In this review of the UKVI portfolio I’m going to look at three things: Setting appropriate performance goals, tracking performance and lowering risk.
But first, a few general points:
- The portfolio holds 30 stocks, split about 50/50 between the FTSE 100 and FTSE 250, with one or two incidental small-cap companies
- I use the Aberdeen UK Tracker Trust (a FTSE All-Share tracker) as a benchmark
- Although the UKVI portfolio is a virtual portfolio it does take account of all real-world costs such as broker fees
- More than 90% of my personal savings are invested in the same shares as the UKVI portfolio
Setting performance goals: High income, high growth, low risk, low cost
Obviously I can’t tell you what goals your portfolio should have, but if I show you the UKVI portfolio’s goals and how I measure them then hopefully it might give you a few ideas to chew over. The goals are:
- High income today: Always have a higher dividend yield than the FTSE All-Share
- High income tomorrow: Generate more income over five years than the FTSE All-Share
- High growth: Beat the FTSE All-Share’s total return over five years by at least 3% per year (after fees)
- Low risk: Have a smaller maximum peak-to-trough decline than the FTSE All-Share over five years
- Low cost: Reduce expenses by only making one buy or sell decision each month
So those are the goals and their related metrics; let’s have a look at whether the portfolio has achieved them or not.
Tracking performance: Beating the market, but not by as much as I’d like
Here’s the usual chart and table of results which shows how the last few years have panned out:
And here’s how the portfolio performed against its five main goals:
- High income today: The portfolio’s dividend yield is currently 3.7%, which is higher than the All-Share’s 3.4%. This has been the case throughout the last five years
- High income tomorrow: For each £100 of capital value five years ago, the UKVI portfolio and All-Share tracker have produced total incomes of £30.60 and £23.70 respectively
- High growth: The portfolio’s five-year annualised return is 13.3% per year compared to the All-Share’s 10.8% per year, an annual outperformance of 2.5% which is slightly below the 3% target (I’ll outline my response to this below)
- Low risk: The portfolio’s maximum decline over the last five years was 8% compared to 11.4% for the All-Share
- Low cost: I added one new holding in July, sold one in August and added another in September, so as usual I’m sticking to the plan of making just one trade per month
The portfolio is entirely on track other than that it failed to beat the market by 3% a year or more over the last five years, but I don’t think that’s a major problem. Here are a few thoughts:
Bull markets are harder to beat: As many investors found out during the 1990s, bull markets are hard to beat, and since 2011 the All-Share has, for the most part, been in a bull market.
The All-Share’s five-year annualised return is now almost 11%, which is well above its long-run average of about 7% (5% real return plus 2% inflation – see the Monevator website for a review of historical UK asset class returns).
The UKVI portfolio has beaten the market by 2.5% a year, and within the context of a bull market I’m quite happy with that.
Missing this goal may be a blip: This is the first quarterly review in which the five-year total return goal hasn’t been reached. For example, at the last review in July the portfolio had beaten the market by 5.1% a year and in the April review the margin was 5.2% a year.
By the next review in January the portfolio’s outperformance could well be back above 3% again.
But, it might not be a blip: If the portfolio continually fails to beat the market by 3% a year over the next few quarters then I will pick apart previous and current investments to understand what’s holding the portfolio back (which, to be honest, I do through post-sale reviews already).
If changes can be made to the investment strategy that I think will improve performance then I will make them.
Overall though, and despite only beating the market by 2.5% rather than 3% a year, I’m generally pleased with the portfolio’s returns and especially its low risk.
Note: I was going to take a brief detour into how I track performance using a spreadsheet, but in the end the detour wasn’t very brief. I’ll do the topic justice with a separate article in the near future.
Lowing risk: Across companies, countries, sectors and cycles
As a defensive value investor, low risk is just as important to me as high returns, and on that front my weapon of choice is broad diversification; or more specifically, multi-factor diversification.
In simple terms, multi-factor diversification means being invested in a wide variety of companies that make profits in different countries and that operate in different sectors with different business cycles.
Some companies, countries, sectors and cycles will be on the way up while others are on the way down. By investing in a wide range of these risk factors the ups of some will negate the downs of others, which reduces overall risk.
The following charts show how the UKVI portfolio is diversified across a range of risk factors as well as the rules I use to manage those factors:
Of those risk factors, only the cyclical/defensive split is currently outside of my preferred range (slightly more than 50% of the portfolio is invested in cyclical stocks).
That’s because attractively valued defensive sector stocks are hard to find at the moment. In fact, the Telegraph’s Andrew Oxlade compared defensive stocks to the Nifty Fifty, the US bubble stocks of the 1960s.
I’m not sure defensives are in a bubble, but most of them are definitely a long way from cheap.
However, although risk to the portfolio from cyclical stocks is higher than I would like, by simply monitoring this risk I am at least aware of it. Using that awareness I can then decide how far above 50% I’m willing to allow the portfolio’s cyclical stocks to go.
More importantly, I can decide at what point to I want invest in a defensive stock (even at a slightly higher price than I’d normally prefer) in order to keep the portfolio’s cyclical risk under control.
The key point here is that it’s just as important to be aware of your portfolio’s current risk factors as it is to understand its past performance.
So there we are, another quarterly review is in the bag and I’ve looked at my portfolio’s goals, past performance and current exposure to a range of risk factors. I suggest you do the same.