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Where to reduce exposure - anticipating a correction

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richfool
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Where to reduce exposure - anticipating a correction

#165559

Postby richfool » September 10th, 2018, 8:14 pm

I hold a portfolio of mainly IT's, plus a few direct UK stocks. Anticipating that the inevitable correction, or even a major meltdown must be due soon, I am pondering what to take off the table. Whilst I intend to remain invested, I wish to reduce the amount invested and my exposure to markets. I propose to do this by a combination of: retaining dividends received (already underway), taking some profits, and reducing or selling some holdings.

Thus with the above in mind I am looking for ideas as to which sectors to reduce my exposure to, and which are most at risk in the event of a meltdown. In addition to UK and global equities (inc the US, Asia Pacific, Europe), I hold some property REIT's, infrastructure trusts, renewable energy and utility trusts. My current thinking is along the lines of reducing some of the US and global equity exposure, but to retain more defensive trusts like MYI., along with the property REIT's, infrastructure & renewable energy trusts.

Would I be right in thinking that financials are likely to be vulnerable in the event of a meltdown, as I do hold several banks and insurers in my direct holdings?

(I appreciate that in the event of a meltdown, a falling tide will tend to lower all boats).

richfool
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Re: Where to reduce exposure - anticipating a correction

#165574

Postby richfool » September 10th, 2018, 10:06 pm

For background information, my holdings are detailed here:

viewtopic.php?f=54&t=11506

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Re: Where to reduce exposure - anticipating a correction

#165578

Postby TUK020 » September 10th, 2018, 10:34 pm

richfool wrote:Thus with the above in mind I am looking for ideas as to which sectors to reduce my exposure to, and which are most at risk in the event of a meltdown.


How good is your crystal ball?
Is the trigger for the next meltdown going to be:
- Iran/Straights of Hormuz?
- Accounting scandal at a big US tech?
- North Korea nukes Seoul?
- Trump trade war with China gets serious?
- etc?
Knowing this would help to answer your question.

In the absence of a crystal ball, perhaps simplify your IT holdings while keeping the spread/diversification, increase your holdings of cash, short dated bond ETF & Gold.

tjh290633
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Re: Where to reduce exposure - anticipating a correction

#165594

Postby tjh290633 » September 11th, 2018, 2:35 am

FWIW, I have always stayed fully invested through the various setbacks since 1970. Usually it works out fine, but 2008 needed a bit of work to recover from it. I usually judge success or otherwise by the amount of dividend income that is generated.

TJH

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Re: Where to reduce exposure - anticipating a correction

#165675

Postby Hariseldon58 » September 11th, 2018, 2:48 pm

I think this is a good question to ask but I would suggest we have a different situation in the US market compared to the World ex US.

The World ex US is basically plodding along, a good recovery from the lows of March 2009 but nothing to shoot the lights out at all.

The US market is expensive whether its valuation metrics, P/E, SchillerCAPE or things like Corporate Profits as a ratio of GDP. We have had exuberance in certain sectors, FAANGs , small and mid caps and prices are hugely higher than they were since market lows of 2009, on a total return basis about 300%+, we have rising interest rates, end to QE. Yet the US market did poorly in the decade or so prior to 2009.

My notes from July 2009 show S&P500 down 14% on a total return basis over thee prior ten years, the FT250 up 84%, Emerging Markets up 215%. On a 20 year basis the US returns are not that exciting, around 7% compounded.

I have benefitted hugely over recent years by moving over to a largely Passive World Portfolio from the returns of the US market and living off my portfolio, on a total return basis, has made me reassess the situation since July going from a low of 4% cash and bonds to around 11%, this provides 9 years living expenses or the basis of some cash in hand to respond to market opportunities.

In addition I moved away from a largely Investment Trust portfolio (UK Equity Income and various Global Trusts) and some passive to almost exclusively Passive but I am starting to move back as ITs are now relatively more attractive. Trusts are starting to jettison performance fees, management fees are tending to move lower, less trusts are saddled with expensive legacy debt and a reasonable discount on purchase can mitigate higher fees.

Dividends are becoming more attractive to me, for a while when EQUITY INCOME was flavour of the month, I did not feel it was good value but lack of popularity is providing opportunities I feel. Added Murray International on a small discount, Middlefield Canadian Income,increased holding in Law Debenture, repurchased Edinburgh Income and Finsbury Growth and Income and Vanguard All World High Yield.

I have sold a bit of all the regional trackers that make up my portfolio but proportionally more of Japan and Emerging Markets. The process continues...
I made significant switches to VUSA and VVAL ( Vanguard S&P500 tracker and Vanguard Global Value ETF ) in Feb 2016, noting declining sterling and thought it might be a smart move ahead of the Brexit Vote uncertainty factor (my crystal ball failed miserably to predict result !) this has given me 50%+ or so uplift in value and consequently an opportunity to purchase more income now.

Its impossible to time the US market, it could fall out of bed tomorrow, 2 years time or never (ie move ever higher such that a subsequent decline is above todays prices) a repositioning does seem prudent. I would not be comfortable having ,say, a £1m in a S&P500 tracker bringing a dividend of around £15,000 pa when invested elsewhere that could bring in a far higher income with more diversity and better able to cope with a sideways or declining market, yet still retain plenty of upside.

On a personal note I am not sure of the attraction of the property REITS, infrastructure funds or renewable energy trusts presently that RichFool mentions but thats just me.

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Re: Where to reduce exposure - anticipating a correction

#165678

Postby OhNoNotimAgain » September 11th, 2018, 3:05 pm

Why bother?
Even a plonk passive fund has delivered a positive return over every trailing 3 years holding period. The worst was 3.4% from Feb 2013 to Feb 2016 and the best was 38% from June 2012 to June 2015.
The whole finance industry is geared to frightening you out of holding on.
Dividends and compound interest are far more powerful than timing the market.

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Re: Where to reduce exposure - anticipating a correction

#165700

Postby Gengulphus » September 11th, 2018, 4:59 pm

FredBloggs wrote:Market in the UK is already about 10 per cent off it's highs. ...

More (and the highs are a lot further back) if you adjust for inflation...

FredBloggs wrote:... But what do I know that others don't? Nothing.

Though rather paradoxically, if you actually know that, you do know something that plenty of others don't! ;-)

Gengulphus

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Re: Where to reduce exposure - anticipating a correction

#165704

Postby richfool » September 11th, 2018, 5:15 pm

Thank you for the inputs.

Over recent weeks, I have sold NAIT (North American Inc trust), though kept my overweight position in MCT (Middlefield Canadian trust); to reduce my US exposure. Noting though that I still have US exposure through several global G&I trusts.

I also looked at my Asia Pacific holdings, with the intention of selling one of the three, but ended up reducing one of the three, -JAI which had the largest exposure to China.

I then looked hard at the UK, noting that I had about 5 UK G&I trusts. I was conscious that several of them had significant overlapping holdings including HSBC (which I also have a separate direct holding of), Shell, GSK and Lloyds. My UK IT's included: TMPL, CTY, SLET, FGT and SHRS (Shires), plus mid cap trust Mercantile.

So after much deliberation I sold Temple Bar, - as it held the largest positions in HSBC, Lloyds and Shell, and was particularly "bank heavy", holding HSBC, Lloyds, Barclays and RBS in its top ten holdings, which I wasn't keen on. I chose Temple Bar for two additional reasons. One it had a lower yield (apart from FGT, which is different animal for a different purpose), and secondly, because I felt the the manager's "value" stance is taking too long to deliver and the trust has lost performance because of it.

With the prospect of interest rates remaining low, I don't see booming prospects for the banks, and certainly not for domestically focused banks like Lloyds.

CTY escaped the chop because of its dividend yield (c 4.4% currently).

That leaves me with some cash, which I will either sit on, or maybe consider a position in a gold miner or ETF.

I realise I am still chipping away around the edges of a more drastic reduction in the number of holdings.

The property, infrastructure, alternative energy and utility trusts are intended to enhance income (yields being in the 5.50 -7.8% range) and provide some inverse correlation with the equities.

I was looking for ideas of what sectors to reduce (or IT's to sell completely) and what alternative assets I might consider for protection.

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Re: Where to reduce exposure - anticipating a correction

#165715

Postby Hariseldon58 » September 11th, 2018, 6:08 pm

@RichFool
In bad times the alternative assets will provide zero protection as correlations of risk assets tend to 1.0

Sovereign bonds would provide protection but they do so at the price of low returns.

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Re: Where to reduce exposure - anticipating a correction

#165722

Postby Itsallaguess » September 11th, 2018, 6:50 pm

richfool wrote:
That leaves me with some cash, which I will either sit on, or maybe consider a position in a gold miner or ETF.


I decided some time ago that I'll never be able to either time a correction correctly, or know enough about where any large impact might originate, for me to be able to plan this sort of stuff at any sort of granular level.

Getting either one of those aspects correct would be tough enough, but to try to anticipate both at the same time must be much more demanding.....This isn't at all a criticism of your approach to this subject - I just know that I personally don't have the ability to do either, so I don't try.....you of course may have much better judgement in these areas than me.

So given that we should probably try to maintain some sort of issue-anticipation (I've never been comfortable at all with any sort of '100% invested' approaches..), I tend to maintain a cash level of around 12% to 15%, and will happily start to drip it into the market if we see a 25% correction.

I'm still working, so would be able to continue feeding into a market that took a wallop and perhaps wanted to stay sluggish, so this approach relieves me of two tasks; both the timing issue and any sort of 'where's the trouble going to come from?' type of questions. This is important to me, as I don't want to have to spend time worrying about either of these specific issues, and certainly not both at once, but a the same time it's also important for me to respect the fact that market-corrections are inevitable, and that I should put something in place to help deal with that fact that suits me personally.

So the above approach helps in terms of the 'put something in place' aspect, and it also helps me a great deal with the rest of my investments, as it allows me to remain 'fully-invested' with the remaining parts of my portfolios (I never think that I should be selling anything I already own, even when markets take a bit of a clobbering, and the removal of that potential worry is also important to me....), and this approach also allows me to quite freely continue to invest any surplus cash over and above my 15% cash (or cash-equivalents..) limit, even in what might be seen as dodgy periods - if I've still got my fall-back plan, I can quite happily continue investing 'as normal' under difficult market conditions, as the parachute can still be felt firmly on my back....

As with all things though, we've got to find an approach that suits us personally, and it's an area that does need a bit of a poke to find a strategy that sits well and allows us each to sleep at night.

Cheers,

Itsallaguess

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Re: Where to reduce exposure - anticipating a correction

#165802

Postby richfool » September 12th, 2018, 8:56 am

Just to confirm I do intend to remain substantially invested, but just review/reduce any higher risk areas to reduce risk, consider whether I should add any alternative assets classes, increase my cash buffer and also reduce the number of holdings.

I saw a podcast last week, I can't remember the source, - maybe the Money Mail, - where they were discussing the safer/more stable asset classes in the event of major market falls.

They suggested the following as safer, more stable asset classes/sectors:
Utilities, healthcare, healthcare real estate, consumer staples, treasury bonds, REIT's, gold and telecoms.

Weaker/Riskier:
Construction, energy, materials, IT, consumer discretionary, industrials.

Another source suggested avoiding:
alternative energy, retail, automotives, consumer discretionary such as entertainment & dining.

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Re: Where to reduce exposure - anticipating a correction

#173507

Postby richfool » October 13th, 2018, 3:36 pm

I carried out an interesting exercise earlier this last week, which gave me a useful insight into which of my IT holdings are likely to be more susceptible to market falls, in the event of a correction or bear market.

I looked at some of the IT's I hold, to see what their falls had been on that particular day, with the thought that those which fell the most would be likely to do so again, if the markets fall further or when they next fall again. I appreciate that won't be an exact science, as markets could fall for different reasons, in which case the picture might not be exactly the same, but I felt it gave me a useful insight.

I noted that it was the trusts with higher exposure to technology, smaller companies, the Asia Pacific and Growth trusts, as opposed to Income trusts which fell the most, and property & infrastructure which fell the least..

Shires (SHRS)............... -15%
JP Morgan Asian Inc (JAI) -15%
Aberdeen Asian Inc (AAIF) -10%
Mercantile (MRC)............-10%
MYI .............................-9%
Henderson European Focus (HEFT) -9%
Witan .......................... -8%
Bankers........................ -8%
Henderson International Inc (HINT) -8%
Econ Global Utilities & Infra (EGL) -5%
Regional REIT ...................... -4%
GCP infrastructure .............. no change.

I generally didn't take much notice of others where the fall was less than 5%.

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Re: Where to reduce exposure - anticipating a correction

#173523

Postby EssDeeAitch » October 13th, 2018, 4:32 pm

richfool wrote:I carried out an interesting exercise earlier this last week, which gave me a useful insight into which of my IT holdings are likely to be more susceptible to market falls, in the event of a correction or bear market.


The market carried out an interesting and painful exercise on my portfolio and came to the same conclusion as you did. It concluded that I was a bit tech heavy :shock:

Lesson learned, re balance when appropriate

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Re: Where to reduce exposure - anticipating a correction

#173529

Postby richfool » October 13th, 2018, 4:45 pm

I did notice a couple of other IT's which I have had on my "Watch List" from to time, fell considerably more. They were MNL (Manchester & London) and IIT (Independent IT). The former has large high commitment holdings in the big technology stocks. The latter, targets smaller strong growth (UK) stocks like Fevertree and some housebuilders. So I concluded I will stay away from those.

(Note JAI, in my above list, holds quite a lot of Chinese technology stocks, hence it suffering more.

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Re: Where to reduce exposure - anticipating a correction

#173538

Postby BrummieDave » October 13th, 2018, 5:28 pm

Sucking eggs and all that, but surely the point is one shouldn't reduce exposure in anticipation of a correction, more one should set the desired portfolio mix to meet one's own mandate and stick to it. The average time for the market to recover from any drop is less than 70 days. Playing the anticipation game is akin to attempting to time the market.

Better to set up the portfolio to meet your needs, then leave alone through good times and bad.

Egg sucking over.

As input to the earlier points, I noticed my REITs and I/F ITs fell less than my equity based ones too. No surprise, just confirming that's all.

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Re: Where to reduce exposure - anticipating a correction

#173542

Postby richfool » October 13th, 2018, 5:38 pm

BrummieDave wrote:Sucking eggs and all that, but surely the point is one shouldn't reduce exposure in anticipation of a correction, more one should set the desired portfolio mix to meet one's own mandate and stick to it. The average time for the market to recover from any drop is less than 70 days. Playing the anticipation game is akin to attempting to time the market.

Better to set up the portfolio to meet your needs, then leave alone through good times and bad.

Egg sucking over.

As input to the earlier points, I noticed my REITs and I/F ITs fell less than my equity based ones too. No surprise, just confirming that's all.

BD, Yes, my objective was to identify holdings that might turn out to be too volatile or risky for my desired level of risk, and to use that information to fine tune my portfolio, when considering future changes. It has tended to reaffirm my preference for income orientated stocks and trusts and to confirm my decision to add alternative asset classes such as infrastructure and property over the last year or so..

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Re: Where to reduce exposure - anticipating a correction

#173543

Postby BrummieDave » October 13th, 2018, 5:46 pm

richfool wrote:
BrummieDave wrote:Sucking eggs and all that, but surely the point is one shouldn't reduce exposure in anticipation of a correction, more one should set the desired portfolio mix to meet one's own mandate and stick to it. The average time for the market to recover from any drop is less than 70 days. Playing the anticipation game is akin to attempting to time the market.

Better to set up the portfolio to meet your needs, then leave alone through good times and bad.

Egg sucking over.

As input to the earlier points, I noticed my REITs and I/F ITs fell less than my equity based ones too. No surprise, just confirming that's all.

BD, Yes, my objective was to identify holdings that might turn out to be too volatile or risky for my desired level of risk, and to use that information to fine tune my portfolio, when considering future changes. It has tended to reaffirm my preference for income orientated stocks and trusts and to confirm my decision to add alternative asset classes such as infrastructure and property over the last year or so..


Then good idea IMHO. I'm a LTBH Doris income seeker and started out with Luni's B7a, then broadened that out to increase non-UK exposure, and finally added some Property and I/F to boost income in short-term, and to diversify. So I'm all in ITs, 90% equity based, split 50:50 UK and international, and 10% Property and I/F.

Keep meaning to post my portfolio for feedback but never quite get round to it.

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Re: Where to reduce exposure - anticipating a correction

#173585

Postby richfool » October 13th, 2018, 8:40 pm

BrummieDave wrote:Then good idea IMHO. I'm a LTBH Doris income seeker and started out with Luni's B7a, then broadened that out to increase non-UK exposure, and finally added some Property and I/F to boost income in short-term, and to diversify. So I'm all in ITs, 90% equity based, split 50:50 UK and international, and 10% Property and I/F.

Keep meaning to post my portfolio for feedback but never quite get round to it.

BD, I would be interested to see your portfolio, as and whenever you get round to it.

My split is:

UK Equities: 22.4%
Global: 31%
North America inc Canada: 8.2%
Asia: 8.1%
Europe: 6.2%
Property: 10.2%
Infrastructure: 4.2%
Environmental Assets (JLEN -wind & solar): 3.3%
Utilities (ECG): 3.4%
Miners/Commodities: 3.0%

One of the UK equity trusts holds bonds.

I deliberately increased my global/overseas exposure after the Brexit referendum, though have been upping the UK exposure recently in anticipation of a post Brexit recovery. ;)

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Re: Where to reduce exposure - anticipating a correction

#173598

Postby BrummieDave » October 13th, 2018, 11:28 pm

richfool wrote:
BrummieDave wrote:Then good idea IMHO. I'm a LTBH Doris income seeker and started out with Luni's B7a, then broadened that out to increase non-UK exposure, and finally added some Property and I/F to boost income in short-term, and to diversify. So I'm all in ITs, 90% equity based, split 50:50 UK and international, and 10% Property and I/F.

Keep meaning to post my portfolio for feedback but never quite get round to it.

BD, I would be interested to see your portfolio, as and whenever you get round to it.

My split is:

UK Equities: 22.4%
Global: 31%
North America inc Canada: 8.2%
Asia: 8.1%
Europe: 6.2%
Property: 10.2%
Infrastructure: 4.2%
Environmental Assets (JLEN -wind & solar): 3.3%
Utilities (ECG): 3.4%
Miners/Commodities: 3.0%

One of the UK equity trusts holds bonds.

I deliberately increased my global/overseas exposure after the Brexit referendum, though have been upping the UK exposure recently in anticipation of a post Brexit recovery. ;)


I'm with you on the Brexit point, there's an upside to be had, it's just a matter of how long it will take.

Party night here so will PM you tomorrow with portfolio details, but I think we are using different definitions. I was looking at the underlying stocks within the ITs, and stating which are UK registered, and which are not (ie International). Your Global includes UK of course.

I think you are going by the definition/mandates of the ITs whereby Global includes UK (as does UK obvs) and also North America, Europe and Asia, which you are showing separately. I can split my portfolio by underlying equities (UK or International) or by the ITs themselves, UK, Europe, US, Asia etc. I prefer underlying assets as this is what the portfolio really comprises.

PM you tomorrow after a strong coffee.

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Re: Where to reduce exposure - anticipating a correction

#173600

Postby langley59 » October 14th, 2018, 12:06 am


I'm with you on the Brexit point, there's an upside to be had, it's just a matter of how long it will take.



Agreed unless there is a general election followed by a Labour Govt in which case I really don't think you would want to have any UK exposure.
Last edited by tjh290633 on October 14th, 2018, 3:05 pm, edited 1 time in total.
Reason: Tags corrected-TJH


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