In February 2023, I penned an article (“The Great Reveal”, here) that provided some attributes of my personal portfolio. I thought that this article might provide some insights into my thinking, for better or worse.
The end of the half of 2023 is a perfect time to provide an update about my portfolio. If I can bear the pain, I do intend to periodically update it, including candid commentary on some of the things I did right and other things I did wrong. There might be some nuggets of interest for you in this update. Having said that, writing it makes me feel like I made many more mistakes than right decisions. So be it, this is my reality! I try to look on the bright side – I could have been sitting on the side lines during this amazing rally, so at least I have that going for me!
Asset class mix: The table below shows the breakdown of my portfolio on June 30th, 2023 by asset class, and the changes (all slight) since the original article was penned in mid-February.
There has not been a material change in my asset mix since February, aside from the increase in cash. Even though the percentage of my portfolio invested in equities has only decreased slightly, I did sell stock in the 2Q23, including my entire positions in LLY and NVDA (both related to valuation, discussed further below). The sharp appreciation in some of my other equity holdings compensated for most of the reduction coming from equities that were sold, such that the percent of my portfolio in equities (72.5%) decreased only slightly. The amount of cash and fixed income investments combined increased to 21.8% (compared to 19.0% in February), a very high level compared to what I normally hold in these asset classes.
Top 10 equity holdings: The table below shows my top 10 equity holding on June 30th 2023:
At the end of June, I held 28 stock positions (compared to 33 in February) aggregating 63.5% of my total portfolio. The remaining equity exposure (9.9% of portfolio) was through stock ETFs, mainly in energy (XLE) and certain countries where I want exposure through indices: Japan (Nikkei 225), China (Shanghai Composite) and Europe (STOXX 600).
My top five holdings represented 28.4% of my portfolio, and my top 10 holdings represented 40.4%. Given the appreciation in my top five holdings, and the fact that all were at or near all-time highs at the end of June, there is an argument for reallocating some from these names into others that represent better value, something I am thinking about as I write this update.
Equity sector breakdown: The table below contains a stratification of my equity portfolio by sector, including all 28 individual stocks and two sector-specific ETFs (energy and a small position in real estate).
The increases in certain positions vis-à-vis February were largely driven by an appreciation in shares. The largest decrease was the result of the sale of LLY, which in the February article was my 3rd largest holding.
Major equity trades: My major trades since February 2023 were:
1. Sold position in Eli Lilly (LLY): I frequently wrote short-dated covered calls against a sizeable position in LLY, a strategy that had generated good ancillary income over the years. Shockingly, I got caught out in late April and had half my position called from me at $395/share. The shares were up over 15% in April, not an ordinary move for a large pharma company. With half of my position gone and convinced that this was a stupid (upward) move in LLY, I sold the rest of my position within two weeks at between $402/share and $425/share. At the end of June, LLY was $468.98/share, so – for now – I have left money on the table. Having said this, the shares trade at a P/E (forward) or around 51.8x, and a price/sales of 14.7x. This puts a lot of tech companies to shame, and it is hard for me to justify not selling a large pharma company at these heady valuations. I must admit that I do regret shedding what I considered to be a defensive position. LLY is a stock I would buy again if it comes back to earth.
2. Sold position in Nvidia (NVDA): I have been in and out of NVDA since the pandemic, as it has been highly volatile both ways. I started a new position in NVDA in May 2022 and added through December 2022, at prices from $147/share to $188/share. Like LLY, I used this stock to write covered calls, on the basis that I love the company but never liked the valuation or the very retail-driven technical aspects of the price movements. I started selling NVDA in February 2023, with an exit price of between $225/share and $230/share, very pleased with my gains over a short period. On June 30th, NVDA closed at $423/share, whether the valuation is wildly over-optimistic or not, I left a lot of money on the table. This was always a trading rather than a core position. Having said that, I would like to own NVDA as a core holding, but could never justify it at anywhere close to the current level.
3. I was lifted on a stop on a small amount of GOOG shares at $118/share in May, having been adding to my core position the months before at around $90/share. GOOG is still my sixth largest holding. 4. Sold some small “fragment names” I no longer wished to follow, including SHOP and AEP. I also divested most of my mutual fund holdings in real estate. The only stock position I added to was SO.
5. I generated income from covered call positions, although as happened in the case of LLY, this strategy can of course result in losing shares in a market where prices are heading higher faster. The rationale for selling LLY and NVDA is that I felt both were wildly overpriced, and I suspected that the price of both would decline. I was wrong. LLY spiked even higher after news about an Alzheimer’s drug and other new developments, and NVDA headed higher off of the AI narrative. I felt in the case of LLY – and in retrospect – the price action ahead of when I was taken out of the shares was highly unusual, so much so that I suspect there was front-running ahead of the news. As for NVDA, this stock takes on a life of its own, and I was happy I made good gains on a short term investment.
My fixed income portfolio / trades: The table below provides the allocations of my fixed
income holdings in my portfolio as the end of June. Except for US Treasuries, the rest of my fixed income portfolio – Gilts, US corporate investment grade loans, and US leveraged loans – is held in ETFs. The major changes more recently in my fixed income portfolio were to consolidate some UST positions and slightly lengthen maturities, noting that my UK government bond exposure (GILTS) is via an intermediate term ETF. 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). I would consider lengthening maturities of USTs as I expect yields to decline in the coming months, but my love for government bonds in general is not particularly high, as I am generally looking for higher yields or am interested in taking more risk depending on market conditions.
Returns: I have looked at my returns in a simplistic manor, and on my stock, bond and cash portfolio only (i.e. ignoring alternatives) On this basis, my $ portfolio (US account only) returned 12.7% in 1H23, and my £ portfolio (UK pension account only) returned 2.4% (in USD-equivalent). The difference in
returns between the two account locations can be largely attributable to the fact that, aside from
Japanese equities (Nikkei 225 ETF index), most of my holdings in my UK pension did poorly because of the direction of travel of UK, European and Chinese equities. My blended all-in return across all of my accounts was 11.2%. Ignoring alternative assets and cash at banks, my portfolio mix was 76% equities, 12% bonds and 12% cash. I used the index total returns in the table below (for bonds I used the 7-10 year UST total return index), which is far from perfect but close enough. I simply do not have time to get more granular. Although far from perfect, here are my returns compared to blended benchmark returns using the same asset mix.
I suppose the message is simple – I would have been better off in indices than in individual stocks, never a surprising conclusion for those familiar with efficient markets. Although I own some solid tech names (which I consider defensive), my stock portfolio has intentionally been skewed gradually over the last year or two towards higher dividend paying, more defensive names (CSCO, PEP, PG, MO, XLE, WM, etc). Also, I have opted to take advantage of yields not seen in many years in lieu of higher risk, higher return stocks. That has been a conscience “lifestyle” decision given my age / stage in my life.
What’s ahead: Since the end of June, risk markets have rallied further, although I have a hard time believing that the second half of the year can offer anywhere near the amazing returns achieved in the first half. As my readers know, I stay generally long equities in good times and bad. The risk of a near-term recession has most certainly been pushed out, but I fully suspect slower economic growth to eventually weigh on earnings. In addition, the story around China, the world’s second largest economy and historically one of the fastest growing, is not looking particularly good. For these reasons, I expect bond yields to be near or past peaks (even in the UK), and equities to be more under the microscope going forward. I suspect for these reasons
I will likely reduce some of my more concentrated holdings (or keep partial stops on shares that have run up very quickly and are hovering near all-time highs),
I will continue to write shorter-dated covered calls, and
I will re-enter or add to select names if markets become “more reasonable” (meaning I feel valuations are generally rather heady at the moment).
I suspect my core cash position might be higher at the end of the year as a result (ceteris paribus), although keep in mind that I withdrawal money from these accounts for living expenses, and that too has a bearing on cash positions.
I also hope there are some messages in this article that might resonate with you. Writing it has certainly been enlightening to me, and not completely in a positive sense. Time and time again, I come back to the mantra of invest for the long term, and if you want to trade, do it around the edges not on an “all in” basis. This strategy is rather rudimentary and boring I admit, but I am certain that it will pay off in the long term.