2023-10-10 13:30:19 ET
Summary
- I am returning from a break from writing articles to pursue the CFA designation, now I will focus on fixing my portfolio.
- The main issues with my portfolio are balance and the need for a review of current investments based on the 7 most important trends of the century.
- Biases towards certain stocks, including AMD, OTGLY, and APPS, need to be addressed.
After a two-year hiatus to pursue the CFA designation, I am back. In my first article, I will share my plan for repairing my equity portfolio with what I have learned.
To do this, we will review my current portfolio, issues, key objectives, risks, and how I plan to address these factors in future articles.
My Current Portfolio
*Percentages rounded (My Charts)
Structural Issues
My portfolio is heavily concentrated on AMD and NVIDIA . This is both an issue and a consequence. The problem is that of additional risk, a concentrated position unhedged, and the symptom of a lack of profit-taking points or rebalancing policies and risk control.
Although many securities are in the portfolio, Technology is the portfolio's driving force, implying a high correlation between the stocks. So, the portfolio is less diversified than it appears to be.
Some sectors are missing from the portfolio. Of the 11 industries in the S&P, only seven are included in my portfolio. This is not necessarily a bad thing, but it can be depending on objectives and diversification.
The common saying "Every portfolio is perfectly designed to obtain the results it has gotten." So, let us also compare my portfolio's results and compare them to the objectives it was supposed to meet.
Return (YTD) | Beta* | Alpha** | ||
My Portfolio | 48.14% | 1.62 | 30.57% | |
Market ( VOO ) | 12.39% | 1 | ||
Delta | 35.75% | 0.62 | ||
*Calculated YTD with daily closing price**Calculated with a 4.09% risk-free YTD return |
While the results are not terrible by any metric, my portfolio had no liquidity constraints, a long-term horizon, no dividend requirement, and a high ability and willingness to take risks. None of the articles are meant to be taken as investment advice. The idea is to provide context for investors to make more informed decisions. Stock inclusion in a portfolio depends on how it fits into the portfolio and each investor's objectives and risk tolerance.
In future articles, I will be building dummy portfolios to exemplify how this process changes depending on the objectives and constraints of the portfolio.
The portfolio objective is to take advantage of what I believe will be the main trends of the century.
Trends of the XXI Century
1. Technological Convergence Across Sectors: The advent of transformative technologies, such as AI and high-speed communications, erodes traditional sector boundaries. The global proliferation of the Internet further accelerates this trend, fostering interconnectedness across previously distinct domains.
2. Data Dilemma in IT: The IT landscape faces a pivotal challenge in balancing privacy concerns against the invaluable benefits of data utilization. Real-time processing complexities loom ahead, requiring adept solutions, while the escalating significance of cybersecurity adds another layer of urgency.
3. Integration of Virtual and Physical Realms: The convergence of virtual and physical spaces will redefine how we perceive work, leisure, travel, and transportation. Innovative solutions will emerge, revolutionizing mass transit for enhanced speed, safety, enjoyment, and environmental sustainability.
4. Transformative Shifts in Demographics and Healthcare: As demographic conditions evolve, the healthcare industry undergoes a radical transformation propelled by technological and data-driven innovations. Anticipated shifts in global population growth , distinct from the trends of the 20th century, will usher in new economic conditions and trends.
5. Sustainability Challenges and Energy Dynamics: Escalating demands on energy consumption prompts reevaluating sustainability practices. Innovations in production materials, waste disposal, and transformation processes are paramount - agile manufacturing technologies, reshaping how products are created, and redefining scalability limits.
6. Transformation in Infrastructure Industry: The infrastructure sector is on the brink of a significant transformation, witnessing the emergence of novel business models, products, and services. The traditional reliance on concrete and steel will give way to a more diversified range of materials, reflecting technological advancements.
7. Increase of Entropy: Societal disruptions, including pandemics, intensified climate change impacts, and migration, signify a new era characterized by new volatility patterns and correlations.
Analysis by sector
Considering these trends and the objectives, these sectors should be adjusted.
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Communication Services: (22% of portfolio)- Overweight. Stocks in the sector: DUOL , GOOG , GOOGL , META , NFLX , UBER . This is an excellent example of how tech blurs boundaries between sectors; communication and tech overlap significantly. My portfolio relies only on META to profit from the virtuality and flexibility of work and how hybrid and remote work will change communication needs and business models; this needs to be revisited.
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Consumer Discretionary: (15% of portfolio) - Trim hedges. Stocks in the sector: ABNB , AMZN , APPS , OTGLY , MELI , YETI . The sustainability concerns of the consumers will be more present, and consumers will have a higher expectation of sustainable production. Companies that can harness this trend and technology innovations to customize and scale their operations or leverage companies that do will outperform. Also, the shift in demographics, like the reduction of fertility rate and the increase of DINK (Double Income, No Kids) families, will increase disposable income, which should increase the TAM of the sector.
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Consumer Staples: (0% of portfolio) - Covered. Exposure to the sector is well covered outside my equity portfolio. I will write little or none at all about the sector as it may pose a conflict of interest due to my work.
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Energy: (3% of portfolio) - Underappreciated. Stocks in the sector: ASPN . The energy sector is embarrassingly undercovered. Sustainability is one of the most important trends, and it will directly impact the sector. Exposure to the sector will also reduce risk as energy prices negatively affect almost all other sectors.
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Financials: (0% of portfolio) - Underappreciated. The financial sector has fingers in many pies. From the proper funding of complex sustainability projects, decentralized finance, and advancements in cryptography to the impact of the change in ways of working and life expectancy will affect mortgages, credit card debt, and asset ownership.
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Health Care: (3% of portfolio) - Improve coverage. Stocks in the sector: CRSP , DXCM , TLRY . The healthcare innovations arising are staggering, and we saw a taste of it with the rapid development of the COVID-19 vaccine. While it could be perceived as alarmist or pessimistic to consider another pandemic in the century, an increase in population mobility, climate change, and the continuous reminder from doctors of the resistance of bacteria to antibiotics is reason enough to be concerned. Besides being a good hedge against black swan events, health care cost typically increases with age, and the demographic shift suggests a significant increase in older adults, especially in developed countries.
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Information Technology: (44% of portfolio) - Hedge or Reduce. Stocks in the sector: AMD , NVDA . There is nothing wrong with overweighting overperforming securities, and Nvidia and AMD have had a stellar run this year. However, past performance does not indicate future results, so an update on the future of these companies is required, as well as the risks that the sector faces.
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Real Estate: (0% of portfolio) - Covered. Exposure to the sector is well covered outside my equity portfolio, so it is unlikely that I will cover it in future articles.
- Industrials: (7% of portfolio) - Covered but not optimized. Stocks in the sector: FLR . The sector is covered, but it is not taking advantage of how the construction industry is changing construction. Techniques for smart manufacturing and new production and construction methods are changing rapidly, and new key players will emerge.
- Materials: (7% of portfolio) - Covered but not optimized. Stocks in the sector : FSI . Besides new materials developed, many agriculture stocks fall under this industry, and how we produce and distribute food will change with technological innovations, and climate change will increase its importance. An interesting example is the tomato export business in Iceland. While not as substantial as a percentage of world exports, the growth of tomatoes in adverse climate conditions using green tech could be an example of future industry trends that will emerge and require inclusion in the portfolio.
- Utilities: (0% of portfolio) - Coverage to be defined. The sector is correlated to the energy industry, and the sustainability trend should impact how the sector develops. However, historically, the sector performance is lacking, and many of the sector market is shifting to others.
Conclusions
There is much to do, from updating return and risk expectations of key stocks in the portfolio, AMD, NVIDIA, APPS, and ASPN. To find and evaluate new stocks that reflect the sectors and key trends of the century. Throughout the articles, I will revamp my valuation methodology and parameters and establish and explain risk control measures and profit-taking policies.
In this new chapter, please feel free to share insights, comments, and recommendations. Your perspectives enrich the ongoing discussion about portfolio optimization. Looking ahead, I welcome suggestions for future articles. Whether exploring specific sectors, delving into market trends, or addressing concerns, your input will shape upcoming content.
Disclaimer: The content provided is for informational purposes only and is not investment advice. Readers should conduct their own research and due diligence before making investment decisions, considering their circumstances and portfolio objectives.
For further details see:
Portfolio Comeback: My Plan For Getting Back On Track