Curse or Blessing in disguise?
Lunar Capital, the company I co-founded last year and Boutique Collective Investment Schemes have partnered and launched an investment fund (Lunar BCI Worldwide Flexible Fund) on 1 June 2016. If someone had told us that Brexit was going to happen later in the month, I’m pretty sure we would have either delayed the launch or possibly had another strategy for the fund. However, we know that no-one knows for sure what will happen in the future. So the paradox that we as investment managers face is that we sell the future, yet we are unable to guarantee the future. Arguably, Brexit could have been predicted given how close the polls were calling the vote. But, there was always going to be uncertainty until the final result.
In a previous blog, I gave you some of thoughts on how to invest in the current market. Basically, I suggested that the current market is overvalued as a result of a number of factors, but that you should have a good understanding of the businesses that you want to be invested in, i.e. those that meet your long-term investment criteria and build up a stake in those businesses at a slow rate. Where possible, if the market does show weakness, you can buy a bit more or if not, you can slow down your purchases even more. When you think that valuations are good, then you can be a bit more aggressive in your purchases.
To know how to get to your destination, you need to know where you are first?
When the Lunar BCI Worldwide Flexible Fund (LBWFA) was launched, it was seeded by a number of investors, including myself. The seed funding took place in the form of cash and shares. So, our first task as investment/portfolio managers was to develop a strategy for how we were going to get our portfolio from what it was when we started it, to what we want it to be in the long-term.
In this blog, I will share with you how we are going through this.
Develop a Target Portfolio
The first task we set about was to develop a Target Portfolio. For this, we started with our key investment themes, which we depict in the diagram below:
Our Key Investment Themes
We then scanned the market and identified the companies (i.e. businesses that we would love to own) that we had a reasonable understanding of, that could benefit from one or more of these themes. This was not an exhaustive list, but we identified approximately 40-50 local and offshore companies on this list.
We then whittled this down to 15 companies (we do want a concentrated portfolio, so ideally, we want to be invested in a maximum of approximately 12 companies at any point in time). This forces us to focus our mind. We weighted these 15 companies, e.g. 9% for a high conviction investment; 5% for one with a bit more risk. We also tried to balance the companies and weightings to the various sectors and between local and offshore (subject to regulatory requirements). Thus, we created a Target Portfolio.
Where are we?
The next step was to identify what we inherited through the seeding of the fund. The most beneficial part of this was that a large part of the seeding portfolio was in cash. We were particularly pleased with this and in fact most of us were holding on to cash to seed the portfolio, because we were concerned about the high valuation levels on the market.
For the remainder of the portfolio, we put the investments into the following buckets:
- Investments that fitted in with our Target Portfolio. This was the second largest pot (after cash), and we decided not to sell any of these.
- Investments that we didn’t like, for whatever reason.
- Investments in sectors that we like, but not our first choice company in that sector.
- Offshore investments, i.e. primarily offshore businesses or instruments (Exchange Traded Funds) listed on the Johannesburg Stock Exchange.
This grouping allowed us to develop a strategy around each group.
What did we do?
- For the investments that we didn’t like, we simply decided to sell out of them and we did this over a 2 week period. We also, utilised the proceeds from these sales to buy into Target Portfolio companies, particularly those that we either had none of or very little of in our portfolio and where we though that the valuations were reasonable (not necessarily cheap).
- Similarly, we swopped out those investments in sectors that we liked, but that were not our first choice companies in that sector, with our first choice companies in those sectors.
- Overall, we also increased our equity exposure from just below 50% to around 57% today, buying when there was a dip in the market in small quantities and to shape our portfolio closer to our Target portfolio.
- In a few weeks’ time, when our offshore accounts are open, we will sell the “Offshore Investments” bucket of investments and use the proceeds plus any additional amounts we have targeted to direct offshore investments. We are mindful ofcourse, that the currency and equity markets may play havoc with our decision making and timing. We would consider drip feeding into the offshore portfolio as well.
What does the portfolio look like now?
The graph below shows you our core holdings in the portfolio at this point in time.
As you can see, quite a conservative portfolio, but also how it fits our investment themes. As we go along, we will keep on evaluating this portfolio and building on it. In particular, we will be increasing our equity exposure as valuations reach better levels.
By sharing how we went about getting to our current portfolio and also showing you that it is work in progress, we hope that this will stimulate you into either starting to build your portfolio or developing a strategy to change your portfolio to be more ‘shaped’ in the way that you want it to be.
Also, by sharing this with you, I wanted to alert you to the fact that there is no perfect time to start a portfolio, unless of course you have the benefit of hindsight. However, you can take a prudent approach, by defining a strategy, and slowly moving in that direction. Moving faster when valuations are better and slower when valuations are higher. In this way you will reduce the risk of getting you timing wrong.
I’ll leave you with a saying and a mantra that I adhere to:
It’s not timing the market but time in the market that builds wealth.