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GAT's 2018 annual review

A helpful place to also put any annual reports etc, of your own portfolios
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GAT's 2018 annual review


Postby globalarbtrader » April 16th, 2018, 7:21 pm

Twelve months has passed since my last annual update:

... so logically it's time for another. Ignore the misleading headline - my time machine is broken and I'm not reviewing the whole of 2018 just yet, only the tax year that just completed.

Current situation

As last years post says I'm a semi retired forty something who lives mostly off my investment income, and also runs a fully automated futures trading system. Last year I said I was putting the finishing touches to my second book on investing; that came out in October (I won't incur the wrath of the mods by posting a link to it, but you can find it if you wish via my blog). I've also been doing some consulting and part time university lecturing; with book royalties this means that my dividend income was nicely padded out this year. The other interesting event this year was the arrival of a modest inheritance.

Overall performance and income sustainability

Our household net worth is up 4.2% this year; however if I factor out the inheritance gain there would actually be a 1.0% fall. As usual I ignore any potential house price inflation in these figures.

Excluding housing equity entirely overall the total return of my investment portfolio was 0.6% of which 4.1% was dividends [gross of tax, of which more later] balanced against investment losses of 3.5%. An appropriate benchmark is the Vanguard 60:40 fund which did a little better, earning 1.3%. Equity only investors will scoff at these figures; but this is the downside of a relatively safe portfolio. Much more detail on performance later.

Rather than looking at net worth, with all the tiresome business of excluding inheritances and trying to account for tax, it's probably better to think about income sustainability in terms of margins of safety. Let 100 be our total post tax income from all sources this year. Then:

Household expenditure excluding mortgages: 54.7
........ with mortgage interest: 70.0
........ with mortgage interest & repayment: 80.5

Income from dividends outside of tax shelters, net of tax: 54.6
Income from all dividends: 80.3
Income from all dividends, plus book royalties (net of tax): 88.1
Income from all dividends, royalties, consultancy and part time employment (net of tax): 100.0

There are numerous interpretations from these figures, which when presented this way I call 'the waterfall'. For example we could almost live off our taxable dividends once the mortgage is out of the way (it's currently in a long fixed rate period so I'm not even thinking about possible early repayment). Including all dividends our mortgage interest is easily covered, but our repayments aren't quite so we might have to dip slightly into capital to repay the mortgage (which wouldn't actually affect our net worth). However the additional income we're currently receiving means we are generating surplus cash, which can be reinvested.

Last year I said: (my)... goal is to cover all my spending from all dividends (regardless of status, and after paying any relevant tax), including both mortgage interest and repayments. That way if the book royalties dry up and the part time job is no longer amicable then all will still be well. ... this is comfortably exceeded with a 7% margin of safety (in other words if dividend income was £100K [not the real number], then after covering all expenses including the mortgage we would have £7K left).

Using the same comparison the current margin of safety this year is -0.3%. The main problem here is that our dividend income is around 10% lower than last year. This could be due to fewer special dividends, or portfolio re-allocation away from high yielding UK stocks to lower yielding ETFs. I'm relatively relaxed due to the personal circumstances we are in that we can easily absorb this dividend fall. Still it's a warning signal for anyone who is relying on an HYP portfolio as their sole source of income.

I took some independent financial advice this year. This is something I've talked about before, but the idea is to get an annual 'check-up', partly as a sense check but also to ensure that if something happened to me that my family would have someone who could be trusted to give them some guidance. In fact the service provided was 'guidance' rather than 'advice', the former being much cheaper (since, as someone who knows vaguely what they are doing and isn't interested in extreme tax avoidance, I don't really need expensive advice).

The most relevant part of the guidance I received implied that I should make the maximum possible contribution to my SIPP, something I hadn't considered doing without employer matching, but when I re-ran the numbers myself it made sense. Of course dividends don't count as income for this purpose, so this basically consists of everything I've earned as 'real' income. I've only really missed one year of contributions, as in the previous two tax years I didn't earn any 'real' income, so I could only have put the nominal minimum amount in. From a few hours of university lecturing I've also acquired my first DB pension (the controversial scheme), which is an interesting novelty.

I also decided to split the contents of one large brokerage account and open an account with another provider; as the concentration risk was too high. Now we have no more than 25% of our net work with any single firm. The slight increase in annual account fees is worth the additional peace of mind.

Portfolio overview

My investment portfolio is more complicated than most, and there are various ways it can be sliced and diced. For this post I will use the following categories; the figures shown are the contribution of each category to my total investment performance:

a) UK equities +3.3%
b) ETFs -2.0%
c) Long only investments (consisting of a plus b) +1.3%
d) Systematic futures trading -0.7%
e) Equity hedge +0%

An explanation of d and e; my futures trading account is funded with a lump of equity (both buy and hold, and ETF) and some cash. To avoid equity returns “polluting” that account I hold a hedge against the equity exposure (also in futures). This makes the returns of that account a combination of two hedge fund strategies - “managed futures” and “equity neutral”. However I think the categories above are easier to understand.

UK equities

Most of this portfolio is now held inside ISAs and SIPPs, and traded using a systematic (but not automatic) set of rules which I explained in my last post:

The logic behind my equity selection is explained here I've since tweaked this during the year, to enforce more sector diversification. The change is that any stock that is sold should be replaced with a stock in the same MSCI [industry] sector.

I said most, there are also a couple of legacy stocks which are held outside tax wrappers, and on which my position is outsized. However I've been gradually selling these down as CGT allowances allow.

At the start of the year my UK stock portfolio looked like this:

STOB	22.41%
ICP 14.05%
VSVS 9.45%
BKG 9.02%
MARS 7.76%
HSBA 7.63%
LGEN 7.62%
KIE 7.53%
PFC 7.39%
RMG 7.14%

Where STOB and ICP are the legacy stocks where my holding is too large. I sold about a third of my STOB holding; withdrawing the value and putting it into my ETF portfolio to reduce my UK equity exposure (which used to be 100% of my portfolio and is now much lower - see the discussion later). The other trades were all mechanical, where I sold after a 30% fall off the stocks high watermark. IBST replaced KIE, GOOG was a substitute for MARS, and BP replaced PFC.

The portfolio now looks like this:

ICP	18.8%
STOB 17.1%
BKG 10.4%
VSVS 9.5%
RMG 8.9%
LGEN 7.6%
GOG 7.5%
HSBA 7.4%
IBST 6.9%
BP 6.0%

In terms of performance I made around 5.8% of the starting value in dividends, and earned another 12% in capital growth. However since I withdrew some funds this slightly understates the real performance of the portfolio. As any fool knows we need to use the IRR function to calculate the true performance; this comes in at 18.3%. I like to benchmark this against a cheap as chips FTSE 100 ETF, and there is a favourable comparison as that had an IRR of 2.2%.

Total return figures by stock are interesting (simple return, not IRR):

PFC	-22%
MARS -20%
KIE -17%
BP 7%
LGEN 12%
IBST 15%
GOG 16%
STOB 25%
BKG 26%
RMG 39%
ICP 46%

Naturally I lost money in the three stocks that were sold after hitting their stop losses; otherwise some excellent performance.

I plan to continue reducing my overweight positions in ICP and STOB; at this point my total UK equity exposure will probably be at a level I'm comfortable with (see further discussion later).


I take all my non UK equity, and all my bond, exposure through ETFs (I also own some Gold and commercial property funds). Throughout the year I traded for a few reasons: CGT optimisation (which meant selling to realise tax losses, using the proceeds to fund ISAs and SIPPs, and then repurchasing), rebalancing from bonds to equities (discussed further below under risk), and making additional investments using funds from selling UK equities, from my inheritance and from excess income.

It doesn't make sense to look at my ETF portfolio performance or risk exposure in isolation; we need to combine it with UK equities which I'll do next.

Long only investment portfolio

Lumping together my ETFs and UK equities is sensible; I target my risk allocation looking at both of these together.

Performance was middling; earning around 4.4% in dividends and losing 3.1% in capital value for a total return of 1.3% and an identical figure for IRR. The benchmark, a cheap Vanguard 60:40 fund, also came in at 1.3%.

Systematic futures trading and equity hedge

There were small losses in this part of the portfolio; my equity hedge was flat (although slightly up if I include the value of assets it is hedging against; remember these are already accounted for in the long only part of the portfolio), and I lost about 4.7% on my futures portfolio (as a proportion of notional capital held). The latter is roughly in line with industry benchmarks.

For those who are interested there is more detail in this post on my blog:

Total investment return

My total return on all my investments, including cash held for futures margin and the resulting p&l on that, came in at 0.6%. Vanguard 60:40 seems an appropriate benchmark (since if I wasn't trading futures I could throw all my cash into that fund), this came in ahead at 1.3%. So like last year a slight underperformance on the benchmark.


My investment portfolio asset allocation at the end of the year stood at 25.1% in bonds, 65.3% in equities, 6.4% in cash and 3.3% in other (Gold and commercial property).

In risk weighted terms the allocation to less risky bonds is lower: 13.1%; with 59.4% in equities, 24.5% in futures trading and 2.9% in other. These should be compared to my strategic allocations: 22% bonds, 50% equities and 28% in futures trading and other. Or in a nice table:

Asset   Strategic   Start of year     Current
Bonds 22% 17.1% 13.1%
Equity 50% 53.8% 59.4%
Futures 25% 26.0% 24.5%
Other 3% 3.0% 2.9%

The lower weight to bonds is dictated by a mechanical model based on their very poor 12 month relative momentum versus equities: global equity indices are up about 16% for the 12 months of this report, versus bonds being down 2%.

Regionally my exposures are (each row adding up to 100% of each asset class):

Asset    Asia     EM   Euro     UK     US   Other
Bonds 0.0% 25.7% 27.8% 4.4% 33.7% 8.4%
Equity 13.5% 27.4% 20.5% 28.8% 9.3% 0.5%

And for comparison last years figures (after I did my annual rebalancing, something I've already done with the current figures shown):

Asset    Asia	EM	Euro	UK	US	Global
Bonds 0.0% 27.3% 21.0% 19.2% 27.0% 5.5%
Equity 14.8% 20.6% 19.9% 37.8% 6.7% 0.1%


This has been another slightly sub-par year; but I'm still intensely relaxed about the stability of my wealth (to misquote Peter Mandelson). Of course I would have done much better if my time machine had been working, as I'd have just bought Bitcoin at the start of the year: but I'd also be much less relaxed!

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Re: GAT's 2018 annual review


Postby Wasron » May 11th, 2018, 8:27 pm

I note that no-one commented on your review. It seems to me that you pretty much everything under control. I have a similar feeling and must say it’s a nice position to be in.

You can always hope to make more money, but in the absence of time machines as long as everything is on track it’s surely good enough.

I keep things pretty simple so haven’t even considered futures trading, or bitcoin... bitcoin just seems like a ponzi to me.

I saw today that Crawshaw is under 6p per share after trading at over 70p. As a share greatly talked up on here and on TMF that raised a wry smile, AIM is not the place for those who want to get rich slowly :)

Good luck with the books, I don’t think i’m your target market but if I picked it up i’d probably read it cover to cover just to understand another investor’s perspective.


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Re: GAT's 2018 annual review


Postby ap8889 » May 12th, 2018, 5:38 am

Someone once said that the key to successful investing is to "do more of what works".

In that spirit, why persist with the loss making futures trading?

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Re: GAT's 2018 annual review


Postby hiriskpaul » May 13th, 2018, 12:57 pm

Curious to know what went wrong with the futures trading. Did it hit stops in February for example? I have done well with options this year but was fortunate to be out of the market and out of the Country in Feb. Had I been in the market I would likely have suffered considerable losses.

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Re: GAT's 2018 annual review


Postby dspp » May 13th, 2018, 1:58 pm

Thank you gt that is a very thorough & honest annual review. Good luck with the trading over the next 12m.
regards, dspp

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Re: GAT's 2018 annual review


Postby globalarbtrader » June 22nd, 2018, 9:40 am

Sorry for the delay in replying, I don't check this board much nowadays.

hiriskpaul wrote:Curious to know what went wrong with the futures trading. Did it hit stops in February for example? I have done well with options this year but was fortunate to be out of the market and out of the Country in Feb. Had I been in the market I would likely have suffered considerable losses.

I was lucky that I didn't have any short positions on VIX or VSTOXX in February, I closed them due to margin shortage. That did save me a little, but only about 0.3% of my net worth. For more detail on the futures

ap8889 wrote:Someone once said that the key to successful investing is to "do more of what works".

In that spirit, why persist with the loss making futures trading?

This is a fascinating question which reveals a lot about the mindset of human beings in financial decision making.

Suppose I was reviewing my portfolio in April 2009, which at the time was 100% UK equities and had something like a 40% drawdown, and if I was then asked:

'In that spirit, why persist with the loss making equities investment?'

Well at least on lemonfool (or as it was back then, TMF) such a question would seem absurd (and in hindsight would have led to some poor decision making). We know that equities are an asset class which generates a return over long periods of time but over short periods of time (which could mean several years) they may lose money or generate nothing. In this respect we are superior in our knowledge relative to the average person who could easily be scared by even a few months of poor performance (of course it doesn't help that many average peoples only exposure to the financial markets is through highly leveraged spread bets).

(I realise I am generalising here, and there were plenty of people on TMF in April 2009 fretting about whether they should sell everything)

So I treat my systematic futures trading strategy as just another asset class. I have expectations that over the long run it will generate a return, but over short periods of time it could easily lose money. Over the last four years it has made money in two years, and lost money in two years. The gains in the first two years far exceed the losses so I am still well ahead. On a risk adjusted basis it has outperformed all the other asset classes I invest in. This is all well within my expectations of the risk / return profile of the strategy.

To recap then the typical smart investor on lemonfool isn't worried by a 40% drawdown in UK equities (indeed this is a buying opportunity) but sees two years of losses resulting in a 15% drawdown in a systematic futures portfolio as an indication that you should 'sell' that 'asset' immediately.

I have a few explanations for this weird double standard (and I'd love to hear more):

1) I think there is an interesting misconception that trading is some kind of 'art' or 'skill' in which luck plays a relatively small role, in contrast to investment.
Because luck is relatively unimportant good traders 'should' make money every month, or certainly every year, and less good traders should be able to quickly realise that they aren't any good and stop trading (in the same way that someone who is losing consistently in a casino should realise ).

The truth is more nuanced. There are a small number of trading strategies which generate consistent profits, but they tend to be interspersed with occasional terrible losses (I'm thinking of option selling). There are a tiny number of strategies which generate consistent profits all the time, but they are not accessible to the average guy on the street (in which category I sadly include myself). But most trading strategies are just like any other asset class, they have their good years and their bad years. Luck still plays a huge role; if we say that in any given month you can make money in equities through dumb passive investing 54% of the time, then an exceptionally good trader can make money 60% of the time.

2) There is an assumption that systematic strategies 'age' and need to be retired and replaced after their performance degrades. This is true of certain strategies that trade extremely quickly on high frequency data. But not of the sort of trading that I do with holding periods of around a month on average. We shouldn't retire a strategy until there is statistical evidence that it's performance is now negative. Two years of (modestly) negative returns is nowhere near enough history to make that kind of decision.

3) Because systematic futures trading is so far removed from the experience of most 'vanilla' investors it is automatically treated with the same degree of suspicion that I treat cryptocurrencies. Don't worry, plenty of hard core traders on other forums I frequent feel the same way about vanilla investment. That degree of suspicion means that the 'asset class' is given an immediate red card and sent off the pitch on it's first offence, whilst a more favoured player could easily stay in the game despite committing numerous offences.


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