Portfolio watch

“Don’t tell me what you think: tell me what you are doing!” This, according to the late Jim Slater, is how Sir James Goldsmith was wont to reply when anyone raised the issue of the stock market with him. While punditry is never in short supply, in my experience there is not much to be gained from listening to those who are not engaged in actively managing their own money. This unfortunately includes most of the media, many of whom are prevented by their contracts of employment from taking positions in stocks or funds and few of whom have sufficient wealth to run sizeable portfolios of their own. (That was true in my case too when I started out in financial journalism).

One of our objectives with the Investment Reader is to try and help readers (even at the risk of personal embarrassment) by monitoring and publishing a couple of model portfolios and wish lists that reflect our own holdings and perspective on the markets. The idea is not to encourage emulation, rather to demonstrate commitment. I first started doing this in 2010 with what I call a core funds portfolio, which is made up of ten investment trusts and open-ended funds, all managed by fund managers whose track records – running to at least ten years in most cases –  is long enough to have convinced me that their success is a matter of skill rather than chance (none of which ensures that their success will continue).

In essence the core portfolio pretty much reflects the way that I mange my self-invested personal pension (SIPP), while the second model portfolio, which includes some favourite small cap growth stocks, and is much higher risk, is similar in shape to my ISA.  It is important to make the point that I am a firm believer in what Jack Bogle, the founder of Vanguard, likes to call the Costs Matter Hypothesis, so there is very little turnover in any of the core portfolios.

My experience strongly supports the idea that once you have identified an excellent fund (which can take a lot of research) there has to be a very good argument for changing it for something else. When an outstanding opportunity does come along, however, it pays to make a significant commitment (“waiting for the fat pitch” in Warren Buffett’s phrase). So much the better if you can meet and establish a relationship of trust with the fund manager as well: picking funds successfully is ultimately about backing human beings, and character is just as important as talent when it comes to finding a good one.

In addition to these two core portfolios, for research purposes I also monitor some other illustrative portfolios that are purely designed to keep tabs on how the market is moving. The “cockroach” portfolio, for example, is a simple five asset class portfolio with a long pedigree in investment literature and which in backtesting has proven to protect wealth very effectively in almost every kind of market condition (though the returns are modest in absolute terms). I have also recently added a “value” portfolio to measure how effectively “value” as a style is performing – not very well being the answer – and a cross-section of investment trusts which are on my watchlist as potential purchases.

It is worth making the point that I am a firm believer that most investors with minimal time or inclination to study the markets should use passive funds as portfolio building blocks. I would do that for myself were it nor for the fact that I believe I have the experience (and I hope sufficient expertise) to locate a handful of genuinely exceptional fund managers who can add value over long periods of time through active management.