Stock markets across the globe have proved robust over the past six months, in spite of the political headwinds. This has created a positive dilemma for many investors: namely, where to invest the proceeds from a growing portfolio. Should you continue to back your winners or take profits and look for value elsewhere in the market?
Run the winners and cut the losers in your portfolio
Nathan Sweeney, senior investment manager at multi-manager Architas, says investors should first consider whether the trend or factor that has driven returns is likely to continue. If not, it could be a good time to take profits on the underlying fund or stock.
Once the decision has been made to take profits, investors need to think about whether they wish to add to existing positions or initiate new ones. For those who opt for the second route, Sweeney advises doing lots of research and taking a disciplined approach. If a new position is added, use it as an opportunity to review the portfolio and sell out of another to avoid running a long tail of stocks.
“The key here is diversification without ‘di-worsification’, where over-diversifying hurts performance,” Sweeney said.
“I tend not to have more than 30 funds in a portfolio. When I am investing I have an initial position size of at least 2% because I don’t want it be too small and not count. If it is too small, why have it in the portfolio? If you want to add something, what are you going to take out?” he added.
The team at wealth manager Dart Capital looks to trim the winners in a portfolio and allocate to areas of the market that appear unloved or undervalued. For example, towards the end of last year they added gold to portfolios after it had fallen out of favour. They have since benefited from the bounce in the gold price.
Inflation-linked Treasury bonds, known as ‘TIPS’, also recently came up on Dart Capital’s radar as an attractive area on a valuation basis.
“Last month, we added an exposure to TIPS, which has been an area that has performed quite well that we think looks reasonably valued,” explained Alexander George, associate director of research at Dart Capital.
The Right Number of Funds
For investors with a portfolio of £50,000 and over, George suggests holding around 20 funds spread across different geographies and asset classes. For smaller portfolios, he says fewer holdings are necessary.
Peter Lowman, chief investment officer at Investment Quorum, echoes his sentiments. In his experience, 15 to 20 positions works best. He suggests monitoring the sector exposures of underlying funds in the portfolio to make sure they fit with your broader views.
Investment Quorum broadly aims to “run the winners and cut the losers” in portfolios. However, at certain points Lowman acknowledges that the portfolio can become too heavily weighted towards the winners, so it is important to rebalance. The team reviews client portfolios on a quarterly basis.
The chief investment officer adds that investors can benefit from taking a step back from the portfolio periodically to think about whether the underlying factors that are supporting markets and economies are starting to change.
“You could decide that we are moving into a new period of the financial cycle. As interest rates go up and inflation picks up, it could mean that certain things you owned over the last 10 years are probably not going to work for the next 10,” he explains.
Top-down Asset Allocation is Key
John Husselbee, head of multi-asset at Liontrust Asset Management, suggests taking a top-down view of the portfolio to make sure you are happy with the split between equities, bonds and alternative asset classes, such as property. Target weights for each asset class or individual fund can help to keep an asset allocation framework in place. In Husselbee’s opinion, the mix of assets, known as the asset allocation, is important because it can drive returns over the long term.
Husselbee notes that one of the most common mistakes that investors make is buying at the top of the market, far from the mantra ‘buy low and sell high’.
‘Investors may find they buy the market when it is outperforming and then they buy the best performing fund over the last three years - only to be disappointed,’ he adds.
Within Liontrust’s multi-manager portfolios, the fund manager aims to blend different fund management styles across asset classes, which he says helps to smooth returns from a risk management perspective.
‘A cheese and wine pairing is what you should be looking for. When two things go together you get the benefits of diversification from the investment styles,’ Husselbee says.
How Often Should You Review Your Portfolio?
George suggests that once a quarter is sufficient, urging investors not to be tempted to ‘over-tinker’. Checking your portfolio too often creates the temptation to top up your winners, which can make your portfolio too momentum-driven, he says.
Investment Quorum also reviews portfolios on a quarterly basis. “Every 12 weeks we have a good look inside the portfolio. Get amongst the weeds, find out what is working and not working, and make sure there are no big mistakes with our asset allocation calls,” Lowman concludes.
