Regular readers will recall that I have been 40% + in cash since shortly before the Brexit vote and subsequently stated that I would remain so until after the US election – this is very unusual for me because I am usually fully invested most of the time. As chance would have it, I was in the US for election week and boy, what a divided country that is at the moment but that’s a story for another day. As for the markets, we are not out of the woods yet and who knows what will happen once Trump takes over the presidency and the UK government trigger Article 50 but in the meantime, I was beginning to feel the pinch of losing out on dividend income by being so heavily weighted towards cash. Therefore, I have this week taken my cash off the sidelines and rebuilt my portfolio, hopefully positioned for the post Brexit and President Trump world we find ourselves entering.

Over the past five months I have been thinking very deeply about the macro situation and have had the luxury of being able to research a large number of shares without the bias of owning them. I have also been able to watch an incoming flow of interim results, trading updates and outlook statements, knowing that I have cash on the sidelines waiting to be invested. As a result, I now own shares in significantly more companies (40) than has ever been the case previously. Although I stated that my plan was to update my “current holdings” on a quarterly basis, the significant restructuring that has occurred this week has prompted me to make an interim update which is now live.

Below, I have provided a summary of my rationale and contextual thinking in relation to the macro environment. So, in no particular order…

Income Portfolio
When I originally set up my current portfolio structure; income, growth and special situations, I was never totally comfortable with my focused income portfolio and consequently, that segment of my portfolio had a much lower weighting than the other two segments. During the past five months I had one of those light bulb moments and realised that my approach to income was completely wrong and that is almost certainly why I had not been comfortable with my strategy. My conclusion is that if the primary reason for buying these shares is income, then being highly focused is simply too risky. I am now convinced that the key to running a successful income portfolio is diversification. To this end, 24 of my 40 holdings now form my Diversified Income Portfolio. 22 of them represent just shy of 1% each of my overall portfolio with two income shares; GVC and SCH, having a much higher weighting. Both of these are core holdings based on my in-depth research. I could just as easily put them in the growth or special situations segments. These two shares aside, the rest of the income portfolio is highly diversified, including the use of funds for areas where I do not have expertise such as Asia, Mining and Resources. The diversification includes size, industry/sector and geography.

The forecast yield for this segment of the portfolio is just under 6% (historic yield is above 5%) and the main reasons for selling shares in this portfolio segment will be profits warnings and/or dividend reduction. I can’t deny that as a second level filter I have included companies with growth prospects in one form or another. The reason for this is that I am aiming for a 10% total return. If 6% of that comes from dividend income, I still have to find a further 4% growth via share price appreciation and dividend reinvestment.

Funds
I have 8 funds in my overall portfolio and as stated above, the main reason for this is that it enables me to have exposure to areas that I have neither the expertise in nor the time/inclination to develop that expertise. The SE Invesco Perpetual fund also gives me an additional benchmark to measure my own performance beyond the FTSE All Share index. Investing in so many funds is a big shift in my previous approach. A couple of these; FEET and WPCT, have a long-term growth focus whereas the majority form part of my income portfolio.

Brexit, Trump, Central Banks and the Eurozone
Putting aside the politics, the next few years are an economic minefield that will have to be navigated with care by investors. Let’s face it, we are entering new territory here and in my view, nobody can accurately predict what will happen. This said, I have drawn some initial conclusions of what I think might happen and indeed, what could happen. Brexit is going to be messy and probably a drawn out process. We’ll begin to find out more when Article 50 is triggered and the exit negotiations begin in earnest. However, the seismic shift that happened the week after the Brexit vote is probably a decent guide; importers will have higher costs and exporters will probably have more favourable trading conditions, although this could change if it transpires that the UK government are unable to agree decent trade agreements with either the EU or the rest of the world. For sure, I think we will be importing inflation (via higher costs caused by the exchange rate) as we go into 2017 and therefore, with a couple of low weighted exceptions, I am avoiding UK retailers and other companies that are net importers.

On the other hand, the US will likely be creating inflation via the focus on infrastructure spend and the reported $1 Trillion of increased debt that will be taken on to fund this. As things stand, I don’t have a lot of focus on US infrastructure investments. I did think long and hard about taking a position in SOM but decided I would need to research this sector more before taking the plunge. I will be on the lookout for a decent fund that gives me exposure to this potential boom as we enter 2017. Another difficulty with the US is the potential emergence of a protectionist culture and again, I have not yet figured that one out.

As for central banks, low interest rates and quantitative easing have surely had their day. As inflation rises, which it surely must, in the UK and the US, fiscal policy seems to be the way out of this vicious circle of low interest rates and low growth that we currently find ourselves in. I believe the UK will be less likely than the US to take on significant new debt but we’ll be able to assess that further once Mr Hammond has delivered his autumn statement next week. However, the problems in the Eurozone linger large in the background; an Italian referendum in December, Italian bank debt, concerns around Deutsche Bank’s financial stability, the ongoing Greek debt crisis and the potential for civil unrest, French and German elections to name but a few. I really do believe the Eurozone could unravel at some point but equally, they could continue to muddle along for a while yet.

Gold
It is the Eurozone cloud, coupled with loose monetary policy that means I will retain exposure to gold as a portfolio hedge – less of a hedge against a market correction/crash and more as a hedge against currency destabilisation. My GPM holding (4% weighting) is the main tool I am using for this as it typically mirrors the price of gold. I do have some additional exposure via CYN and BRWM (around 1% weighting each) and a large position in AAZ which I will discuss further in the next section. Of course, this hedge could be a drag on overall performance, especially if the price of gold declines further. However, it also enables me to sleep well at night knowing that if there is a black swan event, the flight to gold should protect the downside and provide funds for buying when there is blood on the streets.

Big Bets
While I have stated consistently on these pages that my overall aim is to deliver a portfolio return of 10% per annum with a benchmark of the FTSE All Share Index, I am still shooting for outperformance. As I have a personal rule not to use leverage, the best way to achieve outperformance is via some overweight positions. Of course, this could lead to underperformance if I have selected the wrong shares to bet big on.

My largest holding currently is AAZ; a gold and copper mining operation in Azerbaijan with relatively high debt – what could go wrong? I began looking at AAZ when I first started looking at gold as a safe haven and portfolio hedge. As I dug deeper, I saw an opportunity that I have subsequently written about on these pages. In summary, total cost of gold production for AAZ is $700 per ounce versus a gold price that is currently above $1200. 2016 production is likely to be in the region of $70,000 ounces and the company have been paying down their debt rather rapidly during the year. This makes AAZ much safer than many other gold producers who have significantly higher production costs. However, the really exciting thing about AAZ is the likelihood of a major resource upgrade, probably delivered in several stages between now and the end of 2017. At the same time, costs of production continue to be reduced, although I remain mindful of the perceived political risk. The success of AAZ is not solely dependent on a high price of gold or copper, although a strong price does increase profits of course. Rightly or wrongly, I have placed a big bet here which one way or the other, will have a significant impact on my 2017 performance.

Other big bets include SCH (dollar earnings, large cash pile, high dividends, a growth business model and the prospect of a major earnings enhancing acquisition), GVC (successful integration of the BWIN acquisition, refinancing agreed on significantly better terms, a return to dividends in 2017, a special dividend for February 2017 already announced and further M&A activity likely), SRT (one major 3 year contract being delivered 2016-2018 with the prospect of further such contracts being converted from the current pipeline), PEG (a string of contract wins and the potential for more such contracts versus a market valuation of £7m – this just looks way too cheap to me). And as we work down the weightings, I have also built decent sized stakes in AVS, BVXP, ZYT and BJU, all of which have growth business models, rising EPS, pay decent dividends and have sizeable non-UK earnings.

Updates and Portfolio Reviews
When I rebuilt my portfolio, my intention was for it to be “light touch”. In an ideal world, I would literally leave it unchanged until this time next year. In reality though, I will need to react to newsflow and results and I am only one profit warning away from selling out of my holdings. Incidentally, on the subject of profit warnings, there was an excellent research based webinar this week by Stockopedia with the conclusion that the right course of action is to sell on the first profit warning and not revisit that company again for at least a year – nothing that my Twitter pal Stock Whittler (@dosh100) has not been advocating for a while now.

Where was I? Ah yes, while my ideal scenario is to buy and hold, the reality of business is that things change. Therefore, I will be reacting to news, especially profit warnings, on a continuous basis (follow me on Twitter @BrilliantLeader for instant reaction to news) and reviewing the entire portfolio on a quarterly basis. I will run the current portfolios through to year end (my Focused Income portfolio in particular has now lost its relevance) and in 2017 I will be reporting portfolio performance quarterly on this site and weekly via Twitter as well as passing comment on significant newsflow as and when I have the time and inclination.

Happy investing folks!

 

Disclosure – At the time of writing I hold long positions in GVC, SCH, FEET, WPCT, SE Invesco Perpetual, GPM, CYN, BRWM, AAZ, SRT, PEG, AVS, BVXP, ZYT, BJU

EDIT – Since writing this article on Thursday lunchtime, a cash bid of 650p per share has been agreed for Avesco (AVS). During the course of Friday’s trading session I have sold my AVS holdings (average 634p) and reinvested the proceeds in BVXP, BJU,D4T4, RBG, WPCT and ZYT – these changes are now reflected in the current holdings.