Jesse’s Portfolio Update, Q4 2021

2021 was one of those years where it was harder to lose money than make money.

Over in the US, which is the worlds largest share market, 88% of constituents in the S&P 500 generated a positive return. The index itself hit 70 new closing highs, second only to 1995! 🤯 Down under, our S&P/ASX 200 market returned a very respectable 11% for the year. Applying the rule of 72, an 11% return P.A translates to doubling of capital every 6.5 years! Not bad at all.

Sharemarkets have been aided by shareholder-friendly policy over the past two years. However, it seems interest rates could be on the rise in 2022 to curb inflation, which rose to a concerning 7% YOY in the US in Dec 2021′. The last time inflation soared to those heights was in June of 1982!

Throw in the tapering of pandemic triggered stimulus, and the outlook for the share market seems to look bleaker. On the flip side, Analysts expect aggregate earnings per share for companies in the S&P 500 to increase just over 9% in 2022 to back up the stonking 26.2% increase in 2021, which may result in a P/E re-rating.

As Ray Dalio said, “those who live by the crystal ball wind up eating glass”. To heed Mr Dalio’s advice, I’ll cut the forecasting and let time do its thing!

Portfolio Strategy 

For new readers, I like to sum up my share market investing strategy into 3 words ‘Core and Satellite’. The core portfolio consists of low-cost broad-based index-tracking ETFs, and the satellite portfolio consists of high-conviction investments.

For housekeeping purposes, please note that this article is strictly referring to the cash, shares, and crypto that I hold outside super. It also excludes cash savings put aside for emergencies, travel etc that I won’t be investing. I’d highly recommend heading over to my Q4 2020 Portfolio Review to get a stronger grasp on my approach if you’re interested.

During Q4 21′, I moved closer to my target of growing my core portfolio of index-tracking ETFs to 70% of my overall portfolio. In Q4, the core portfolio increased from 33.7% in Q2, and 38.7% in Q3 to 45.1% by the time the year was out. Essentially I’d like to continue increasing my allocation to broad-based index-tracking ETFs to:

  • Mitigate any concentration risk by providing ballast to my overall portfolio should a satellite holding be troublesome;
  • According the the 2021 SPIVA Report, 86% of Aussie Fund Managers have underperformed the index over a 15 year period. If the so called ‘experts’ are struggling, then what does that mean for retail investors?;
  • I’m struggling to find any companies on my watch-list that are reasonably priced. Although that look’s like it might be changing shortly!
  • With a lack of high-conviction ideas, my compounding machine needs to keep turning. Low cost-index tracking ETFs are as good a fuel as any!
Figure #1 – Portfolio Summary

Cash, or no cash?

My cash position should naturally reduce to my target of 5-10% over time without me deploying any of it into the market because I pay myself first and automatically invest the same percentage of my monthly income in passive index-tracking ETFs.

There is a school of thought that suggests being fully invested 100% of the time is a more favourable strategy to avoid ‘cash drag’ on your portfolio given the market will likely rise over the long term. While I agree with that sentiment logically, psychologically I prefer to keep a small percentage of cash on the sidelines to capitalise on market pullbacks. The January 22′ Nasdaq correction is a case in point!

The flip side of that argument is simply that the markets can, and have risen for several years in a row. Between 2000-2021, the S&P 500 only endured 6 down years, and notched up 5 years of consecutive growth twice! With this in mind, the investor who remained fully invested, and invested regularly would have been handsomely rewarded.

Core Portfolio

Q4 was another quarter of not much for the Core Portfolio, which is exactly the way I like it! As Paul Samuelson once said, “Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.”

Over the period I continued dollar-cost averaging into passive broad-based index-tracking ETFs, specifically VGS in Oct & Dec 21′, and NDQ in November.

Figure #2 – Core Portfolio

2022 will also welcome a new ETF into the core portfolio. A200! I haven’t always been a big fan of owning Australian focussed ETFs largely to avoid the dangers of ‘home bias’. Don’t get me wrong, I can appreciate what our biggest and best companies have achieved, especially those kicking goals in the health care space. The reality is, the Aussie market is a very small fish, a very large pond (approximately 2% of global sharemarket value).

On the flip side, the ASX 200 has performed very well historically, which is why I’m comfortable holding it as a small part of my internationally diversified core portfolio.

Why did I go for A200 over VAS or IOZ?

You can read my review of A200 here to see why I prefer it over alternatives like VAS and IOZ. 

Jesse’s DCF Cycle

Recently I decided to take my dollar cost averaging cycle to the next level with the table below! Although this simple table doesn’t seem overly sophisticated, I used to have this cycle written on the back of an envelope. The only way was up from there!

Dollar-cost averaging helps to remove part of the emotion from investing. By making the commitment to invest monthly come rain, hail or shine, questions, ‘like is now a good time to buy?’ aren’t relevant.

As Captain FI said when adopting a DCA strategy, “it’s never there’s never a good time to buy, and it’s never a good time to sell. It’s also never a bad time to buy, and never a bad time to sell.”

Jan 22Feb 22 Mar 22April 22
May 22June 22 July 22Aug 22
Sept 22Oct 22Nov 22Dec 22
Table #1 – Jesses Core Dollar Cost Averaging Cycle

Satellite Portfolio

My satellite portfolio is designed to house my highest conviction stock picks that I believe will outperform the ASX 200 Large Cap Index over the long term.  I’m well aware that history says I’m playing a losing game by trying to pick winners. But hey, I can be a real sucker for punishment at the best of times!

Some people like camping, others like roller skating, me? I like digging into business models, MOATs, and financial statements. Weird, I know. The satellite portfolio allows me to scratch that itch while my core portfolio chips away in the background earning the market return. Over the long term, I intend for my high conviction satellite positions to supercharge my returns.

What’s Changed This Quarter?

In short, not much! Apart from increasing my position in slightly MFG, I haven’t opened any new or closed existing positions.

In terms of my existing holdings, CSLs acquisition of Vifor Pharacuiticals (read my thoughts here) was certainly the biggest piece of news. Other than that, the news was on the quieter side, which is always fine with me. I’m a firm believer that the best stocks to own are the ones where you feel comfortable only receiving an update on the company once a year. Examples of such companies that I hold include Visa, Ferrari and Baby Bunting.

Figure #3 – Satellite Portfolio

Satellite Portfolio: What I’ve Bought

Bought: Magellan Financial Group (ASX:MFG)

I commenced building a small position in Magellan Financial in Q3 2021 and discussed my thesis in more detail in my Q3 Portfolio Review.

Since then, Magellan’s share price has taken a further battering following a string of negative news. In a nutshell, Magellan announced that their CEO was stepping down unexpectedly, CIO Hamish Douglass split from his long term wife, and Magallen lost their largest institutional mandate which accounted for 12% of the firm’s revenue and a $23Bn reduction of FUM. All within one month.

Figure #4 – MFG Share Price- Jan 17′ – 22′

In my Q3 Portfolio Review, I mentioned three key risks I was aware of prior to making my investment in MFG. Sure enough, 2 of those 3 risks have materialised into issues.

  • Magellan’s fund performance does not improve, this could result in material FUM outflows – Materialised. $23Bn St James’s place Mandate lost. Additional outflows also incurred.
  • Key personel leave Magellan, this could result in reputational damage – Materialised. Unexpected step down of CEO Brett Cairns.
  • Magellans Capital Partners investments do not materialise into profitibale ventures, this could continue to drag down earnings over the medium term – To be confirmed in Magellans FY 22 1st half results.

When the facts Change, I Change My Mind

The reason I’m continuing to hold Magellan is that fundamentally, I don’t think the story has changed. As Hamish mentioned in his Dec 21′ video update to shareholders, Magellan has no intention of changing their global equities strategy (their largest fund) and reiterated the fund’s north star. “To achieve attractive risk-adjusted returns over the medium to long term while reducing the risk of permanent capital loss.” I should also point out that while the fund has underperformed its benchmark recently, it has continued to achieve its target return of 9% (after fees) over the economic cycle.

Without much good news to go off, attempting to pick the bottom here wouldn’t be too dissimilar attempting to catch a falling knife. Instead, I’d prefer to add to Magellan following a positive announcement that demonstrates signs of a turnaround. Any significant insider on market buying would also tempt me to add more. They’re only buying for one reason!

For now, I’m sitting tight! Although an 11% dividend yield, complimented by a P.E of 8 is an awfully tempting offer from Mr Market.

Satellite Portfolio: What I’ve Sold

No positions sold for the quarter. As they say, I remain slow to buy, and even slower to sell.

Companies I’m Interested In

1. Dominos Pizza

I’ve ignored Don Meijs Dominos pizza for too long simply because of its eye-watering valuation. Impressively, Dominoes have continued to justify their valuation as a result of their rampant growth. Who would have thought they could have sold pizza to the Japanese? Clearly not me. It’s about time I dug deeper into one of Australia’s great growth businesses. If you’re interested in learning more about Dominos, listen to this podcast with Dominos CEO Don Meij. I never thought the Pizza business could be so intriguing!

2. Adobe

Adobe passes with flying colours on every key financial metric’s I measure when assessing a company’s financial health. Their impressive software like PDF and Photoshop is so deeply entrenched throughout enterprises that it’s unlikely their recurring revenue SAAS based model will stop delivering monstrous profits any time soon.

2022 Portfolio Goals

Considering I can’t forecast what the market will do over the next twelve months, I’ve decided to keep this year’s portfolio goals within the confines of my control.

Goal #1 – Continue dollar-cost averaging into my core ETF portfolio montly (refer to table #1)

This one shouldn’t be too hard given much of my investing is automated.

Goal #2 – Keep an eye out for any exciting opportunities for the satellite portfolio. 

I’ll achieve this through staying informed with financial news, and building on my watchlist of investable companies.

Goal # 3 – Increase my monthly investment amount by 10%. 

I aim to achieve this through income growth from a) my 9-5, and b) modest income generated through The Money Pal.

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About The Author – Jesse
Hi, I’m Jesse, but you can call me Jes for short. My passion is simple, I’m on a mission to make the world of investing easily understood by removing the ‘too hard basket’ stigma that surrounds it.

P.S. I’d love to meet you on Twitter or Insta or both.

Disclaimer: The information provided in this article is general in nature only and does not constitute personal financial advice. The author is NOT a financial advisor and does not hold an AFSL. You should also consider seeking the advice of an investment advisor who holds an Australian financial services (AFS) licence or is a representative of an AFS licensee. Be sure to work with someone who understands your investment objectives and tolerance for risk. Your investment advisor should understand these products, be able to explain whether or how they fit with your objectives, and be willing to monitor your investment alongside you.

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