If you think you do then you might be interested in a presentation by JP Morgan from a couple of years ago which I came across recently called the Agony and the Ecstasy of a concentrated portfolio. This reminded me why I like to run a diversified portfolio.
Now it is US based data, but as that is the largest and probably most liquid equity market in the world, then I'm sure similar lessons would probably still apply to the UK and elsewhere and maybe the results might be distorted by greater index concentration in larger names perhaps?
Rather than trying to summarise it all myself, I'll present one of the graphics from the presentation below. If that whets you appetite to read more then you can download the file at the end of this piece which also includes its own Executive Summary if you don't want to plough through the whole 54 pages, but it does also provide some useful pointers to the more volatile and vulnerable sectors and those that seem more resilient.
If you are running or thinking of running a concentrated portfolio then it is well worth a read and thinking about the issues and I think the video at the end might also be (in)appropriate?
...on my own (hmm I do believe that is a song) - as I'm about to suggest going Against the Grain (RIP Rory) and over ride my Compound Income Scores. Before that an apology for the late post today. This was due to a fault on my Broadband which I had to get sorted with an engineers visit this morning hence no internet. This explains the poor quality of my interview on the podcast yesterday with bits dropping out.
Any way the stock concerned today is one I got into recently thanks to the Compound Income Scores and the fact that it had made it into the Compound Income Scores Mechanical Portfolio. This was Alliance Pharma (APH) which I wrote up a few months back when I suggested it as a buy on weakness below 40p. Fortunately I followed my own advice and bought into this one when it then dipped below 40p. I must admit I was not expecting much from it in the short term apart from collecting the final dividend as it has been a pretty pedestrian stock in recent years. However, I was hopeful that it might be able to re-rate gradually and perhaps hit 50p.
So I was pleasantly surprised in recent weeks when it not only went XD the final but has stormed through 50p without much in the way of new news apart from a positive sounding in line trading update earlier this month. They have however continued to talk about doing more deals, so perhaps a deal is on the way and they have ramped up ahead of this or perhaps it is just a genuine re-rating – I guess as ever time will tell.
Looking at the chart however it is now quite extended and overbought. So with the shares now also looking more fairly valued on 15x with a 2.2% yield plus given not much has changed and this one does have a habit of flat lining like its earnings, I have exited up here. However, as it continues to score well with a CIS of 96 so it is likely to remain in the Mechanical portfolio for now. So I'll be able to see how it does and repent at my leisure for selling a winner and going against momentum and the Scores if it goes onto deliver much greater returns!
So with the title of this piece in mind here is another music video for you to go with the Rory Gallagher link at the beginning. For younger readers he is no relation of the Oasis brothers but was a great Irish guitarist who sadly died too young but is worth checking out if you like rock music and you are not familiar with his work.
Talking of music I saw reports on some "interesting research” from professors in Cambridge about how your personality type might explain the music you like. It seems analytical types might be expected to like rock music and this report about it seems to confirm that I almost certainly fall, unsurprisingly, into the analytical category as the Spotify play list included within it mostly rocks as far as my analysis is concerned, although I draw the line at The Prodigy & I'm not too sure about Art Ensemble of Chicago (too jazzy for my taste) or Red Velvet (too poppy).
Finally, on the subject of play lists I have found the BBC play lister gadget on their on line radio service quite good for saving tunes you like and new music which you might otherwise hear but not have a clue who it was by. I have discovered quite a few good new artist this way – so if you like music too then it might be worth checking this out as you can also then share it with Deezer, Spotify and I-tunes and playyour saved tracks there too, which is quite cool.
Any way sorry about all this chat about music as I'm sure most of you are not here to hear about that - perhaps I should set up a sister site to talk about music? But just to show I'm not completely stuck in a rocky rut as far as my music is concerned check out this fine new album called Pageant Material from a country singer called Kacey Musgraves – yea ha have a great weekend ye' all.
..as this is a post I probably should have done at the weekend but I was too busy playing cricket and enjoying the summer now it has finally arrived! Any way in much the same way that you might use left overs from the Sunday roast to make a meal on Monday, as it is also a quiet start to the week, I thought I would use this material to make a post today.
So this is one of those post where I share some of the stuff I have been reading recently that I found interesting and which I hope you might find useful and maybe even educational too. I say educational because it features comments form two professors.
First up in an interview with Robert Shiller which featured on the AAII website and is a look at bubbles, valuations and why interest rates / bond yields might remain low from here for a while yet.
Meanwhile the always useful Aswath Damodaran in his musings on markets blog looked at the Value and Pricing of Cash: Why low interest rates & large cash balances skew PE ratios. In this he not only does a teach in on calculating intrinsic value but also links to another post which looks at the combined effects of cash and debt on ratings. Interesting stuff and something worth thinking about when you are trying to assess fair values or come across a stock which seems to be on a cheap PE.
There you go and as I always try to educate and entertain so today you have had Stereophonic Professors as it were which puts me in mind of something which might entertain you and liven up a quiet day - so I bring you just enough education to perform, which has some appropriate titled tunes like - Mr. Writer, Every Day I think of Money and Have a nice day!
Read some interesting research recently from Brandes Institute who are a well know US Value Manager. They have produced research on the performance of the well known value factor and the graphic above comes from a write up about this which appeared recently on Value Walk which I find to be a useful website.
They extended previous US based research to cover global markets and found the same positive results for Value versus glamour stocks. They did however point out that there can be extended period when value underperforms such as in the late 1990's tech boom, but overall it outperforms more often than not. Interestingly from the graphic above it seems that non- US developed market value stocks seem to perform slightly better than US ones and suffer fewer periods of under performance. If this is of interest to you then you can read more by clicking the image above or download the original Brandes report below.
Another interesting research document I cam across recently looked at a Consumption-Based Explanation of Expected Stock Returns. I cam across this thanks to the awesome Wes Gray, one of the the authors of Quantitative Value, at his website. In this recent post he looked at significant and robust out performing factors such as Value and momentum and these were matched by the aforementioned Consumption based model as researched by Motohiro Yogo.
It is quite a technical paper with lots of stats to wade through and I'm not sure how applicable it is to everyday investing other than as a guide to think about how you might allocated between value, growth, large and small cap given where you are in the economic / stock market cycle. The author's conclusions were as follows:
Regardless of whether one believes in the representative household model, this paper has
uncovered some intriguing facts about stock returns and the business cycle, which should
guide future research.
1. Small stocks and value stocks have higher non durable and durable consumption betas
than big stocks and growth stocks. The returns on small stocks and value stocks are
more pro-cyclical than those on big stocks and growth stocks.
2. The expected stock return is high (low) when non durable consumption growth is high
(low) relative to durable consumption growth. The equity premium is strongly counter-
3. The conditional covariance of stock returns with durable consumption growth is high
(low) when non durable consumption growth is high (low) relative to durable consumption growth.
Stock returns tend to be unexpectedly low (high) during recessions (booms).
The bottom line quite obviously is that stocks do well in booms and badly in busts, but intriguingly small cap and value stocks seem to be geared into this cycle which I guess makes intuitive sense. Any way as I say not sure how one can apply this other than maybe making sure that you are up to speed with how the economy is shaping up and if a recession looks like it is on the way then obviously invest accordingly. I guess one could track durable v non-durable consumption from economic data releases and maybe use this as a signal. You can get a copy of the whole 62 page paper from within Wes Gray's post above if that is of interest to you.
Next up if you are still with me is an oldie but goodie from Tweedy Browne, another well known US Value manger called
The High Dividend Yield Return Advantage.
I'll let that speak for itself if you haven't seen it before then I would highly recommend it. While on a similar track I attach below some interesting research on Dividends: A review of Historic Returns - which also makes interesting reading in my opinion.
Compound Income Scores Research
Finally, if you are still with me, hopefully I have saved the best until last. Please find attached below a short e-book I have written explaining the background to and the research underpinning the Compound Income Scores, enjoy and have a great weekend.
Read an interesting post by the Professor of Finance at the Stern School of Business at NYU recently which included the above graph. In it he questions and presents evidence to question whether their is a small cap effect or not. You can read it by clicking the graph above if that is of interest to you.
He also included in his post a link to a useful Academic paper which helpfully reviews all the Literature on the Size effect which you can check out and download here if you are so inclined.
I guess the key takeaways from this is that you probably shouldn't just buy smaller companies thinking that they will outperform just because they are small. As ever returns will be driven by the cash flow, earnings and dividends that a Company produces and the price you and other investors are prepared to pay for the same.