Pondering the Portfolio

There are a number of different ways in which to analyse a portfolio of shareholdings and each, I'm sure, has its advantages and disadvantages. As I move into a another phase of my life, I'm trying to get a clearer view about my investments, so I thought I had better explore some ways to analyse them. In a few months time, I shall be moving from a situation where most of my income is earned to one where it's completely unearned and much smaller. In proportional terms, my notional income from SG Mega Holdings will thereby assume much greater importance than hitherto. As chairman, CEO, CFO and general factotum of this ragged enterprise, I've taken no salary in the past, but then I've not done a lot of work either. Soon, I shall have to spend more time managing the business (mostly more research) in order to earn the opportunity to take some reward, should it prove necessary.

Day to day, my pension should cover my contribution to the Grano household, but if things get tough I can look for a low paid job somewhere, although I don't know what. I'm not a person driven by work and would not want to go back into a demanding role. Certainly, nothing particularly appeals to me at the moment and, oddly, my interest in retraining as a bra-fitter did not meet with Mrs. G's wholehearted approval. In dire circumstances, another plan would be to relocate away from London and realise some equity on the house but, although this is not ruled out in the long term, neither of us wants to do this in the next 4-5 years. I've just received a flyer from a local estate agency assuring me that they are very interested in selling renovation projects in my area, so I think I know where I must direct my practical energies in the near future.

I thought I'd do some general reviews of my share portfolio in the hope that, by putting down in words my approach to investment, I could see if it made sense both to myself and to others. To begin with, I'm going to look at sectoral allocation. The side bar gives my overall asset allocation, but to my simple mind there are really only two kinds of assets, ones that go up and down and ones that don't. Since I hold no bonds or commoditites, this breaks down into shares versus cash of various sorts and I'm currently split about 50/50. Possibly, I should have aimed to be higher in shares at this point, but I like holding a fair amount of cash for all sorts of reasons, even when I must perforce see its value slowly eroding. Currently, my shares are all listed in the UK, although I am thinking of diversifying abroad, particularly into the USA, but the time is not right, I feel, FX-wise.

There is a certain amount of vagueness concerning sectors. The categories are not objectively defined and most companies either do not fit neatly into them or else fit into more than one. Nevertheless, I find it useful to mentally structure the portfolio this way and, until I actually worked out the proportions, my grasp of the overall balance was actually quite hazy. So, looking at sectors for SGMH, it breaks down roughly as follows: Commodities (4%), Construction (12%), Energy (10%), Financial (15%), Insurance (12%), Leisure (7%), Manufacturing & Distribution (13%), Property (15%), Retail & Food (7%), Telecomms & Utilities (5%).

My first reaction to this is that I have mishandled commodities and energy. After one of the best bull markets in recent times for these sectors, I should perhaps be up to about double of what I have. Even allowing for the fact that I have sold off some shares recently (possibly a bad move) my maximum would not have been above 18%. Well, so much for hindsight, but what of the future? I'm not one for churning the portfolio for quick profits and I like to hold what I perceive to be good businesses for a long time, but I do also like to realise some gains after market exuberance. All the companies I bought in these sectors I still hold (apart from Wellstream which was taken over), but I should have bought deeper and wider, especially in commodities. For now, I'm going to leave these sectors largely alone.

I am slightly surprised to find that I am 27% invested in finance and insurance although that covers a lot of widely differing companies, including my single biggest holding at 6%, namely HSBC. These are just the sort of companies that, as a customer I tend not to like, so maybe there is something revengeful going on there.

Taking a sectoral approach is helpful in the sense that I think one should be mindful of the general areas of business in which one has entrusted one's money, but it is surely no substitute for thinking about the companies that are actually bought. In general, I like to have two or more companies in a sector so that I can compare and contrast the outcomes after a number of years. I'm not sure that that makes a lot of sense in analytical terms (why not just pick the best company?), but it seems to be part of my investment style.