Mac 2022 review of the winning stock portfolio

Fundamentals 22: In Jan 2022, I constructed a stock portfolio that is to be reviewed and updated based on "live" data. The goal is to illustrate how to manage a stock portfolio.  This is the first quarterly review of the said portfolio. 

Mac 2022 review of the winning stock portfolio

In Jan 2022, I constructed a stock portfolio based on the companies that I had analysed and valued over the past year. The goal was to track the portfolio performance over the years to provide some insights on how to establish and manage a stock portfolio.

There are two objectives for the end of March 2022 portfolio review:
  • To determine the portfolio return.
  • To ensure that the portfolio still meets the diversity criteria.

During the 3 months from the start of January 2022 till the end of March 2022, there were some changes to the portfolio. I have added a new stock to the portfolio. I have also sold some of the existing shares in the portfolio. This post illustrates how I carried out such a review given the changes.

To benefit from this article, you should. 
  • Read the Notes under each table presented in this article as it explains the computations and the rationale for it. The various tables can serve as templates for your own portfolio.

Disclaimer. This post is to illustrate how to maintain a stock portfolio. While I have used real-life companies to illustrate how to establish and maintain a stock portfolio, it is not a recommendation to invest in them.

Contents

  • Portfolio at the start of 2022
  • Changes to the Portfolio
  • Tracking the portfolio performance
  • End Mac 2022 Review
  • Conclusion
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Portfolio at the start of 2022

I started the investment with an initial USD 100,000 set aside for the portfolio. At the start of 2022, not all the monies were invested.  Rather the total amount spent on the investment came to USD 79,547 with the balance held as cash for other investments.

The portfolio investment plan at the start of 2020 is summarized in Table 4. If you want to see the basis of the stock selection and position size, refer to the article “How to construct a winning stock portfolio for 2022.”

Investment Plan
Table 1: Investment Plan

Changes to the Portfolio

During the period from 1 Jan 2022 to 31 Mac 2022, there were two changes to the portfolio:
  • In Feb, the share price of Boustead Plantation started to rise. I suspect that it was the result of the Ukraine invasion. I started to sell about 10,000 shares at RM 1.18 as this was above my estimated Asset Value of RM 1.16.
  • In Mac, I bought 7,200 shares in LIIHEN. This was after my fundamental analysis of the company. Refer to my post “Is LIIHEN one of the better Bursa Malaysia furniture stocks?”.  Note that the number of shares was because of the current guideline of allocating USD 5,000 per stock for the portfolio. 

It should be obvious that my purchase and sale decisions were based on comparing the market price with the intrinsic value. 

Tracking the transactions for each company

I used an EXCEL spreadsheet to track the portfolio performance. Table 1 is part of the main worksheet.

The information for each stock in the main worksheet is obtained from individual stock transaction records. The charts below show the transaction records for Boustead Plantation and LIIHEN. 

BPlant transactions record
Table 2: Boustead Plantation Transactions Record
Notes
a) This is the number of shares bought or sold.
b) This is derived and = c / a.
c) This is the actual cost inclusive of the brokerage charges and other transaction costs. I track the actual cost in the local currencies. 
d) This is the actual cost converted into USD. This is for tracking the portfolio performance.
e) I track the return over the holding period. The duration statistics are to enable me to do this. For each transaction, this is a weighted value derived using the EXCEL function = no of shares X (date value at review date - date value at transaction date) / 365. The duration of 0.25 under the total row = total weighted values / total number of shares. 
f) You can see that I have separated the purchase part from the sales part. My nomenclature is to have the purchases recorded as positive values and the sales as negative values. 
 

LIIHEN Transactions record
Table 3: LIIHEN Transactions Record
Notes
a) The duration = 0.0 under the total row because I am comparing the date of the review (31 Mac 2022) with the transaction date of 21 Mac 2022. 
b) The conversion from local currency to USD is based on the exchange rate at the transaction date.

Tracking cash

At the same time, I also have a transaction record of the cash used as per the chart below. You will notice the Boustead Plantation and LIIHEN transactions have been converted into USD. I used the following exchange rate as of the end of Mac 2022 for USD 1. 
  • RM 4.19
  • SGD 1.35
  • AUD 1.41

Tracking cash
Table 4: Tracking Cash
Notes
a) Rather than show the individual transactions in Dec 2021, I have summarized them for the purpose of this illustration
b) The Boustead and LIIHEN transactions were the costs in local currencies converted to USD at the transaction dates. 

Tracking the portfolio performance

Keeping tabs on your portfolio performance is an important part of investing. It enables you to adjust the investments as needed to stay on track toward your financial goals. When it comes to assessing performance, you have the following options:
  • Look at absolute returns.
  • Compare your returns with those of the benchmarks.

  • Compare the returns on a risk-adjusted basis.

There is a difference between measuring the returns of a stock and measuring the returns of a portfolio.

In the case of a single stock, the total gain = capital gain + dividends. The return is then the total gain divided by the original investment sum. You can then use this concept to compute the simple annualized return or the compounded growth rate.

When it comes to the stock portfolio, the return for the portfolio is complicated by the following situations:
  • During the period, some of the stocks could be losing money. You could have a negative total gain if there is a capital loss that is larger than the dividends.
  • You could have sold off some stocks and be holding cash. Alternatively, you could be holding onto some dividends in cash form rather than have them reinvested during the review time.
  • You could have also allocated additional funds to the portfolio. In other words, the portfolio is bigger not because of any gain, but because of additional funds.

To cater to such situations, I define the total gain and return for a stock portfolio in the following manner. 
  • Total Gain for the portfolio = current portfolio value - previous portfolio value + dividends
  • The portfolio returns for the period = gain divided by the previous portfolio value.
  • The portfolio value includes any un-invested cash.

I used the market value of the stocks in the portfolio to calculate the portfolio value. It is the sum of the market value of the respective stocks. The current and previous values refer to the value of the portfolio assuming it is liquidated. 

The market value of a particular stock = number of shares held × market price. The number of shares held currently may be different from the number of shares held before. This could be due to bonus issues and or other corporate activities.

To ensure that I am comparing apple to apple, I also include any dividends or money that I have received that has not been reinvested. 
  • The dividends refer to all the dividends paid during the measurement period. Since there is a likelihood that you may reinvest the dividends, I look at the after-tax value of the dividends received.
  • The money could be money pending reinvestment or money taken out.

You can see from the transactions that there are currently no dividends or any cash added to the fund. We will face these in later periods. 

The chart below shows how I track the portfolio performance for the period from 1 Jan 2022 to 31 Mar 2022. Note the following:
  • I have updated the market price to be as of 31 Mac 2022.
  • Note that the number of shares for Boustead Plantation is linked to the individual Boustead Plantation transaction record. You can see that the number of shares ie 22,100 is the same as that shown in the balance under the transaction record.
  • This table included the LIIHEN position. This was not in Table 1. 
Portfolio performance Jan to Mac 2022
Table 5: Portfolio Performance Q1 2022
Notes
a) While I track individual stocks in the local currencies, I monitor the portfolio in USD. This is because the portfolio comprises stocks of different countries.
b) The cost in USD was taken from the original purchase values as shown in Table 1. The exceptions are highlighted in yellow.
c) For Boustead Plantation, the cost refers to the cost of the balance shares after the sale. This is = 22,100 X purchase cost of RM 0.65 converted to USD. Refer to Table 2 for the purchase cost.
d) For LIIHEN, the cost refers to the cost of purchasing the 7,200 shares converted to USD. Refer to Table 3 for the cost in local currency.
e) Note that the Grand total for the cost refers to the total for the current portfolio. Similarly, the Grand total gain refers to the current portfolio.


Case Notes

Over time your portfolio will get out of sync with its original goals. This could be due to changes in the stock prices. Or you may have new investments. The goal of the portfolio review is to bring the portfolio back to its original goals. 

There are many ways to carry out a portfolio review. For example, Morningstar suggests the following 7 easy steps.

Step 1: Conduct a 'Wellness Check'

Step 2: Assess Your Asset Allocation

Step 3: Check the Adequacy of Liquid Reserves

Step 4: Assess Sub-allocations and Troubleshoot Other Portfolio-Level Risk Factors

Step 5: Gauge Inflation Protection

Step 6: Review Holdings

Step 7: Attend to Tax Matters

You will have to establish your process taking into account your investment plans and circumstances. But before you do this, I would recommend that you explore strategies from people like Morningstar and Seeking Alpha.*.




End Mac 2022 Review 

There are 2 goals for the periodic review. The first is to compute the portfolio return. The second is to ensure that the portfolio meets the diversity criteria.

The total portfolio value as of the end of Mac is RM 105,5466.

Portfolio value end Mac 2022
Table 6. Portfolio value end Mac 2022
Notes
a) I have assumed that Cash did not generate any return.


The total portfolio value at the start of the period = USD 100,00.  This is made up of USD 79,547 stock value as per Table 1 and cash of USD 20,453 as per Table 4.

The return = (105,319 - 100,000) / 100,000 = 5.32 %

The above is of course an illustration for computing total returns. It is a conservative estimate as it assumed that cash or money taken out does not have any other gain.

I don’t worry about the returns for the money taken out. This is because if it is invested in other assets, the returns would be captured under the asset portfolio performance.

Benchmarking returns

Now whether the 5.47 % return is a good performance can only be gauged by comparing it with some reference performance or benchmark. 

The first step is to select the benchmark. One common benchmark is the stock market index of the stock exchange in which you are investing. If you have stocks from several stock exchanges, you may have to construct a weighted composite index of the various stock exchanges.

When you assess the portfolio return, you are assessing the investment strategy. You are assessing whether the selected stocks are delivering better returns. When you use a benchmark as the reference, the benchmark should be viewed as an alternative investment.

If you are not performing better than the alternative investment, you should be switching to the alternative. This is especially if you are seeking to maximize returns.

My benchmarks are then:
  • KLCI for Bursa Malaysia. The FBM KLCI, is a capitalization-weighted stock market index. It is composed of the 30 largest companies on the Bursa Malaysia by market capitalization.
  • STI for SGX. The Straits Times Index (STI) is a capitalization-weighted stock market index. It tracks the performance of the top 30 companies that are listed on the Singapore Exchange (SGX).
  • S&P 500 for the US.  The Standard and Poor's 500, or the S&P 500, tracks the performance of 500 large companies listed on stock exchanges in the United States. It is one of the most followed equity indices. It is a free-float weighted/capitalization-weighted index.

The weights for each benchmark are the value of funds allocated to the respective stock exchange at the beginning of the period. In this case, it is 1 Jan 2022. 

As per Table 7, for the first 3 months of 2022, the weighted benchmark return was 1.23 %. In the computation, I have assumed that cash did not generate any return. I have included cash because in determining my portfolio returns, I included cash.

Benchmark returns - computation
Table 7: Calculation Benchmark Returns
Notes
a) The overall gain is the sum of the individual weighted gain.
b) I have assumed that the Cash did not generate any gain. This is consistent with the assumptions used in computing my portfolio return as per Table 6.
c) Technically, the portfolio weights changed when I sold part of Boustead Plantations and I bought LIIHEN. I have taken a simple approach of assuming that the weights remained the same as those at the start of the period. This is because my goal was just to get an approximate value of the benchmark returns. 

Based on the computation, we can say that the portfolio performed well. It achieved a return of 5.32 % compared to the benchmark of 1.23 %

The example so far assessed the portfolio performance based only on the rate of return. If you view volatility as risk, you can include volatility in your assessment of the portfolio performance. In practice, there are 4 such measures:
  • Treynor ratio.
  • Sharpe ratio.
  • Jensen alpha.
  • Information ratio.

I do not view volatility as a risk. But I do use the CAPM concept, especially the Beta in determining the cost of capital. As such I assess my portfolio performance using the Information ratio and the Jensen alpha. But to compute these returns, we need returns from different review periods. As such I would cover these in the future. 

Checking the Diversity

The goal of a portfolio is to have about 20 to 30 uncorrelated stocks. You will have difficulty computing the covariances required to determine the correlations.

My approach was to use a “back-of-envelop” approach to analyse the portfolio based on several criteria to ensure that there is diversity. I assessed the degree of concentration under the following criteria.
  • Regions as represented by the stock exchanges.
  • Sectors or industry.
  • Market cap or size.
  • Business performance - Turnarounds, Compounders, Cyclicals.

The idea is to select stocks based on different factors. These could be economic, political, technological, and even market sentiment factors.

For each criterion, I classified the stocks in the portfolio into several groups and use this as the basis to assess diversification.  My rules of thumb for diversification are:
  • Single stock concentration - the market value of a stock should not be more than 10% of the market value of the total portfolio.
  • Group concentration - the market value of the stocks within a group should not be more than 30% of the market value of the total portfolio.

I then analysed the stock portfolio based on the various groupings as illustrated below. Note that for this analysis I have classified LIIHEN as a quality value stock.

Portfolio profile - regions
Chart 1: Portfolio Profile - Regions

Portfolio profile - investment types
Chart 2: Portfolio Profile - Investment Types

Portfolio profile - sectors
Chart 3: Portfolio Profile - Sectors

Portfolio Profile - Size
Chart 4: Portfolio Profile - Size

You can see from Charts 1 to 4 that we have the following breaches.
  • Regions/stock exchanges. 54 % of the portfolio is invested in Bursa Malaysia stocks. This is because I am familiar with investing in Bursa Malaysia. Having said this, I will look for investment opportunities in other countries to reduce this exposure.
  • Investment type. 36 % of the stocks are the Quality Value ones. I would not worry too much about this as the Quality Value stocks are my base investment type.

There was no breach under the sector or market cap criteria.

Conclusion

You will note that there are two aspects to maintaining the stock portfolio.
  • Keeping track of the various transactions. I suggest that you set up an EXCEL worksheet to do this. This can then provide the transaction history.
  • Reviewing and interpreting the results. This should be the main focus. By having a standard EXCEL worksheet, you can then spend time thinking about this rather than on the mechanics of tracking the various transactions.

Having a portfolio of stocks is part of the risk mitigation plan. This will require you to construct and manage a stock portfolio. 

Once you have set up the portfolio, you will need to review your stock portfolio quarterly. This is to ensure that it is still in line with the return and risk objectives. There are 2 critical review areas - the portfolio returns and the portfolio risk.

This is my first review and I have kept it simple by not considering dividends or increasing the portfolio size with additional funds.  I will cover such situations in a later post.



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Disclaimer & Disclosure
I am not an investment adviser, security analyst, or stockbroker.  The contents are meant for educational purposes and should not be taken as any recommendation to purchase or dispose of shares in the featured companies.   Investments or strategies mentioned on this website may not be suitable for you and you should have your own independent decision regarding them. 

The opinions expressed here are based on information I consider reliable but I do not warrant its completeness or accuracy and should not be relied on as such. 

I may have equity interests in some of the companies featured.

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