBC disclosed its highest paid staff, with a predictable fuss ensuing about an apparent gender pay gap. Meanwhile, across the pond Mr Bezos briefly became the world’s richest man, a rather less impressive fact when you consider how much more his gazillionaire rivals Buffett and Gates have supported charity and some of the astounding results the Bill & Melinda Gates is achieving (in part thanks to Buffett’s donated billions).

From a market point of view, what’s been going on?  The below-inflation pay cap bodes well for corporate earnings but badly for wider society.  And Bezos’s 15 minutes of fame stemmed from continued boom for USA tech stocks, as well as the wider markets. I only have a couple of the FAANGs in my portfolio but I’m not complaining.  USA equities were up over 1%, with UK and Oz markets rising a bit too.

In the currency markets, the pound and the US dollar both fell.  The Euro and the Aussie dollar both gained over 3% against the pound and dollar. Accordingly, European equities fell around 2% – this is a similar effect I think to what happens with the globally-exposed FTSE-100 when the pound gyrates. The more domestically-focused Australian equity market managed to rise despite a strengthening Australian dollar.

Continue reading “July 2017: Congratulations, Mr Bezos” →