International Portfolio

Strategy

The investments in this portfolio are all traded equities (mainly ETFs tracking a variety of indices) in the US. In this way, the portfolio is diversified and “passive” to the extent that its allocations should not change under practically any circumstance. This reflects the view that markets are “efficient”, which means that there are few opportunities to actively pick out winners. This contrasts with the approach taken in the Malaysian portfolio for several reasons:

1. These counters are traded in the US and hence heavily analysed already (less likely to be finding hidden gems there).

2. The universe of assets are a lot wider. Because it’s possible to invest in bond funds which give a pretty decent return (over 7%) as well as commodities (which are a useful hedge against inflation), it’s possible to blend them with stocks to achieve a mix which maximises profit and yet minimises losses (the ability to blend assets classes in this way is one of the key requirements to operate an optimal portfolio).

The percentages for each allocation is really an approximation, as there are many different ways to determine this. Every investor will have different weights according to his appetite for risk and reward. For me I determined that I would be happy for the portfolio value to fluctuate by as much as 20%, so I weighted the stocks with 40% of all the money in large cap US and emerging market stocks, on the basis that if there were a market crash and say equities decreased by 50%, I would only lose 20% of my overall portfolio. At the same time, my bonds will continue earning me returns and hopefully even go up to balance against such losses.

Investments

Okay so what are these counters?

1. FDV - this tracks stocks in the S&P which have a good balance sheet (using sophisticated analysis which my company scorecard tests are derived from).

2. EEM - tracks the largest capped international stocks in emerging economics. This gives me access to large international companies (unfortunately there isn’t an index like the above that looks for good value companies for emerging markets yet which is available to the public. If there were I would buy it instead of this.)

3. AGG - tracks a corporate bond fund index. Plain and simple. I am thinking of changing this to something with a higher yield such as LAG which also has a lower expense ratio, but this does give pretty decent returns as is.

4. DBC -tracks a basket of commodities (like oil, wheat, gold etc.). There is ETF which tracks steel at this moment, which would be a great investment for the future, so I’m left with this one.

Rebalancing

In order to keep transaction costs down, I will rebalance every quarter (or half year - or year depending on how it goes!), which means ensuring that if any ETF does exceptionally well, some profit gets taken and the proceeds used to buy some more shares of other ETFs which have not done so well so that the overall allocation percentage is maintained. In that regard, the exercise is automatic and doesn’t require making any bets about this company or that company (this is why these types of portfolios are called the lazyman’s portfolio).

Malaysian Portfolio

This is a different kettle of fish altogether. I treat this as an actively managed account which makes up anwhere between 10-20% of my total investment capital (taking into account the International Portfolio).

As it’s difficult to achieve true diversification within only equities, I will not be implementing anything more than a rudimentary asset allocation technique.

The main thing here is to pick well-managed companies (i.e. companies that score 9 or above on my Company Scorecard with a leading PE ratio of less than 10) going to for cheap and then supplementing that with slightly higher risk growth stocks (which still score more than 9, but which demonstrate great annual growth in sales revenues and profit margin). So in short, I am picking a variety of companies with decent fundamentals year-on-year (I don’t trade frequently enough to look at anything on a quarterly basis). This should give me plenty of time to continue blogging and researching companies (which to be honest, I love doing more than trading).

The biggest enemy in any portfolio is commissions and this is no exception. So the less I mess around here the better. I am currently going to for a couple of blue chips and smaller counters.

Hold on - didn’t you just say that studies have shown that technical or fundamental analysis does not outperform the market in the long run?

Yes! And this a a fact identified by William Bernstein in his book “The Intelligent Asset Allocator”. However, this analysis was conducted on stocks listed on the main board in the US, which faces much greater coverage. Well known stocks which are traded internationally have scores of analysts pouring over them and prices assimilate new information quickly.  This is not the case in Malaysia where liquidity is too low for large hedge funds and mutual funds to trade and coverage of the market is scant. This means that it takes time for information to be assimilated and makes Malaysia a place where it is much easier to identify temporarily undervalued stocks.