• Three reasons why I am still bullish on the market. Read here.

One important aspect of active portfolio management


One important aspect of active portfolio management

In this week’s video insight Andrew discusses one of the most important aspects of active funds management – the ability to change exposures in our portfolios.  I’m sure you’ll agree the idea of changing exposures depending on the risks is logical, although is it really that simple?

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  1. Interesting insights, Andrew – thanks for sharing.

    I found it particularly interesting for the long only global fund – and highlighting how difficult this approach can be – that for the second from the right circle (around late Nov) cash was at 11%, and for the last circle (late Dec), when the index was significantly lower again, it was 10%. So only 1% of the total value of the portfolio was switched from cash to equities over this period which obviously turned out to be (with hindsight) the optimal time to reallocate (though I realise that as the value of the equity portion of the portfolio falls this would naturally increase the cash weighting, assuming minimal redemptions).

    This reminds me of Grantham bemoaning that even during the GFC they failed to get fully invested as they expected a greater overshoot on their fair value/revert to mean calculations.

    It’s a tough thing to do – but, I agree, well worth the effort, and it’s better to be close enough then fully invested at the peak!

    During the GFC I went from 100% cash (had been for around 12 months before it started) and reached fully invested in equities a week or two before the ultimate trough. (Pure luck – I take no credit for it other than knowing it was the approach I wanted to employ as I rebuilt my family’s finances ravaged from the financial folly of trying to contribute to mankind through a career in scientific research.) At that point I said to myself “well if it turns out to be The Great Depression II then I’ll only lose 80% from here rather than 90% if I was fully invested at the peak!” – a very comforting thought, not :)

    As I said on David’s article, in this recent period I went from less than 20% in equities to around 70% – including increases in MOGL and Montgomery Fund – but I have already taken profits on my (considerable) China and wider EM positions as I want to see how the current reframing of the West’s relationship with China progresses, and because I want to be a lot more thoughtful as to my views on the ethics/risks of investing with companies arising from non-democratic authoritarian systems. My own personal experiences have never sat comfortably in this regard.

    On 26th Dec I had buy orders in for Apple, Alphabet, Microsoft and Caterpillar – if they dropped another 3% or so (though was not surprised by the bounce – still I think there will be more chances to buy them at lower prices in the next 12 months or so)…

    I was so heavily in cash as I had sold out of an investment property 12 months ago in anticipation of greater value becoming available in equity markets going forward. (I bought the property at the trough in the Gold Coast correction after the GFC impacted that market more heavily than most other Australian property markets – at that point I figured it was a lower risk position than progressing with equities as the European debt crisis began to hit – and although I never agreed with it’s introduction, I took advantage of the possibility to leverage within SMSFs to purchase property).

    Just for interest, Andrew, if it is not proprietary, I’d be interested to know what is the average transactional stock purchase ($) for you guys and what is your brokerage cost over say $100,000?

    One of the things that makes building and trimming positions for me is the small sums that I invest and the impact that the $40+ in & out brokerage costs have on this approach. That makes adding or trimming 10% of my position in any listed stock pointless. Though I should say that I am attempting to use my macro judgement only as an overlay while employing Roger’s Value.Able approach as a bedrock for stock selection and ultimately a largely buy and hold strategy – still proportional cost of brokerage means that I typically build positions in just one or a few tranches.


    • Thanks Brett, good comments.
      Just one thing to note: when the market falls, your cash weighting naturally increases (because your equity book declines in value while the cash stays roughly the same). So the 1% increase in the cash weighting in December was actually more than 2%… But point taken, we should have done more with the benefit of hindsight.
      All the best,

      • Apologies for not being clear (and I realise my comments are “wordy” and you are very busy) – the point you made was included in my original comment – but it was not my overall point that you should have done more/better… (I feel bad that you thought it was)… just highlighting how difficult it is to get spot on, and impossible (i.e. highly, highly improbable) to do so frequently, but agreeing the approach is well worth the effort as being close will improve returns…

        And yes, guilty, a bit narcissistic – I guess sub-consciously I hope one day someone might recognise my undeniable talent and offer me a fabulously paying (and intellectually stimulating) job that I can do without compromising my greatest legacy to the world – the full-time raising of my sons! :)

        Shall refrain from commenting further as do not wish to unproductively take up your valuable time… I, on the other hand, have a bit too much of it between 9 and 2 :)

        Am very (fiercely) supportive of Roger and his team, and very, very appreciative of the work you are all doing!…

        All the best

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