Value Investing Portfolio Matters: Thematic, Global Growth and Special Situations

I had indicated a while ago that I would discuss my portfolio and subsequent performance in more detail. This article starts that journey, but first I want to discuss my investing context (if such a thing exists). To surmise conventional investment "wisdom", one can conclude that 99% of expected return from the stock market is down to asset allocation, dividends and (possibly) timing.  If that is true, then it makes sense to go and buy a few index trackers, ideally in the form of low-cost ETFs, set your dividends to reinvest themselves, and then go off and wash the car, creosote the fence or whatever else is on the 'to do' list. This approach assumes that the market is "efficient" and that it is not worth your while spending effort and energy in trying to finding market-beating investments, because you will not be able to do so sustainably in the long-term. 

At the other end of the spectrum, if the market is not so efficient then consistent above-average returns can be made from stock-picking the right companies at the right time a la Buffett, Graham & Co. I take the middle ground and adopt a bit of both. My portfolio of ISAs and SIPPs is currently structured into three components as set out below. NB - I did not deliberately set out to create three components, but after considering my rationale and doing some analysis, I realised that my portfolio fell into three camps. For more instructive discussion and analysis on portfolio allocation and passive investing, I would heartily recommend spending some time with Monevator. 

Three Components

A - Thematic - Big picture: the global population is growing; resources are finite; food, energy and infrastructure will be in demand; emerging markets are...emerging. My sphere of knowledge extends to UK listed companies. I do not have the expertise or time to try to understand overseas companies with a degree of comfort. I also believe that emerging markets in particular are less efficient and that a good stock-picker (fund manager) should be able to generate superior returns (in the medium-term at least). In the past, I have favoured Investment Trusts as these can often be bought at a discount to net assets and tend to have lower charges than Unit Trusts. Going forwards, I will look increasingly at ETFs. On a PE/yield basis, Brazil and Russia look cheap, China and India look more expensive. Current holdings:

• Asia - First State Asia, Scottish Oriental  
• Emerging - BR Latin American, TEMIT, Aberdeen EM, JP Morgan Emerging Markets Income
• Infrastructure - International PP, HICL, Utilico EM, Ecofin Water & Power

B - Global Growth: These are UK listed companies with a global footprint and a track-record of delivering for shareholders over the long-term, usually with a generous dividend. The key to optimising returns will be buying these at the right price. Current holdings:

• Shares - Vodafone (LON:VOD), National Grid (LON:NG.), Aviva (LON:AV.), BP (LON:BP.), Unilever (LON:ULVR) and Reckett (LON:RB.).
• I/T - Hansa Trust (LON:HAN), British Empire (LON:BTEM), Rit Capital Partners (LON:RCP)

C - Special Situations/Value/Discount/Other - This is really the category for anything that I like which is not covered in the other two categories and where the main thrust of this blog has been so far. Current holdings:

• Drax - UK only, but reasonable value and good dividends
• Johnsons - turnaround/recovery play that appears to be on the right track
• Jacques Vert - lowly valued, cash rich, retailer with steady growth potential
• Vertu - discount to net assets, net cash and growth potential 
• HMV - double or quits 
• Gleeson - housebuilder with strategic land - big discount to assets, but needs to clarify CEO and business model
• UK Mail - reasonable value, cash rich, good dividend 

Others, not yet covered on the blog:

• Hansteen (LON:HSTN) - interesting property play with growth potential
• Chesnara (LON:CSN) - long-term holding that has doubled my money in three years 
• HG Capital (LOM:HGT) and Graphite - private equity players with growth potential and acquired at significant discounts to NAV
• Home Retail Group (LON:HOME) - Argos and Homebase retailer on a relatively low value, with net cash and a good dividend 

Asset Allocation - In terms of allocating funds between the three pots, I am aiming for a 30/30/30 split with /- 10 deviation either way, and the remainder to be in cash and/or fixed interest. This will force me to think about re-balancing, as well as keeping a pot of cash available for new opportunities. As at 31 March 2011, the split was as follows:

A - 19% - with a locked-in yield of 3.8%
B - 19% - yield of 5.1%
C - 27% - yield of 4.1%
Cash & fixed interest - 35%

The Future - I am aiming for a pot of 15-20 companies to follow in categories B and C, and am there or thereabouts for that. My current holding of cash is a bit on the high side and I will drip-feed into certain investments as appropriate, with my focus on categories A and B. I am looking at re-writing/re-focusing my Rules to accommodate B opportunities as well as C. Richard Beddard  and UK Value Investor in particular, as well as some interesting correspondence with other private investors, have really got me thinking more about 'great companies at a reasonable price' rather than 'ok companies at a cheap price' - ie quality first, price second. Overall, I am still aiming for an annual return of 15% after costs.

Play Time - This will be my last post for a while as I am off for an extended holiday shortly. I will be back in May, hopefully with some modified rules in tow. Happy investing!