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Having a Bit of a Clear-Out
Assessing My Current Personal Portfolio
We are all guilty of finding it difficult to admit we are wrong and I know it is particularly true for me. One of the most important skills in investing is to be able to reassess investment decisions you have previously made and sometimes admit defeat. This can be particularly hard when markets are behaving with as much volatility as they are today. When markets are bad, it’s easy to go ahead and blame the market.
This week I carried out a full assessment of what remained in my personal portfolio. The world is entirely different from six months ago when I last did a full refresh. We now have a long drawn-out war in Ukraine, stickier inflation, faster rising interest rates, falling consumption, more aggression and authoritarianism coming from China, and the most chopping and changing in Government in the history of the United Kingdom.
It is entirely understandable that your initial theses on your investment decisions no longer hold nowadays, particularly when you are a medium-term investor who focuses on macroeconomics and company fundamentals such as myself.
In this memo, I will look to honestly and hopefully objectively review some ideas and positions I have held these last few months and how they have panned out. Once I have completed the rebalancing, I will write a similar piece on how the new portfolio looks and what my ideas are going forward. If you don’t want to miss out on that, then just subscribe!
I will not cover all positions but the larger ones and some of the more interesting ones. Please note that the performance figures are the return I have achieved on these positions in GBP (so for example the performance of a US-issued stock will include both the performance of the stock itself and of the USDGBP currency pair). The performance figures also have baked into them the associated trading costs.
To get an idea of the performance of these positions against the equity market, I have built a simple benchmark for comparison which reflects my portfolio’s broader positioning. That benchmark is 50% FTSE 250, 25% S&P 500, and 25% Nasdaq with no currency hedging. Over this recent period since my last portfolio review, the benchmark performance is -9.8%. My portfolio performance was similar at -10.5%.
Importantly, none of my writing should be considered investment advice and is purely for information purposes.
Firstly we shall cover some of the luxury goods companies I have had exposure to, some of which I have already exited these last few months.
Exited in period:
Hermes International +6.4%
My overall thesis was that consumer spending on luxury goods would remain high since traditional customers of luxury goods are not going to be as affected by rising energy and food inflation. Additionally, with most of these positions being French domiciled, these positions were added to the portfolio ahead of the last French presidential election in April where there was uncertainty about Emmanuel Macron potentially not winning. I was certain of Macron winning another term and as such, it looked like a compelling buying opportunity.
In the end, both of my ideas here turned out correct. Revenues from luxury companies have remained steady, and in some cases increased significantly as has been reported in the latest round of earnings for Q3. The overall French stock index the CAC 40 has only lost -5.1% over the period we are looking at, however that is a lot better than my overall benchmark.
For Hermes, LVMH and Burberry, I exited the positions a while ago, so as to lock in some profit and reduce overall portfolio risk as things were getting more uncertain over the past few months with regard to the broader economy and markets.
The hiccup here is with Kering which has lagged behind the other names. The reason behind this is the significant exposure to China that the company has, particularly the Gucci brand, which has seen slower earnings growth in the region because of the strict regional Covid-19 lockdowns imposed by the Chinese government.
Kering, I continued holding on to until the Q3 earnings release so as to see if there was any turnaround on the China earnings figures. With last weekend’s rout in Chinese equities not overspilling into Kering’s stock price, I have chosen to exit the position at this stage and not have an allocation to luxury goods in the meantime.
FINAL VERDICT: Sell the remaining Kering position, keep Luxury Goods on the watchlist and maybe add back to the portfolio at a later date.
The performance of my Chinese positions has certainly been a mixed bag. If you have seen how Chinese stocks have performed since the end of the Chinese Communist Party congress last week (they have been totally decimated), you might be shocked at how well some of my positions have performed. This is because I exited them a while ago in either profit-taking or loss-cutting exercises. Currently what remains in the portfolio are Baidu, Alibaba and Weibo.
Exited in period:
Hang Seng Tech ETF +3.0%
Niu Technologies -48.1%
The China situation has evolved hugely since I initiated these positions, and you can read more detail about it in last week’s recap:
When I first put these positions on, they had already taken a beating on the back of the uncertainty around the US listings of these companies (since I am holding the US-listed shares). These are around the Chinese not necessarily wanting to provide the level of corporate transparency and financial disclosures required by US exchanges.
In my analysis, these were large and growing companies whose inherent value and potential value were greater than the price at which the stocks were trading. Additionally, I liked JinkoSolar as it added renewable energy exposure to the portfolio which I am bullish on for the longer term.
What has happened, is as described in my note from last week, Xi Jinping has taken more power within the Chinese government and there are increased tensions around a potential invasion of Taiwan, with the United States retaliating by cutting chip and semiconductor exports to China. This has significantly driven up uncertainty, with Western investors now selling Chinese stocks.
My remaining Chinese positions are now fairly small (thanks to them falling significantly in value), and I feel like now a lot of the uncertainty has now been priced in. Although the prospects for these companies are likely to be not as bright as before, with the Chinese economy slowing and the increased uncertainty, I still see value in these large Chinese companies, certainly at the prices that they are now trading at.
FINAL VERDICT: Hold remaining positions, no intention to add at this stage given the uncertainty, happy to keep the small remaining exposure.
In my US Tech/Growth allocation, we had the below positions, and each individual case has its own thesis as opposed to being overweight US Growth companies on the whole. I won’t go through each one on a case-by-case basis because otherwise, we would be here a while!
Exited in period:
Nasdaq 100 ETF +6.5%
Meta (Facebook) -29.3%
Going back to the very start of this (now quite long) memo, I began by stating at some point you have got to admit you are wrong, and I was wrong on Peloton. My thesis was that the stock had already sold off significantly in April, and in my eyes would have made a great acquisition for one of the larger streaming or technology companies looking to bulk up their digital health offering. This did not materialise and the company has fallen further and further in value and is now beginning to cut jobs.
Netflix on the other hand has worked out great for me. I bought at the lows when the market reacted very violently to slowing subscriber numbers. Since then, subscriber numbers have increased again and the company is back on course. Although I like the company, and Netflix will continue to be the largest streaming platform, my thesis played itself out as expected and as such, it was the right time for some profit-taking.
I will be exiting all these positions however since I don’t feel so strongly about these positions as compared to some of the new convictions that I have now.
FINAL VERDICT: Sell the remaining US Growth positions, keeping them on the watchlist and maybe adding them back to the portfolio at a later date.
I won’t list the remaining trades in the portfolio because there are a lot of them, but apart from one or two opportunistic situations, the rest were UK-based names. On the whole, they have not performed well, in fact, they have performed overall closely to the performance of the FTSE 250 and the recent volatility in the UK certainly hasn’t helped.
Firstly, since I am UK based, I want the predominant part of my portfolio to be in GBP to avoid too much foreign currency fluctuation. My overall thesis was that inflation would come down quicker and interest rates would not need to rise so much and as such UK consumer spending would stay where it was and the recession in the UK would be more manageable.
What I didn’t expect was the total shambles of Government we have seen and the subsequent uncertainty in the markets. Inflation is a lot stickier than anticipated and this means higher interest rates. Higher interest rates mean much higher mortgage payments for households and as such consumers will significantly restrict spending. I am expecting in the medium term a significant fall in demand in the UK. With the new Rishi Sunak government, although public finances will be in a much better place, this will result in lower public spending and higher taxes, also impacting demand.
Apart from a couple of positions that I think should fare decently well in a slowdown, the rest of the portfolio will be cut at an overall loss.
Another lesson I have learned from this part of the portfolio is unlike with the other themes, I have held too many different names and not employed similar profit-taking or loss-cutting measures. I would have had the same return simply holding a FTSE 250 exchange-traded fund and would have saved significantly on transaction costs. I was reluctant to reduce this section of the portfolio so as to keep my currency balance where I want it, however, I should have been prepared to be more ruthless.
FINAL VERDICT: Sell the remaining UK positions, add a FTSE 250 ETF to the watchlist that I can opportunistically dip into for UK exposure.
The New Portfolio
My new positioning is going to look very different, and I look forward to discussing what it will look like shortly here on Substack with some very new themes. On the whole, I am not too disappointed in how I had positioned my portfolio to start with, particularly how I managed the individual positions within those themes, however not being more active on the bulk of the portfolio was what I certainly could have improved.
Look forward to the questions and discussions, though I am sure you are much more interested in what I am buying. You will find that out very shortly.