Portfolio planning is like writing a book

James Sullivan

James Sullivan

Within our industry it’s both common practice and politically correct to proclaim oneself as a ‘long term investor’, but in a world that has become more short-termist in all aspects of life, is it right that we continue to trot out this proclamation.

When constructing a portfolio, my belief is it’s a little like writing a book - one needs a start, a middle and an end.

In other words, one needs a blend of short, medium and long-term strategies that evolve, mature and are recycled, to ensure cumulative performance of the portfolio is smoother than if all investments are initiated with a long-term horizon.

To put this into context, our ‘start’ at present would include our short duration bonds, a blend of both investment grade and high yield, sourced from a blend of active and passive strategies.

The duration is long enough to allow us to collect some useful coupons to keep the portfolio ticking over at ground level, whilst being short enough to avoid the worst of the tightening draught caused by the FED or any other central bank.

The relative activeness of short duration high yield isn’t what it once was, but remains a valid investment concept in the right mandate.

Our ‘medium’ at present comprise of our equity income strategies - pursuing stocks and sectors that offer visibility on dividend sustainability and potential growth.

This would exclude much of the resources sector due to the questionable dividend cover.

Our second strategy in this area of the portfolio would be our ‘value’ theme - sectors that are perceived to be valued below the broader market, yet remain good businesses in the wrong cycle.  

Both these strategies will carry equity like sensitivity, but whether it be the sustainable coupon, or the lower starting valuation, the characteristics of these themes lead us to believe we have a good chance over the medium term of generating value for unit holders.

The ‘end’ which is arguably the more exciting area of the portfolio would include our South American and ASEAN exposures - areas of the global market that are more susceptible to currency, liquidity and political risk on top of the accepted equity risk.

Nonetheless, the valuations of such markets (equity and currency) are not beyond fair value in our opinion, and given a longer time frame, stand a wonderful chance of adding meaningful value.

In addition, one could include the developed market small and micro-cap equity theme where value can often go unrecognised for years (partly due to lack of analyst coverage) before compensating investors for that level of patience.

There are many ways in which one can create a portfolio, and rarely is there an obvious right or wrong way.

However, by blending investment strategies with various time horizons (and being able to shift the emphasis on each of the time horizon components subject to the environment), for us, feels sensible.