Education

Advanced Portfolio Skills – Strategic Reviews, and why you might need one

In this article, which of necessity is a longer read (and for that reason will come as 2 parts), I will address the need to make portfolio changes at the very highest level – to actually refocus the basic asset allocation that I encourage investors to have as their portfolio’s very foundation.  I hope all readers have a note somewhere of what they wanted to do in terms of asset selections when they built or last reviewed their portfolios.

Although it is appropriate to call asset allocation a foundation, it cannot be set in stone.  It might better be described as the ‘standing orders’, always there to guide us and identify out of order decisions but still requiring a rewrite once in a while.

Readers will be familiar with the analogy I use that suggests that portfolio construction and maintenance is rather like gardening.  This works well as an analogy for asset allocation and fund selection.

At a practical level, we ought to remember that like a good gardener: 

we need something that performs reliably in all seasons and accept that means that: not everything is ‘in bloom’ at once;

in severe weather conditions nothing thrives but we ought to have invested in survivors that will recover strongly when the sun comes out;

we won’t be bulldozing the whole thing and replanting from scratch;

some things grow rather more rapidly than we expect and need to be cut back, others are slow developers that require years to reward our patience, some less than exciting selections are good for covering a lot of ground and don’t need much attention.

And so on….

Most of you will now have a good knowledge of setting a high-level asset allocation and how that helps with volatility management as well as researching funds, generating factual review data and generally keeping on top of portfolio housekeeping.  That is like doing the original landscaping and planting plan, which will be difficult to change once the plants are in and have started growing.

Gardeners do however have to deal with semi-permanent changes in seasonal weather patterns and that can require some serious rethinking about the garden layout and stock of plants. Investors might occasionally need to do the same.

Recognising the need for a major long term portfolio shift requires skills that I do not teach in my progressive course, simply because I have until now not really worked out how to convey what amounts, in my case, to a combination of some slighly relevant specialist education and more importantly, many years of experience.

I am talking about how to detect that the permanent economic or ‘macro’ climate has begun to change and then to react to that by making some strategic changes.   In other words, doing what John Maynard Keynes was talking about when he said that ‘when the facts change, I change my mind’.

By this I mean more than just banking profits or moving out of a sector that has done really well, or even dumping a fund that was a poor choice with hindsight.  I would hope that you have by now absorbed the message that such actions are necessary, and it is more than likely you now have actual experience of such tactical changes.

I am now referring to something that in gardening terms is more like global warming – a permanent change in the climate in which we invest that might mean some of our original plans, made when times were different, need a major refresh.  In most cases, these changes will not have been foreseeable, and we will likely only notice them a while after they have begun. 

Reacting to the changes too late, or not at all, could be disastrous for portfolio performance. 

To give a topical example what I am thinking about, I would draw your attention to the investment industry way of defining ‘emerging markets’ and a recently recurring suggestion that this sector’s inclusion as a high level asset allocation decision may now be inappropriate, because of issues with Russia, the size of the Indian economy and potential over-valuation of Indian shares, the apparent missteps that have been made by the Chinese Communist Party, the maturity of stock markets in Korea and other Asia Pacific countries and so on. 

In summary, does one now want to think of emerging markets, as they have classically been defined, as an asset class like one would North America or the UK? Or is that definition well past its sell-by date? It is certainly hard to justify making a fixed allocation to Emerging Markets without some deeper thinking about what one would actually end up owning. That is a new problem and requires a rethink of a high level asset allocation mix that has a fixed percentage allocated to the sector based on what it used to mean.

Another historic example of a major change that would have justified major strategy tweaks was Brexit, or more broadly the politics in the UK around Brexit and the functioning of the UK ruling political party before and after that event. I am confident that historians will look back on the last decade as at least an interesting case study in the history of Great Britain!

A normal default decision to allocate say 20% or more of a UK investor’s portfolio to UK listed shares would have been seriously imprudent 5 or 6 years back, but going overweight in the UK made sense once the worst of the damage had been done (arguably after the Truss/Kwarteng debacle). In that case, there was a strong case for avoiding what might be seen as a core asset allocation, but only temporarily. So two major decisions had to be made – to avoid the UK and then to fill that asset bucket back up, maybe even finding a bigger bucket!

In this article, I am going to attempt to offer tips on learning to use a systematic approach to conducting high level strategic views of your portfolio, reassessing the ongoing suitability of the strategic decisions you made when you set it up and revising such decisions when you are confident that something major has changed..

Stage 1 – become familiar with the assessment framework you will need (collecting your tools)

I was taught a long time ago that Rudyard Kipling’s ‘friends’, the main question words of ‘who, what, why and when (with ‘how’ following up)’ are the key to constructing a procedure to deal with a stated objective, but that is jumping the gun a little.  The first thing we must always do is to define the objective in such a specific way that we will know what work we need to do and then if we have succeeded or not later on.

I would propose this objective, or something like it:

To complete a formal assessment of our portfolio design at a high level so as to check that it still seems appropriate, after spending some time thinking about what is different in the financial, political and economic world since we last set our strategic goals;  then making logical changes that improve the prospect of future returns without altering the level of risk we have decided to accept, but allowing for the new information we have discovered

The work framework for addressing that objective will need to include these thinking components:

• Using the obvious questioning approach already mentioned, for example, as a start, how will we know what has changed, what is it that matters, why has it changed, how much might it impact our investments and so on?  Where is our information to answer these questions coming from? This can be thought of as a funneling approach, with any number of questions and many answers eventually getting sorted and filtered, resulting in a few key recurring focuses worthy of our attention.
• With access to vast amounts of data via the internet and the ability to use generative AI to question that inconceivably large data resource, we do these days have some help on hand, but we need to know what precise questions to ask.  If we cannot answer the starting question, being what has changed, we won’t really be able to do any more useful work. It may require a lot of thinking time (perhaps accumulating in bits and pieces over a period) to actually be clear on that.
• In practice, although the assessment itself might be periodic, maybe only annual, our knowledge of the context (and thus our awareness of change) will be all the better if we actually are continuously aware of what is happening in and around the investment world, so our framework ought to include continuous absorption of at least some basic relevant data from news sources that we like to or ought to consume, be they printed, audible or on-line. This is something that maybe not all my readers have dedicated their valuable time to in the past.
• A necessary process that may be the most difficult for investors with no formal training in business studies or personal business experience (I think all my subscribers have the latter at least), is working out the implications of the news.  Of course, I do my best to help with that by posting comments and information all the time and by having one-to-one on-line meetings with most readers on a regular basis. However, I won’t be around for ever!

To summarise, this more sophisticated review work can be done well if we have the need to do it at the back of our minds all the time, adopt an inquisitive stance with whatever news flow we choose to consume and have our senses tuned to noticing long term changes. 

I appreciate of course that specialised experience is a huge asset in taking on this task, but one can acquire distilled experience from an old hand! I will do my best to pass some of it on.

Stage 2 – collecting data and avoiding ‘noise’.

In this section, I will offer some pointers as to where the data that allows one to detect major changes in the investment climate comes from. 

I will add some (partial, to keep the article to a modest length) guidance as to what to do with that data, based on my long experience. 

As one can easily tell when using generative AI tools like Microsoft’s Copilot, having an inconceivably large bank of data and massive data processing power has the potential to yield utterly useless answers.  To sermonize a little from the Old Testament, accumulating knowledge is one thing, having the wisdom to use it well is rather more of a challenge!

So, how does one sort the ‘wheat from the chaff’? Where do you start looking for it? Here are some suggestions and some Do and Don’t tips. I apologise in advance if at times I am stating what is already obvious to you!

The traditional printed media

There is some useful content in the financial pages of the better newspapers, especially the weekend parts, I believe (I stopped reading print newpapers years ago, but read the internet extracts from the traditional papers often).   The quality will depend on the jounalist and only material from a writer whose by-line is stated with a specialist job title (ideally one who writes for that part of the paper every week) is worthy of your time. Much of the material will be direct recycling of press releases.

One can also read specialist magazines that are marketed to investors and subscribe to investor ‘tip sheets’, although the latter are more likely going to be delivered electronically nowadays.

I subscribe to the international electronic version of The New York Times (a traditional and august media organ), which is very low cost for ‘overseas’ readers and in addition to giving me a full daily news source that is typically 12 hours behind the UK, that allows me to receive one early morning US based news summary bulletin on week days, written for international readers, and the ‘Deal Book’ daily briefing note which is specifically for investors.  At only £2 per week, or the cost of a coffee here, that’s very good value and the coverage is broad and slightly different because it is US East Coast based, perhaps relatively left wing for a US news source.  There are other resources like this available, which can easily be found with help from Google or similar – I am just offering the NYT as an example.

Do:  treat information acquired from such sources as generally ‘lightweight’; remember that many journalists in specialized subjects have careers that rotate them through specialties – this week’s financial journalist may have been last week’s cookery correspondent; recognise that newspapers have biases and are targeted at specific audiences – only The Financial Times is likely to offer truly independent financial commentary in the UK and that’s an expensive paper.

Don’t: believe that quotations from learned persons are the whole story – they will often be out of context and selected to suit the theme that the writer has chosen; think that everyone who works in the investment management industry is an expert – that is no more likely to be true than in any other industry; assume that predictions are reliable – they are guesses;  don’t treat economics as a science in the empirical sense and rely on quotations from economists.

The broadcast media, including the content on the Internet

There is one reason why, for British people at least, this resource is potentially more useful, that reason being the BBC, with its independence from proprietorial interests.

The quality of BBC economics coverage in the daily news is far from perfect but if you have the time to listen to some of the specialised programmes on Radio 4 or via iPlayer, you will be able to absorb much more useful data about what is happening in the world in terms of economic and financial matters, although not in a way specialised for investors. It also tends to be backward looking, but I find it educational and sometimes very relevant.

The format of most programmes is naturally designed for general consumption and so don’t expect too much depth.  The BBC’s coverage of UK and US politics is, in my opinion, worth paying attention to, even if only as a supplement to your preferred partisan source, if you are a newspaper reader.

Although the BBC is attacked for bias from both left and right, it is definitely not a source of propaganda.  Clearly politics and economics are bedfellows at least some of the time, and the Beeb does produce quality output (generally via Radio 4 and in podcasts), that tries to (not always successfully) connect the dots using input from well qualified commentators in business and academia..

There are many other sources of podcasts and video presentations with various levels of expertise, bias and reliability (Apple and Microsoft (MSN) both run news services and portals). An educated and experienced person will generally be able to sort the wheat from the chaff and a trick I use is to briefly take in a variety of viewpoints to distill a ‘most likely’ version of events and the consequences.   There are even internet services that will (for a fee) filter the news and indicate political bias for you.

Subscribing to the Youtube channels commentators who have demonstrable expertise in a global region or sector (like China, or the oil industry for example) can deliver a very easy to access source of up-to-date news.  However, any presenter opinions are only that single person’s point of view – what is useful is that the better Youtubers draw together a range of other reporting and comment, effectively acting as information consolidators. It will take a while before you can decide if a commentaror is objective and has useful expertise, possibly several months.

I often find that I pick up advance hints of changes that might impact my investment decisions while watching or listening to material that is just of general interest, or connected with my leisure preferences. 

For example, I am a car enthusiast and what is happening in the automotive industry is  highly relevant to global economics at the moment with tariffs on electric cars, mined supplies of metals and other rarer elements, fossil fuel demand and so on constantly being discussed.  Companies that on the face of it may not sound like they are directly impacted by motor industry trends may in fact be very dependent on the way the markets for vehicles move forward, like electronic component makers, logistics companies or perhaps more obviously, Australian lithium miners.

Another example of a current topic that ought to on anyone’s radar is the escalation in truly major wars.  Wars consume capital like nothing else. Apart from the actual weapons systems, there is infrastructure damage, release of capital from the state into the private sector (just think how much Russia is spending in ‘bounties’ to new army recruits) and the losses of personal property. 

As a small anecdote, I can tell  you  that secondhand cars where I live are now much more expensive because of the demand coming from Ukraine and that in itself feeds through to car imports to the Baltic States from Western Europe and then on to new cars sales in Germany, France and so on. This may not be a major indicator of economic change but it illustrates the way in which changes one may note in one’s personal life feed through into the bigger global economic picture.

Do:  listen to or watch the business and political news on a daily basis, from several sources if possible; be prepared to extract information that is potentially relevant to investment strategy from media that you are consuming for leisure purposes.

Don’t: fall for slickly put together apparently independent media that is in fact pure propaganda or sales material;  get caught by AI generated material, which can be surprisingly good; assume that the all guests on a well reputed broadcast series do actually know what they are talking about; think that DIY investors can ignore the news and need not spend time on keeping up to date!

More specialised resources

Most direct to customer dealing platforms and all discretionary investment managers put out client briefings and often have a daily news feed on their web sites.  The regular newsletters vary in quality and are very often simply summaries of recent history with some broad and vague ideas about what asset allocation changes might be under consideration. I would not spend much time absorbing these missives.

Strategy proposals and funds’ ‘best buy’ list may be put together by highly qualified and expert people if they come from Morningstar, or the likes of Fidelity, JP Morgan or similar organisations, but they may also have been based on simplistic qualitative data extracted by pressing a button and written up by a wet behind the ears trainee!

I am not sure which category I would put the Interactive Investor material into as I have had reason to doubt the credibility of one or two of their missives! I am aware that quite a few of my readers will see that material and I suggest it is cross checked. It is certainly very useful and to hand as a ‘heads up’ if you are an II client.

I have access to some seriously experienced and expert analysts and commentators via the Brightalk webinar app but I have to log in as an investment professional and have completed a questionnaire about my business role.  You won’t be able to do that (unless you are prepared to fake it!) but many of the presentations I see are eventually released out via the providers own website or on YouTube. 

I tested this while preparing this article and searching the internet for ‘investment outlook for UK investors’ generated a wide range of quality material when I tried it. If you have the time, there is plenty of well presented background information and commentary out there from real professionals – not only Youtube influencers!

JP Morgan publish quarterly market guides that are available to the public, regionally filtered (so we want the version for EMEA (Europe), as opposed to North America or Asia Pacific).  These are full of data charts and might be overwhelming to some readers but are a fantastic resource.  Furthermore, if you search for the guide, you will find some accompanying short videos that summarise the main points or particular themes, delivered by top professionals in the investment industry.

Do: spend time looking around the internet to see if you can find content that is kept up to date, is relevant to your investment objectives and level of knowledge; remain skeptical of anyone claiming to have special knowledge unless you can be confident of their qualifications and experience; remember that absolutely no-one can predict future investment returns reliably; keep in mind that you are looking for commentary and analysis, NOT investment propositions!

Don’t: expect the quality of internet content to be consistent because the resources available to content creators vary hugely; treat British produced media content as naturally more reliable or even influential (even if it’s good, the UK stock market is now a relatively small part of what drives global market trends).

Avoiding ‘noise’

By noise, I mean the turmoil of trivial short term information that will come your way if you do start trying to regularly take in information to assist you in steering your portfolio in the right direction.

Daily stock market moves are interesting in that they will give you advance hints as to what the financial and economic news is likely to be, but it takes a while before one can consistently and logically match the market direction with the actual news that is driving it, and even I can’t always make the connection. 

It is said that global stock markets are discounting machines, meaning that they work out the price of future risks and opportunities in the form of a sort of mysterious calculator that prices equities and bonds as the chips on the table multiplied by the odds of a win. 

I would assert that prices offered and obtained are influenced by mainly human behaviour and what drives that is a matter for whole libraries of writing.  So if market pricing is the result of thousands if not millions of human decisions made in a sort of confined space (not physically restricted, but by being focused on the same narrow activity of dealing in securities) then market direction is certainly telling us something about the consensus.  Ignore the market at your peril, as they say. But don’t treat what happens in the markets every day over seriously.

I would suggest that short term price movements are a bit like the weather in the UK – one may just about be able to tell what season we will be experiencing outdoors for a week or two at a time, but what happens daily is almost impossible to predict reliably, even the night before and using immense computing power!

Other low level daily news information, like stories in the print or broadcast media about trends in consumption, medical research, technology products and innovation, global conflicts and so on is likely to be too old to make much difference to short term market trends by the time you get it. 

The market price on the day you get the news will have already anticipated it.  However, deep structural changes, or those that will be set in for some time, are worth noting as they gradually become permanent, like for example the arrival of the slimming wonder drugs, or the war in Ukraine, or (in the past) the way Brexit would be perceived globally, or the growth in influence of the political hard right in Western democracies (a fact one ought to be getting to notice right now!).

It is also perhaps disappointingly true that retail investors are kept out of the most profitable early stages of important new innovation which is funded by venture capitalists, hedge funds and private equity generally.  So don’t waste time hunting for funds or ETFs that can get you invested into the latest new drugs research or car battery technology, for example.  That is almost always going to be  a wild goose chase.  We, as retail investors, can only invest in the later stages of innovation, which does have the advantage of being less risky.

Finally, an old favourite of mine:  economists are the people who will tell you tomorrow why what they predicted yesterday did not happen today (probably a Winston Churchill quote).   There are some great economists working for investment houses who analyse data and tell you what it means and then offer highly qualified opinions, understanding that they are offering ‘best guesses’.  I would say there is one of those to every 10 that spout speculation as science.  If you find what might seem to be a good one, stick with that one and over time you will find out how reliable they are! But generally , one can save time by not reading a load of predictions form economists and strategists!

Stage 3 – reviewing and applying the data

Microsoft Word reports that I have already written around 3500 words but I still have a way to go to conclude this guidance.

It may be a relief to some readers and a disappointment to others, but I have decided this ‘performance’ is long enough to require an intermission. 

In the best of stage traditions, you have probably had 60% of the show now.  I am not sure that the finale will generate calls for an encore, but part 2 will be a little shorter, I think!

If any reader has questions or wants me to clarify or expand on anything I have written so far, I will be happy to hear from you.