Portfolio Construction
Portfolio Construction
Special, Super, Sustainable and the Statistical Portfolio
The way to understand our portfolio construction is that we aim to construct a portfolio that is diversified across
Different geographic region
Different industry sectors
Different time period
Different investment maturities
Different investment strategies
We will touch a tad more on investment strategy. Investment strategies should provide some smoothing of investment returns as strategy goes in and out of style. While we are comfortable with volatile return, we recognise that most investors would prefer a smoother ride and that is what we are trying to achieve.
The aim of the portfolio is to compound at 24% per year. With returns from the stock market at all time high, we think it is a tough mountain to scale.
The portfolio will be maintain for at least 5 years from 2020 and we will consolidate and review the results.
Each of the strategy is funded with SGD 250,000 (live portfolio) at different period during 2020 and 2021. The returns highlighted would be on a compounded basis.
Our aim is to generate absolute returns. For investors who are interested in relative returns, we would be comparing our return versus the MSCI World, MSCI Emerging and MSCI ACWI index. While it is nice to know how we compare relatively to the world, we are not in the least interested in how we perform. The reason is that we are buying companies may or may not be part of the index and the thing that matter is the valuation which we bought these companies and their business performance.
Special Strategy (Special Situation)
Audience: Professional investors
Type: Companies going through possible Special Situation
Weighting: Up to USD 100,000
Our special situation investing style relies on imagination (aka human). That also means that the investment could be pretty much anything under the universe where an event is happening (spinoff, margin improvement, etc.). There is also a timeline for that event to happen which should result in the re-evaluation of the company triggering a share price increase.
Once the share price is up or the event had played out, we are out with our returns.
This position may grow into a unrecognised growth position and we may just swap them into the Super Portfolio.
Statistical Strategy (Graham type)
Audience: Mainly for the retail investors
Type: Mainly small cap and nano-cap
Weighting: Tiny - small (around USD 10,000)
Alright, we know that we had indicated that we will stay out of graham type situation. But we continue to buy and sell them… It is too ingrained in us not to do so. We will hear of an idea, look at the balance sheet and immediately knew that is a bargain. Sometimes, the position is being flag in our computer system and we knew we need to take action!
What we are doing here differently is that a catalyst is required going forward. The catalyst could be new shareholders, buyback, etc. The catalyst may not re-rate the price but it provide us some comfort in maintaining a position we may not know very well.
Once the market re-rate for any reason, or maybe just that the market had decided to go up, we will be out of the position. The position may grow into a unrecognised growth position and we may just swap them into the Super Portfolio.
Super Strategy (Unrecognised Growth)
Audience: For all
Type: All type
Weighting: All sizes up to USD 100,000
Unrecognised growth will be base on the company which is supposed to be growing fast but is unrecognised by the market. They could be loss making, have a huge TAM, etc. They have something which is within our mental tookkit that we can understand.
Akin this to VC investing in the stock market. We had worked with many startups in the past and hope to put that knowledge to work. The buying and holding and praying and finally selling if growth did not materialise is what this strategy espouses.
Sustainable Strategy (Recognised Growth)
Audience: For all
Type: All type
Weighting: All sizes up to USD 100,000
Recognised growth will be well established companies which we can see into the future with. They are names which everyone knows and should be fairly valued. This portfolio should generate adequate returns over the long term as winning companies continue to win.
This should look familiar to what FundSmith is doing. Buying good companies at reasonable valuation and hold forever. If something better comes along, we will exit our least desirable position to buy that.
We had find the writing process pretty useful so far. The discipline to document our thoughts in a systematic manner is invaluable.
For readers, we will be highlighting the type of concept with the naming of
Special,
Statistical
Super
Sustainable
as the header of the newsletter.
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