With the FIFA World Cup in full flow it seemed appropriate to corrupt a football cliché in search of a heading for this article.

Friday evening on Twitter I reported that the last week of June had been horrible, rounding off a poor month and an OK quarter. I was probably a little harsh on myself regarding quarterly performance but I guess that reflects the emotional reaction to losing money in June (I was c13% YTD at the end of May, falling back to 8.5% YTD by close of quarter). In reality, the portfolio performance over the quarter was better than OK, beating every benchmark except Fundsmith and beating all the benchmarks on a year-to-date basis. The full breakdown can be viewed here. There has been little movement in the StockRank averages (quality down 3, value down 2, momentum up 2 and overall StockRank average unchanged at 83), average volatility has reduced from 2.95 to 2.81 and the natural yield has increased from 2.68% to 3.14%.

During the quarter, I have executed my compounding strategy of top slicing winners, cutting losers (mostly) and reinvesting dividends across the portfolio. It sometimes seems that I should be trading less but I think the current process is working as I am making money, beating benchmarks and sleeping well at night.

Hopefully, the second half will give me an opportunity to move all of these metrics further in the desired direction (i.e. increasing StockRank averages, reducing volatility and increasing natural yield) while also delivering decent absolute returns and outperforming the selected benchmarks. As I highlighted in a previous article, I could just switch out of a couple of my more speculative positions and into lower volatility, higher yielding holdings. However, for now at least, I have chosen to make this transition more gradually in order to benefit from the upside risk that I believe is still evident in the market.

However, my conviction/patience does get tested when there are sharp market falls like we have seen in the past couple of weeks. The third quarter will provide a lot of trading updates and interim results and I will be making judgements as we go through that period based on business performance/outlook, trying to ignore the market noise. This said, I note that an increasing number of investors, many of whom I have great respect for, have been moving money out of the market recently and into larger cash positions. For now, I am staying fully invested and therefore, it is sensible to assess where the risks (upside and downside) lie and to have a tactical plan in place in order to provide clarity in decision making.

High Volatility
I have one “Highly Speculative” holding (AAZ) and a further five “Speculative” holdings (IQE, MPAC, SPSY, BKS and KAPE). Six out of thirty holdings in the high volatility category is about right for the balance I seek. The problem in my current instance is that these six holdings account for 32.78% weighting which is too high. I am aiming for more like 20% speculative weighting in bull markets and closer to 10% weighting when the bear returns. My personal challenge is that I am excited by the prospects for all of these companies while recognising that any bad news such as a profit warning is likely to be severely punished.

I am going to have to make some critical decisions as these six companies progress through interim results season, hopefully top slicing gains rather than selling because of problems.

I have ten holdings that I classify as high quality (BVXP, GAW, SOM, VCT, APH, XPP, SCH, BOY, AAPL, BMY) accounting for 32.02% weighting and a mix of “Balanced” and “Adventurous”. I regard these holdings as compounders, mostly delivering on all three compounding dimensions. If ever I were to go back to having a focused portfolio, probably eight of these holdings would make the cut in a 10-12 stock portfolio. I am more likely to add to these holdings than reduce but again, I will aim to make judgements based on business performance and outlook as we go through reporting season.

Large Cap Income
I only have four holdings in this low volatility category (GSK, LGEN, DLG and RDSB) accounting for 8.6% weighting. The average yield for these four companies is 6.22%. I should own more of this category but struggle to find holdings that I am comfortable with (having been stopped out of several in the past year). Certainly, I am looking to add to all four of these existing holdings as the quarter unfolds.

Collective Investments
I have a large holding in Fundsmith and smaller weightings in several investment trusts (currently BNKR, EDIN, HFEL and MRCH with a target to buy a couple more). Overall, these collectives currently account for 14.72% weighting. I am looking to increase it to around 20% by year end. There are multiple reasons I like to incorporate collective investments in the portfolio, the most important one being I want to make it easy for my wife in the event of my premature demise. The less morbid reasons include low volatility, increased diversification, internal benchmarking and access to global equities.

The Problem Children
CAML and IQE are both giving some cause for concern and lingering at stop-loss decision points. The former pays a 6%+ dividend and the latter is a pain the backside – the naughty child that you know will come good eventually! I am seriously considering a further top-up of CAML if it remains close to current prices whereas as I have written previously, it is my intention to reduce IQE when the opportunity arises.

The Outliers
That leaves four holdings that I couldn’t find a category for (PMP, JIM, CLIG, IPX), Three of them are held for growth (with decent quality characteristics) and one held for its 6%+ dividend. All are smallcap, medium volatility and medium conviction. They account for 8.18% weighting which is spot on and I don’t anticipate any action with these holdings for the time being, unless the investment thesis changes.

Final Thoughts
I still have not had a takeover in my portfolio (Avesco was the last one in November 2016) nor thankfully, a profit warning (BMS was the last one in August 2016). During this past quarter I dodged at least one major bullet by selling out of XLM on a stop loss the week prior to a profit warning. I am realistic enough to know that both runs will come to an end eventually and then my world will duly be turned into short-term turmoil.

As with football, it is stating the obvious that the game/year is divided into two halves. The question we all want answered is, will the second half be better or worse than the first?

I will see you all on Twitter at 7am for the first of the Q3 RNSs.

Simon (@BrilliantLeader)


Disclosure – As this is a portfolio review, I own all of the shares in this article except Avesco, BMS and XLM. A full breakdown of my current holdings can be viewed here