The second half of 2019 has probably been the most uncomfortable I have ever felt as an investor. Firstly, the stakes are high – I invest for a living now and sequencing risk (losing money at the beginning of drawdown) can seriously damage a retirement portfolio. Secondly, I have been carrying a c30% weighting in my largest holding (AAZ) and while this weighting is due to it being a big winner, it doesn’t alter the fact that I have been carrying a large, concentrated risk in a single holding. And finally of course, we have had an extraordinary period of political uncertainty both in the UK and globally.
Put together, I have been right at the limit of my tolerance for risk from the summer onwards. While I have mainly felt the risks were under control (and I will write more about that in my annual review), I have also known that one wrong move, one major political event or a black swan moment could send my portfolio into a tailspin.
The risks were highest this week with the “Brexmas Election” (who thinks of this stuff?). I spent a chunk of last weekend scenario planning or rather updating the scenario plans I have been using since it became clear an election was coming. I had a plan for each general election scenario alongside the probability of it prevailing. For example, in the event of a Labour majority, I had identified 8 portfolio holdings that would be immune and the rest would need to be sold BUT it was the least likely scenario and so I didn’t feel the need to act in advance, although I would have been able to act very quickly if that scenario began to emerge during the week. The most likely scenario that emerged was a Conservative majority, so I decided to move towards executing that scenario.
Clearly, making a play on an unknown outcome that is being watched and traded by the whole investment community is going to carry risk. The only way I could justify to myself making this play was to reduce risk elsewhere in the portfolio. Mainly, I focused on reducing the AAZ weighting (from 31% to 22% weighting) although it took several days for me to do so without moving the price against myself and I also exited DOTD. It was my lowest conviction “high-flyer” holding, a new position and easy to let go.
The other consideration when deploying funds from AAZ is that it is currently responsible for around a quarter of my annual dividends and as I rely on dividends as my “salary”, it was important to deploy the funds with dividends in mind. I also wanted to be buying for the long-term – that is, this was not a pure trading play for me but rather, an opportunity to buy a stake in high quality companies at value prices. History will be the judge of how successful my selections prove to be but here is what I bought.
New Holdings: RECI (purely for income diversification), ULS (a very interesting Quality/Value microcap with 100% UK focus) and AMO (this was a re-buy, having been spooked out of my holding a week earlier).
Adds to Existing Holdings: VNET, RMV, MONY (subsequently sold today, so not very long-term this one), HHI, IUKD, HFEL, PSN, SSON, TRIG, IGG and PAY.
The rest, as they say, is history. Or at least, the first part of this plan has worked a treat – all of these holdings are up today, some quite dramatically, now that we know the Conservatives have a large majority. I’m sure UK PLC has many challenges ahead and it remains to be seen how my holdings, many of them recent portfolio additions, work out over the medium and long-term. But for now, I am happy to reflect on a job well done. My exposure to AAZ has been reduced to a level I am comfortable carrying into the new year and the profits have funded a portfolio I am very comfortable with for the year ahead (as ever, this will be a process of continuous assessment).
My overwhelming emotion is one of relief at having successfully navigated the portfolio through a very challenging year. I shouldn’t speak too soon because we are only a Trump tweet away from who knows what. But that aside, I am now looking forward to the prospect of a Santa rally for UK stocks, driven by domestic and foreign funds returning to the market and I have a hunch that this might also unlock quite a few M&A deals next year.
Hopefully, a “Phew” this week will turn into a “Woo-Hoo” next week. Until then, I wish you all a wonderful weekend.