Portfolio review

Model Portfolio review (first half April 2018): the core portfolios underperform

  • MTD portfolio performance: +0.15% (+0.28% since inception)
  • MTD benchmark performance: +0.47% (-0.33% since inception)
  • Net performance: -0.33% (+0.61% since inception)

Theme returns and model allocation

2018-04M theme returns

2018-04M allocation

2018-04M model contributors

Markets recap

On month to date basis, the S&P500 is up +0.66% while crude oil is up +3.77% and US 10 year yields are up +9bps to 2.83%. Meanwhile emerging market bonds are down -0.66%. The dollar was flat against the euro and a bit stronger against JPY (+1.0%). Finally, the VIX index has come down to about 17% as of yesterday’s close.

There have been worries about a potential trade war between China and the US, but after soothing words from both sides the bulls returned to the market. Having said that, Donald Trump just ordered attacks (supposedly a one-off) on Syria in retaliation for Assad’s use of chemical weapons, and Russia has vowed to retaliate. The general risk-on mood may sour in the last two weeks of the month depending on how this all plays out.

Notable portfolio underperformers

Core equity (27.5% allocation). Returned -0.07% vs +0.68% on Vanguard Total World. Non-US developed market stocks did better than the Total World index (which itself is 35% part of this theme), but emerging market stocks and frontier markets are getting hammered this month on worries around trade wars.

Core bond (5.0% allocation). Returned -0.33% vs -0.15% on Vanguard Total Bond Mkt. Given the rally in US rates, international diversification to developed markets worked out well, but the inclusion of 25% EM bonds in the portfolio hurt. Notably bonds of Russia (~5% of the index our EM bond ETF tracks) took a hit as the US imposed new sanctions.

Global tourism (2.5% allocation). Returned -2.20%. In the portfolio of 9 equal-weighted tourism related stocks, CTrip, Carnival and Wyndham each sold off -4% to -6%. It is easy to see that the airline stocks in the portfolio (RyanAir and Singapore Airlines) would sell off on the higher oil prices, and perhaps that sentiment resonates throughout the sector.

Notable portfolio outperformers

Clean energy (5.0% allocation). Returned +2.31%. A lot of that was driven by the second biggest holding in the ETF, Huaneng Renewables, to return nearly +11% MTD based on several rating upgrades from analysts.

Modern agriculture (2.5% allocation). Returned +1.22%. Mostly due to +2.3% on FTAG (First Trust Index Global Agriculture ETF). Within that index, Monsanto and Bayer AG are the two largest constituents forming 20% of the total and each returned +8% on the news that Bayer will be allowed to buy Monsanto by the US Department of Justice.

Urbanisation (2.5% allocation). Returned +1.20%. Mostly on the SPDR Metals and Mining ETF (XME) which returned +4.4% in the month. Alcoa, the largest holding in the ETF at over 5%, returned +22% as the price of aluminum shocked upwards after the US imposition of sanctions on Russia, targeting Rusal.

Thoughts on the portfolio going forward

I want to say I am 100% happy with my portfolio but to be honest at the moment I am not. Core equity and core bond have significant portions invested in emerging markets which over the longer run (I am talking about years) should really aid outperformance, however I am getting the feeling that we are working up towards major market turmoil and I am not sure if I want to stick with these allocations while going through that. It is a pity that I don’t rebalance intra-month because otherwise I would probably want to make some changes today.

I am still pondering over it, but for the moment I am also considering to reduce allocation to core equity (-5% or more). Also I am intending to reduce healthcare and robotics by as much as 5% to 10% as while I believe in the themes, a lot of the companies in the underlying ETFs seem quite overvalued from a P/E point of view. They will work, but not in the months where it all comes crashing down. To replace that allocation, I will likely add money in themes like Low Vol High Yield and Late Cycle.

Categories: Portfolio review

Leave a Reply