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My view on what's going on in the financial markets and the global economy, and a few other things that might interest me from time to time.

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  • Writer's picturetim@emorningcoffee.com

3Q2023 portfolio update

In February 2023, I penned an article (“The Great Reveal”, here) that provided some attributes of my personal portfolio. I updated this article for the end of June (here) and wanted to do the same for the end of September, recognising that the third quarter was a more challenging investment period than the first half of the year.

In fact, returns were negative for both the S&P 500 and US Treasury bonds in the recent quarter as you can see in the table to the right. The poor performance in the quarter reduced the positive return YtD for equities and pushed returns on US Treasuries YtD into negative territory. The table illustrates returns for stocks and bonds the first three quarters of this year and for years 2019 to 2022, along with returns on mixed portfolios of stocks and bonds (70/30 and 60/40) over the same periods.


I discuss my portfolio in the sections below.


Asset class mix: The table below shows the breakdown of my portfolio on September 30th, 2023 by asset class, and the direction of change since the last update on June 30th:

The changes to my asset mix in the third quarter primarily reflect my view on financial markets which have not changed significantly since the beginning of the year:

  • Financial markets would get more challenging throughout the year so my stock portfolio should take on a slightly more defensive tilt,

  • My corporate bond portfolio (credit) would remain focused on investment grade USD-denominated bonds and leveraged loans (latter meaning “top of the capital structure” high yielding, secured floating-rate loans), and

  • Short-term yields would remain elevated, so I would keep a good mix of shorter-dated UST bills and cash.

These views have influenced a modest decrease in equities and an increase in general liquidity (cash + UST bills) in my portfolio during the year. The decrease in stock prices in the third quarter also had an influence on the asset mix.


Top 10 equity holdings: The table below shows my top 10 equity holding on Sept 30th, 2023:

My top 10 stocks accounted for 39.2% of my total portfolio, similar to the end of June, and individual stocks in total (26 positions) accounted for 62.6% of my total portfolio. In addition to individual stocks, my other equity exposure (8.3% of portfolio) was through stock ETFs, mainly in energy (XLE) and certain countries / blocs where I want exposure through indices: Japan (Nikkei 225), China (Shanghai Composite) and Europe (STOXX 600). I also had a sliver of a US real estate mutual fund that I exited in October.

Equity sector breakdown: The table below contains a stratification of my equity portfolio by sector, including all 26 individual stocks and two sector-specific ETFs (energy and a small position in real estate, with the latter sold since end of quarter).


Major equity trades: I exited Este Lauder (EL) and Nike (NKE) in the third quarter, both of which I had held for many years. For the former, its recent performance has been abysmal, driven by a combination of waning sales in China and lower sales related to travel (duty free, etc), mainly in greater Asia. With respect to Nike (NKE), I still like the stock but have placed my bets more strongly in the consumer discretionary sector with Lulelemon (LULU). This was a tactical decision, although I would go back into Nike under the right circumstances.


I added slightly to CSCO (Comms Services, 17x P/E, 3% yield), JNJ (Healthcare, 31.8x P/E, 3% yield) and SO (Utility, 23.7x P/E, 4.15% yield), all reflecting a more defensive tilt and higher dividend yields. I also started a position in CRWD (CrowdStrike), a more aggressive position but one that reflects my views on growth in global cyber-security. I will add to this position over time on weakness, assuming that the company’s business fundamentals continue to trend in the right direction.

My fixed income trades: Below are the allocations of fixed income holdings in my portfolio as the end of September:

All of my positions except US Treasuries are held as ETFs: Gilts (0y-5y), US corporate investment grade bonds, and US leveraged loans. The major changes more recently in my fixed income portfolio were to consolidate some UST positions and slightly lengthen maturities. I also held on to my position in US corporate credit via ETFs, one in investment grade corporate bonds (5-10 year maturities) and one in leveraged loans (mutual fund). Although I have thought about lengthening maturities of USTs as I believe yields might have peaked, I have never been overly enthused about long-dated government bonds under any circumstances. My latest UST maturity at the end of September was (and still is) June 2024 (nine months).


Returns: I have looked at my returns in a simplistic manner for my combined stock, bond and cash portfolio only (i.e. ignoring alternatives) On this basis, my $ portfolios (US accounts only) had a total return (price change + div yield) of 10.9% YtD through Sept 30, 2023 (vs 12.7% YtD through June 30), and my £ portfolio had a total return of a mere 1.3%, down from 2.4% in the first half of the year. The blended all-in return across all of my accounts was 9.5%. As reference points, here are market returns at the end of the third quarter:

  • S&P 500: 12.7% (11.7% index and 1.0% assumed yield)

  • US Treasury 7y-10y total return: -2.6%

  • Corporate bonds, investment grade: 0.4%

  • Corporate bonds/loans, high yield: 6.0%

  • Cash: 4.5% (more or less)

Ignoring alternative assets and gold, my portfolio mix at the end of the quarter was 75.2% equities, 16.5% bonds and 8.3% cash.


What’s ahead: The third quarter was much more difficult than the first half of the year, pouring a dose of reality on investors that might have believed it would all be smooth sailing following a poor 2022. The risk of an economic slowdown or recession has been pushed out beyond what I had thought would be the case, but I fully suspect slower economic growth will arrive and will eventually weigh on earnings. In addition, growth of the world’s second largest economy (China) remains fragile, certainly worse than had been hoped this year. Higher interest rates will eventually bite, and I continue to believe that bond yields are at or near their peaks. These views shape what if anything I shall do in the final quarter of this year.


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