http://boards.fool.co.uk/brief-update-on-my-strategy-holdings-12869875.aspx
http://boards.fool.co.uk/strategy-going-forward-12928310.aspx
http://boards.fool.co.uk/six-months-of-retirement-13027173.aspx
http://boards.fool.co.uk/six-monthly-update-13134610.aspx
http://boards.fool.co.uk/irregular-review-13193291.aspx
http://boards.fool.co.uk/6-month-review-13276840.aspx
http://boards.fool.co.uk/annual-review-13359810.aspx
If you can use the notoriously poor search function from the other place you'll find older sporadic updates.
For newer readers; I am in my early 40's with small kids and a mortgage; 'retired' from a city job in late 2013 thanks to being grossly overpaid whilst using LBYM principles, since when I've focused on properly organising my investments, building my own automated futures trading system, blogging, and writing one book. I'm currently in the final stages of finishing my second book on building investment portfolios, which should be out this summer (more to follow).
Overall performance
Headline figure: our household net worth is up around 12% over the year. Excluding housing equity it's up around 14.2%. As always I've ignored any house price growth in these calculations, so housing equity is growing only slightly due to the effect of mortgage repayments. The notional value of our house (not net housing equity) is around 30% of total net wealth, so our exposure to house prices is lower than for most people (reflecting a relatively large investment portfolio, and a relatively modest house).
Headline investment performance: Excluding housing equity I earned around 18.2% on my investment portfolio of which 5.1% was in dividends. 18.2% is slightly below the appropriate benchmark given my strategic asset allocation, the Vanguard 60:40 lifestyle fund, which earned around 19.3% over the relevant period (the prior UK tax year).
The difference between 18.2% investment return and 14.2% asset growth is the net of some modest income from book royalties and a part time job, and our household expenditure. To put it another way supporting our household budget required 4% of investment return. That is a little unfair because some of the spending was paying taxes on investment income; the net investment return needed was 3.6%). Compared to the dividend return of 5.1% that is a margin of safety that I am comfortable with; particularly as some of the expenditure was used to acquire a newer car (a once in 8 year event, which under proper accounting principles would be depreciated over the next 8 years rather than hitting the bottom line in one go).
I said in my last post that it's my aim to cover all my spending from non tax sheltered dividends, excluding mortgage repayments. Because I've rebalanced my portfolio to push the highest yielding assets into tax sheltered ISAs and a SIPP (for good reasons), this is no longer achievable. A revised 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. If I amortise the value of our newer motorised transport then 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).
Given the options available in the future (going back to work, downsizing our house at some point, earning a state pension which I've completely disregarded, freeing up a chunk of income when the mortgage is paid off in ~20 years): I'm more relaxed than a 70 year old with an HYP [who has already downsized to be mortgage free, and had no prospect of working again] would be with a 7% margin of safety.
Back to the story, that headline figure (18.2%) hides a lot of uneven performance. You might remember that my portfolio is more complicated than most, and lives in the following categories:
1) UK equities.
2) ETF's. These give global and multi asset exposure.
3) Systematic futures trading.
4) Equity hedge.
An explanation of 3 and 4; 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
In my last post I split this into a 'buy and hold' residual portfolio which was held outside tax free wrappers, and a 'traded' portfolio inside wrappers. Thanks to some judicious selling the residual holdings are down to just two names so it doesn't seem worth keeping them separated.
The logic behind my equity selection is explained here http://boards.fool.co.uk/time-to-join-the-party-13313278.aspx. 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 sector (of which there are 11). Most of the trades below reflect that change.
However it will be a while before the portfolio exactly reflects what I want, as the two holdings I have outside tax shelters can't be sold immediately without incurring CGT.
Performance
Portfolio IRR: 29.2%
FTSE 350 benchmark IRR: 22.7%
Performance by stock (simple total return, not IRR):
STOB 98.5%
HSBA 69.6%
BA/ 28.6%
VSVS 23.6%
IAP 19.1%
ICP 18.0%
OML 17.9%
GSK 15.7%
BKG 11.2%
MARS -0.4%
CLLN -0.5%
LGEN -1.1%
DCG -3.2%
KIE -3.3%
PFC -4.8%
RMG -7.7%
BMS -14.7%
Trades
Generally I traded for the following reasons this year:
- Improve sector diversification
- Mechanical trades using stop loss rule
- Reduce UK equity exposure
- Reduce assets held outside tax shelters
- Make use of CGT allowances
Mechanical trades:
Sold BMS (stop loss rule, see http://boards.fool.co.uk/time-to-join-the-party-13313278.aspx?sort=whole#13313278)
... and bought BKG
Other trades:
Sold DCG (taxable UK holding, CGT optimising)
Topsliced STOB (taxable UK holding, CGT optimising, massive overweight)
Sold IAP (taxable UK holding, CGT optimising, reduce overweight in financials)
Sold CLLN (taxable UK holding, CGT optimising)
Topsliced HSBA (reduce overweight in financials)
Sold OML (reduce overweight in financials)
Bought KIE, MARS, PFC, RMG, VSVS, LGEN (mechanical purchases across additional sectors)
Current exposure
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%
Future plans
I'll be using CGT allowances tactically to eventually remove the last residual taxable holdings (ICP and STOB), so that all my equities are held inside ISAs and my sipp, and so I am down to one stock per sector. At the same time I will keep reducing my UK equity exposure, which is still too high at around 45% (more on this later). Eventually I'll be down to just mechanical trading- which is much easier.
ETFs
My ETF portfolio is constructed so that my overall risk profile is as desired (see more later). Broadly I get all my exposure in foreign equities, and in bonds, through ETFs.
Performance
Portfolio IRR: 19.1%
Vanguard 60:40 benchmark IRR: 18.7%
Still you can't win them all... If I combine my UK shares and ETFs I get this:
Whole investment portfolio IRR: 22.3%
60:40 Benchmark IRR: 17.7%
Trades
Generally I traded to reinvest proceeds from selling UK equities, and keep my risk exposure roughly where I wanted. In practice then I only bought ETFs this year.
Current exposure
It isn't meaningful to look at the exposure of this independently - see the later section on total risk exposure.
Future plans
See the later section on total risk exposure.
Systematic futures trading and equity hedge
I lost money in this bucket of my portfolio last year. As a proportion of the notional capital at risk I lost around 14% last year in my core futures trading portfolio (which was poor, and also a little worse than industry benchmarks for which a comparable figure was around -7%). This is on the back of two very good years however (58% in year one, and 23% last year; which were both significantly better than the industry overall).
I lost a similar amount in my equity hedge; although if I look at the net performance of the hedge against the relevant assets it made back all the money I lost futures trading. So taken together my two "hedge funds" broke even last year.
In practice though the combination of these two buckets drags down my overall return from the 22.3% I earned on my vanilla investments to the 18.2% I earned on my entire non housing portfolio (some of this 'dragging down' also happens because I have to hold cash for futures margin that could otherwise be invested and would have earned more money last year). This brings my overall performance to below the benchmark of 19.3%, but on the back of two great years when I blew away the benchmark (and making 'only' 18.2% is something I can live with - if you have to under-perform the market it's better to do so in an up year).
For those who are interested more detail is contained in this blog post http://qoppac.blogspot.co.uk/2017/04/investment-and-trading-performance-year.html
Risk exposure
My asset allocation at the end of the year was: Bonds 36.6%, Equities 50.1%, commercial property 3.3% and cash 10%. But I prefer looking at the risk weighting of different buckets. These figures are bonds: 21.3%, equities 47.8%, futures strategy 27.5%, commercial property 3.2%.
The regional breakdown looks like this:
Asia EM Euro UK US Global
Bonds 0.0% 23.8% 18.6% 18.5% 33.7% 5.4%
Equity 14.3% 15.9% 23.7% 45.1% 0.9% 0.2%
I vary my asset allocation using a trend following rule (plug for new book), which currently recommends a higher allocation to equities than bonds. I can also reduce my cash allocation a little since I have more than I need for margin purposes. After some judicous trading my new risk weighting looks like this:
Bonds 17.1%
Equities 53.8%
Futures strategy 26.0%
Commercial property 3.0%
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%
Summary
This has either been a slightly sub-par year (on a relative basis) or a great year (on an absolute basis).
To be honest when I 'retired' our margin of safety really was razor thin, and a few years of poor performance and/or dividend cuts could have potentially curtailed my early retirement. Fortunately the timing has been extremely good, and so with a lot of luck and perhaps some skill (frankly it's impossible to tell), the total growth in net worth has been 46% since I got my last pay cheque.
I wouldn't be in this extremely fortunate position without the 'other place', and so I really will try and spend more time on this 'new place'.
Moderator Message:
Have removed url to your book as that is deemed a link for commercial gain. Hope you understand. We have been removing links to "own" blogs on other boards, but I will leave yours as I found it to be very informative and comprehensive. Raptor.
Have removed url to your book as that is deemed a link for commercial gain. Hope you understand. We have been removing links to "own" blogs on other boards, but I will leave yours as I found it to be very informative and comprehensive. Raptor.