This coming weekend I will be launching the ISA01 real money portfolio to coincide with the new ISA tax year. I will also publish and track the holdings for each of my three investment strategies; Focused Income, Compound Growth and Special Situations.
Context and Goals
I am in my early 50s (as is my wife) and we plan to retire before we are 60. We have a focus on capital appreciation over these years and our equity portfolio is one aspect of achieving this. My employment involves much international travel and busy days, therefore, I need to have a portfolio that is low on maintenance and low on surprises. I am looking for a high level of predictability in our portfolio performance. Moreover, I am looking to hone my investment strategy and skills to provide even more predictability in our retirement. To this end, I am looking to gradually move from a growth oriented strategy to an income oriented one over the next 5-8 years.
Overall, my aim is to outperform the FTSE All Share Index on a consistent basis (otherwise I should just invest in funds) and deliver an average total return of at least 10% per annum – in reality I am looking to exceed this level of return because inevitably, there will be the odd bad year, especially when markets are in decline.
Focused Income Strategy
I am still refining this strategy as part of my medium term strategy to move towards income orientation. Therefore, the overall weighting of stocks that fall into this category is currently the lowest of all three strategies and I am looking to build up these holdings over time. My decision making incorporates several criteria; yield percentage, dividend cover, dividend policy, dividend track record, sector diversification and my assessment of the overall business prospects. Realistically, I would be happy if this category returned total annual returns of 10% (split between dividend and capital appreciation) and I know in advance that these holdings are unlikely to ever deliver spectacular growth. I don’t operate a stop loss with this category – it is a change of dividend/dividend policy that will dictate sell decisions while any share price dips enable me to accumulate income units at a lower price.
Compound Growth Strategy
This strategy is the core of my portfolio and an area I am very comfortable investing in. Again, I have several factors that drive my selections; PER, PEG, EV/EBITDA, StockRank, rising EPS, paying a dividend (normally between 1 and 5%) and sector diversification. Essentially, I am looking to invest in companies that are already profitable, are priced reasonably and have a fighting chance of growing profits over the next 12-18 months. Of course, there will be companies where trading results disappoint and others that exceed expectations but essentially, I am looking to include companies where I believe 10-20% total return is a reasonable expectation (I have a bias towards smallcaps in this category). I believe it is important to take a “basket” approach to this type of investing because none of us have a crystal ball when it comes to business performance. By having a basket of 10-15 stocks in this category and operating a largely mechanical stop loss, it should be possible to even out the returns and deliver a consistent performance overall. Generally, I buy into these holdings in a small way at first and add to my holdings as I become more confident that the company is delivering results and progressing in the right direction. The most important elements of this strategy are dividend reinvestment and regular rebalancing in order to compound returns over time. I don’t necessarily reinvest the dividends in the company that delivers it but rather, I tend to allow total dividends to accumulate for six month periods and then decide which companies to reinvest in based on my buying criteria. I also take this opportunity to review existing holdings and cut those which are no longer a good fit for the strategy.
This category is the higher risk portion of my portfolio. Generally, these companies are either pre-profitability or recovery situations. In the ideal sequence of events, I would buy a company in this category and see it become a compound growth stock before holding it for the long-term as an income stock. It rarely works out quite that way of course! This is not a criteria based strategy and I am relying on my own assessment of the business prospects and management’s ability to deliver. As such, I normally research these companies very deeply before investing. Only a small number of my holdings are in this category and overall, I am looking for a 20-50% return but also, I accept that some years this category will not deliver and inevitably, some companies in this category will never succeed and/or will involve dilution along the way. I believe the phrase is “not for widows and orphans”.