Portfolio review

A tough month for the model portfolio (April 2018 review)

  • MTD portfolio performance: -0.76% (-0.62% since inception)
  • MTD benchmark performance: +0.10% (-0.70% since inception)
  • Net performance: -0.85% (+0.08% since inception)

Markets recap

Developed market equities trended up this month while emerging markets and frontier markets lost ground. Meanwhile, volatility levels receded, US treasury yields climbed higher and oil continued on its upwards trajectory.

  • The S&P500 returned +0.38% but on year-to-date basis is still down -0.38%. Emerging Market stocks (EEM) lost -2.8% and frontier markets (FM) as much as -3.9%
  • The VIX volatility index declined from 20.0 at start of the month to 15.9 at the end of the month. Besides some volatility early in the month it mostly was a gradual decline.
  • US 10 year treasury yields saw a strong spike upwards from 2.74% to 2.95% (+21bps), intra-month touching above the 3% for the first time since 2014.
  • Brent Crude Oil continued its march upwards, increasing from 70 to 75 (+7%)

Theme returns

Broad Market (VT)-1.29%+0.42%-0.88%
Hard Brexit-1.79%+2.88%+1.04%
Rising interest rates-0.48%-0.05%-0.53%
The next market crash+0.32%-0.96%-0.64%
Trade wars+1.32%-0.10%+1.22%
Low volatility high yield-0.20%+1.40%+1.20%
Robotics / Automation-2.45%-2.51%-4.90%
Water scarcity+1.56%-0.20%+1.36%
Global tourism-2.41%-1.22%-3.60%
Frontier Markets+2.49%-3.94%-1.55%
Healthcare Innovation+0.48%-1.96%-1.49%
Core Bond+1.02%-1.29%-0.28%
Core Equity-0.19%-1.11%-1.30%
Space Race-2.41%-5.01%-7.30%
Clean Energy+1.71%+3.47%+5.24%
Modern Agriculture-2.23%+0.13%-2.10%
Self-driving vehicles-4.06%+0.91%-3.19%
Emerging Markets-0.21%-2.77%-2.97%
Post Trump Administration+1.05%-0.54%+0.50%
Late Cycle+0.65%+1.09%+1.75%
Dawn of Eurasia-1.21%-2.42%-3.60%

Winning themes: Cybersecurity, Clean Energy, Brexit

  • Cybersecurity. One of the biggest winners of this month was Cybersecurity, returning +4.2%. Both ETFs which make up half-half of the portfolio did well and returned 3% to 5%. Looking at the CIBR ETF (+3.2%), we see that companies like Palo Alto Networks, Symantec and VMware (together nearly 20% of the constituents), all returned in the range of +6% to +10%. Cybersecurity is a hot topic right now.
  • Clean Energy. The Clean Energy theme had a very good month, returning +3.5%. Many of its largest constituents had very strong returns, such as Siemens Gamesa Renewable Energy (+8%) and Verbund AG (+7%). But perhaps most significant was China Longyuan Power Group which returned 29% and is 5% of the ETF.
  • Brexit. Pound sterling weakened, commodities rallied (good for BHP Billiton) and British stocks rallied (good for the likes of Sky and Vodafone). As worries about a hard Brexit grew, almost everything came together for our Brexit portfolio, which returned +2.9%. I would expect this theme to keep doing its job as crucial dates creep closer.

Losing themes: Space Race, Frontier and Emerging Markets

  • Space Race. The iShares US Aerospace & Defense ETF saw terrible returns (-6%), causing the Space Race theme to sell off and lose -5.0%. Notable were returns of -5% on United Technologies Corp and Lockheed (together 14% of the ETF).
  • Frontier Markets. Frontier Markets saw mostly negative returns, largely off the back of US dollar strength. The theme lost -3.9%. The larger Frontier Markets ETF lost -5%, and especially Vietnam at -9% in one month had a fall from grace, having previously been one of the best performers YTD. Egypt saved the day returning +2%, but it didn’t help much.
  • Emerging Markets. Emerging Markets similarly had a bad time due to US dollar strength and lost -2.8%. Brazil, Indonesia and Russia all lost -4% to -8%. In local currency terms all but Indonesia actually gained value, but especially Russia could do nothing as the US imposed more sanctions and its currency went in free fall.

Model allocation and returns

2018-04 allocation2018-04 theme returns2018-04 model contributors

When coupled with the Emerging and Frontier markets constituents of the Core equity theme, the portfolio contains a total of 8.3% emerging market and 7.8% frontier market exposure. In a month where both asset classes sold off on a resurgent US dollar, that hurt returns. On their own, these two added some -0.5% to total return. Exposure to Healthcare Innovation and Robotics and Automation further sunk the portfolio.

The stock benchmark (VT) returned +0.42% and was outperformed by themes like Clean Energy (+3.5%) and Urbanisation (+1.6%). It was on the other hand underperformed by themes like Frontier Markets (-3.9%), Robotics and Automation (-2.5%), Healthcare Innovation (-2.0%) and Global Tourism (-1.2%). The Core Equity portfolio returned -1.11% due to its larger emerging and frontier market exposure.

The bond benchmark (BND) returned -0.87% as US interest rates climbed 21bps. It was still underperformed by the Core Bond portfolio (-1.3%) as there were slightly better returns on non-US developed market bonds (-0.2%) but far worse returns on emerging market bonds (-3.4%) that form part of it. Other themes that can be seen as going up against the bond benchmark fared better, for instance rising interest rates (-0.05%), low volatility high yield (+1.4%) and trade wars (-0.1%).

What changes am I making to my asset allocation?

This month I am making quite a few changes which should hopefully position the portfolio better for currently changing markets:

  • Reducing Emerging and Frontier Market exposure. Both the Core Equity theme (30% EM and 10% FM) as well as the frontier market portfolios are cut down to size. I expect more dollar strength and eventually a serious market downturn and at this point want to lower my sensitivity to that.
  • Reducing Clean Energy, Tourism and Healthcare Innovation. These are themes I have had my eye on throughout the month. Clean Energy has rallied tremendously in April but like the other two seem ripe for repricing.
  • Close the Trade Wars theme, add Cybersecurity and Blockchain. It seemed to work for a while during April, and then it did not. No harm done, but with today’s announcement that steel and aluminum sanctions will be postponed, it does not seem to me like a real trade war is forthcoming. I am adding Cybersecurity and Blockchain at minimal exposures. Let’s see what they can do.
  • Increase Low Volatility High Yield and add Late Cycle, Stagflation. I like what I’ve seen so far in the low vol high yield theme, and am getting convinced this one will help to soften the blow and build up a buffer for the next market downturn, all the while generating decent returns. Best of both worlds. I am adding a significant bit of exposure to the Late Cycle and Stagflation themes, which should play into the current market environment quite well.

Categories: Portfolio review

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