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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

Portfolio update Dec 31, 2023 (4Q23 and FY 2023)

In February 2023, I penned an article (“The Great Reveal”, here) that provided some attributes of my personal portfolio.  I have updated my subscribers on my portfolio on a quarterly basis since then, and this is the update for the most recent quarter ended Dec 31, 2023.

 

Market performance 4Q23

Both the bond and equity markets rallied hard in the fourth quarter. The S&P 500 powered forward to register a full-year gain of 24.2% (index only), more than doubling the gain for the first nine months of the year. US Treasuries also rallied, with yields on US Treasury (“UST”) bonds falling sharply in the fourth quarter.  The bond rally pushed the ICE BofA 7-10 year total return UST index from a loss of 2.6% at the end of September to a full-year gain of 3.8%, a remarkable turnaround.  The table below shows returns for 2023 for the S&P 500 and the 7-10 year UST total return index, along with blended returns assuming two portfolio mixes: 70/30 and 60/40. 

 

Although far from perfect because they represent only two traditional asset classes, these are the benchmarks I used to look at my own performance for the full-year which I will cover towards the end of this article.

 

My portfolio attributes

 

Asset class mix

The table below shows the breakdown of my portfolio at the end of 2023 by asset class, and the direction of change since the last quarterly update (Sept 30, 2023).



The main changes to my asset mix in the fourth quarter reflected a combination of the strong performance of risk assets, particularly of US equities in the fourth quarter, and a few tweaks on my end which reflect my views of the future direction of markets and my own portfolio requirements.  These views have been fairly consistent throughout the year:


  • Financial markets would get more challenging, so my stock portfolio took on a 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 to meet my own cash flow needs.

 

I did very little buying / selling in the fourth quarter, although the appreciation in global stocks – especially in the US – pushed my portfolio mix towards a higher percentage of equities.  Also, my net cash position was effectively over 10%, since all of the US Treasury bonds that I own were UST bills with maturities of less than six months.  I was comfortable having this rather large liquidity cushion because current yields were generally above 5% for much of the year.  In many respects, I had cash on hand and was mentally prepared for a market correction, one that as of today has never come.

 

Top 10 equity holdings

The table below shows my top 10 equity holding on December 31st, 2023:



My top 10 individual equity positions accounted for 41.9% of my total portfolio, a slightly higher percentage than at the end of September mainly because of the ongoing increase in prices of the Mag 7 (of which I have positions in four).  JNJ fell out of the Top 10 as the stock underperformed, while Lululemon became my seventh largest position because the stock appreciated sharply in the fourth quarter (arguably too much).  At the end of the year, I held positions in 25 individual stocks, which in total were 65.9% of my total portfolio including gold and alternatives.  In addition to individual stocks, my other equity exposure (7.7% of total portfolio) was through stock ETFs, mainly in energy (XLE) and certain countries / blocs where I want exposure through indices including Japan (Nikkei 225), China (Shanghai Composite) and Europe (STOXX 600). 

 

Major 4Q23 equity trades

Major equity trades during the fourth quarter included:

  • I increased my position in US utility company Southern Company (SO), and added to VISA, CSCO, PG and MCD, all in the first half of October.  These all suggest a greater focus on defensive names, and all pay decent dividends.

  • I lost my position in ActivisionBlizzard when its acquisition by Microsoft closed in October.

  • I started a position in early October in CrowdStrike (CRWD), buying a couple of chunks throughout October.

  • I sold a real estate mutual fund (Fidelity) at the beginning of October.

  • In my UK brokerage, I rebalanced several ETFs at the very end of the year, lightening slightly on Japan (Nikkei 225) and Europe (STOXX 600), and adding to China (Shanghai Index) and an intermediate term £ corporate bond ETF.

 

Recall also that I exited NKE at the very end of the third quarter.

 

Regrets (and I have a few!)

The trade by far I most regret in 2023 was exiting a large position in LLY in August at around $400/sh (stock closed 2023 at $582.92/sh).  I also regret trading out of NVDA in 2022.  Although I had excellent gains on both positions when I sold them, it is clear in retrospect that I left a considerable amount of money on the table, equating to a low single-digit impact on my total return due to foregone gains (had I held the positions).  In both cases, I thought the stocks were well ahead of themselves as far as valuation, and both serve as unpleasant reminders that momentum trumps fundamentals in a market that is running in one direction. I have held on to some underperforming legacy positions for much longer than I should had, a mistake I intend to sort in the coming days.  In summary, I have done a lot of positive things in my portfolio, but the reality is the handful of mistakes and missed opportunities tend to haunt me much more than all the things that I have done right. Welcome to the emotion of personal investing!

 

Options strategy to hedge

In early December, I wrote covered calls to finance long put positions (downside protection) on several stocks, including AAPL, MSFT, CRWD, LULU and ABNB.  The maturities were in mid-January and mid-February.  The only position that looks vulnerable as far as losing shares relates to covered calls on CRWD that expire in February, as the shares have run significantly since mid-December.  I also have puts on the SPY (445) out to April, as a form of downside protection / insurance.

 

Equity sector breakdown

The table below contains a stratification of my equity portfolio by sector, including all 25 individual stocks and one sector-specific ETF.



Fixed income holdings

My fixed income holdings for year-end are summarised in the table below:



Major 4Q2023 fixed income trades

Major fixed income trades during the quarter included:

  • I bought two six month BBB-rated corporate bonds (maturities less than six months),

  • I bought a targeted maturity ETF containing corporate bonds with maturities in Dec 2025.

  • I rolled some maturing UST bills, but only until April 2024 (although I do have legacy positions extending to June 2024).

 

Returns

I have looked at my returns in a simplistic manner for my combined stock, bond and cash portfolio only (i.e. ignoring alternative investments).  On this basis, my $ portfolios (US accounts only) had a total return (price change + dividend/interest income) of 17.1% for the full year (vs 10.9% through Sept 30), and my £ portfolio had a total return of a mere 3.1% (vs 1.3% through Sept 30, 2023). The £ portfolio includes currency movements, too, so my blended return across all of my accounts in USD was 15.0%.  Recall that a 70/30 stock/bond (USTs) portfolio returned 18.1% for the full year, so my portfolio slightly underperformed the 70/30 benchmark, which I attribute to an overly defensive stock mix (in spite of positions in four of the Mag 7 stocks).  As reference points, here are market returns for full-year 2023 for several buckets of assets:


  • S&P 500: 24.2% (index only)

  • US Treasury 7y-10y total return: 3.8%

  • Corporate bonds, investment grade: 8.4%

  • Corporate bonds/loans, high yield:  13.4%

  • Cash (more or less): 4.8%

Including alternative assets and gold, my portfolio mix at the end of the quarter was 73.6% equities, 11.9% bonds, 8.8% cash and UST bills, 3.3% alternative assets and 2.4% gold. 

 

What’s ahead

The fourth quarter generated strong momentum as we finished the year, and this sentiment looks to be carrying over into early 2024.  There is generally good news built into asset prices reflecting a resilient US economy and a early pivot by the Fed.  I don’t want to sound too much like a broken record, but I remain reasonably conservatively positioned which allows me to sleep at night.  I am thinking about disposing of some laggards and perhaps taking on slightly more risk should the clouds on the horizon lift, but I have not decided yet if I want to do this at elevated prices and in a contentious US election year.  Any additions or disposals I make (should there be any) will be in graduated steps. 

_________________

 

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