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My view on what's going on in the financial markets and the global economy, and a few other things that might interest me from time to time.

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Portfolio update: 1H2024

I have been providing quarterly updates of my portfolio since last year.  This is the update for the most recent quarter ended June 28, 2024.

 

Market performance 1H24

The first half of 2024 was an exceptional period for most global equity markets, including US stocks.  It was much less favourable for bonds with the expected Fed easing anticipated at the beginning of the year largely giving way to the “higher for longer” narrative as inflation remained stubborn and the US jobs market remained firm. 

 

  • Yields on US Treasuries were higher by around 50bps across the curve at the end of June compared to the end of 2023, leading to total-return losses on intermediate- and long-duration US Treasuries. 

  • US investment grade corporate bond total returns were flat in the first half of the year, with USD and EUR high yield total returns slightly positive as they benefitted from tightening credit spreads.

  • US equity markets were solid, with the S&P 500 index soaring 14.5% in the first half of the year.  Driven by the Mag 7, the NASDAQ index was up even more – 18.1% in 1H24. 

  • Globally of the indices EMC tracks, Japanese equities performed the best in 1H24, with the Nikkei 225 index increasing 18.3% although most of those gains occurred in the first quarter.  Both the FTSE 100 and the STOXX 600 also touched record levels in the second quarter, while Chinese equities were one of the few global equity markets to lose ground in the first half of the year. 

  • Both gold (+12.9% 1H24) and Bitcoin (+43.3% 1H24) registered solid gains in the first half of the year, although Bitcoin was down 13.7% in the second quarter, illustrating why the benchmark cryptocurrency remains far from a store of value. 

 

The table below shows returns for the five years 2019-2023, and for the 1H2024, for:

 

  • the S&P 500 (total return),

  • the 7-10 year (intermediate) UST total return index,

  • the USD high yield total return index and

  • cash (UST bills with maturity of three months).


 

It also includes blended returns assuming four portfolio mixes: 85/5/5/5, 75/10/10/5, 65/20/10/10 and 50/20/20/10.  For each period, the portfolio mix that provided the best return has been highlighted.

Although far from perfect, these are the benchmarks I use to track the performance of my portfolio, a mix of around 77.5/0/12.5/10 (including gold with equities).  Using the total returns above for 1H2024, my portfolio mix would have generated a hypothetical 1H24 return of 12.7% using the total returns in the table above.  The reality is my portfolio far underperformed this hypothetical asset mix using standard benchmarks, a topic I will return to towards the end of this update. 

 

My portfolio attributes

Asset class mix

The table below shows the breakdown of my portfolio at the end of the first half of 2024 by asset class, and the direction of change since the last quarterly update.

The changes in my portfolio mix in the second quarter were modest, influenced less by conscience decisions and more by the strong appreciation in equities.  The cash portion of my portfolio – effectively the cash line item plus the USTs line item (since all of the UST bills I own have maturities of four months or less) – declined slightly.  I will restate the philosophy of my portfolio strategy which has not changed since the end of March:

 

  • Financial markets will (eventually) get more challenging, so my stock portfolio will likely continue to gradually shift to a more defensive posture,

  • My corporate bond portfolio (credit) will remain focused on shorter-dated (i.e. less than two years) investment grade USD-denominated bonds and leveraged loans (latter meaning “top of the capital structure” high yielding, secured floating-rate loans),

  • Short-term yields will remain elevated, so I will keep a good mix of shorter-dated UST bills and cash to meet my own cash flow needs , since these are generating mid-4% to 5% returns (although this is ending), and

  • Stay long equities and employ options strategies to provide insurance / hedging, some on individual names and some on the S&P 500 index.  I have always been an investor that recognises it is impossible to time the market.  Therefore, my philosophy is that it is better to pay for downside protection via portfolio insurance than getting in and out of equities.

 

Top 10 equity holdings

The table below shows my top 10 equity holding at the end of June:

My top 10 individual equity positions accounted for 45.2% of my total portfolio at the end of the quarter, slightly more than at the end of the first quarter.  The increased concentration was largely driven by the stellar performance of the four “Mag 7” stocks I own, even though I also reduced my holdings of BRK as planned simply because BRK was becoming too concentrated of a position in my portfolio.  I also sold some AAPL shares in April (too early), although the table does not necessarily suggest this because of the unexpected (and unexplainable) strong run in AAPL shares since mid-April. The leavers from the Top 10 table vis-à-vis end of 1Q24 included CSCO and PG, not because I reduced the positions, but because their share appreciation lagged many of the other names in my portfolio.

 

At the end of June, I held positions in 26 individual stocks, which in total represented 68.4% of my total portfolio including gold and alternatives.  In addition to individual stocks, my other equity exposure (8.6% of total portfolio) was through stock ETFs, mainly ETFs invested in energy (XLE) and certain countries where I am seeking exposure through indices including Japan (Nikkei 225), China (Shanghai Composite) and Europe (STOXX 600). 

 

Major 2Q24 equity trades

My major equity trades during the second quarter of 2024 included:

 

  • I sold some positions in early April for (US) tax reasons, including small pieces of AAPL, AMZN, SBUX, MSFT JNJ, and PEP.  I added back to all of these in other accounts within two weeks, except for SBUX.

  • I lightened again in SBUX in June due to performance concerns and completely exited DIS because the company’s stock is continuing to suffer from a combination of streaming losses and “over-wokeness”.

  • I started positions in NVDA (small) and ASML in early April, and added a couple of times to ASML.  This is my AI play – better late than never!

  • I added to V, CRWD and LULU (only to subsequently lighten in LULU in July because I am worried about the US consumer).

 

Options strategy to hedge

During the quarter I employed some hedging strategies, and just recently extended by S&P 500 puts to December and January (2025), to offset the fact that I am staying long equities. 

This insurance covers circa 40% of my equity portfolio.

 

Equity sector breakdown

The table below contains a stratification of my equity portfolio by sector, including all 26 individual stocks and one sector-specific ETF.

As far as geographic exposure, 85.3% of the stocks I own have their headquarters in the US or Canada, 11.1% in Europe (including the UK), 2.0% Japan (country ETF) and 1.6% China (country ETF).  Keep in mind that headquarters aside, most of the companies are global players regardless of where they are headquartered, although the exchange on which the various companies’ shares are traded of course matters.

 

Fixed income holdings

My fixed income holdings at the end of 2Q2024 are summarised in the table below:

Fixed income and cash decreased as a percent of my total portfolio, mainly reflecting the outsized appreciation in equities in 1H2024.

 

Returns

I have looked at my returns in a simplistic manner for my combined stock, bond and cash portfolio only (i.e. ignoring alternative investments).  On this basis, my $ portfolios (US accounts only) had a total return (price change + dividend/interest income) of 8.4% in the first half of this year, versus a full year 2023 return of 17.1%.  My £ portfolio had a total return (£) of 7.6% in the first half of 2024, versus 3.1% for full year 2023.  The blended return across all of my accounts in USD-equivalent for the first half of 2024 was 8.3%.  Recall that a 77.5/0/12.5/10 portfolio mix (see first table in this article) returned 12.7% for the first half of this year, meaning that the performance of my portfolio underperformed this hypothetical portfolio. 

 

This comparison of course is not perfect in that i) I own stocks and ETFs that are non-US (and hence not part of the S&P 500), and ii) my stock portfolio is more defensive that the S&P 500, especially since my aggregate ownership of Mag 7 stocks is less than the concentration of these same stocks in the S&P 500 index at the end of June.  Nonetheless, the underperformance of my portfolio can be attributed to at least four things (and perhaps more):

 

  • Although I own four of the Mag 7 stocks in size, I do not own META (+42.7% 1H24) and only own a small position in NVDA (entered April).  These two stocks were a material part of the Mag 7 that pushed the indices to record after record in 1H2024.

  • I owned some laggards to say the least, starting with LULU (-41.6% 1H2024), but also SBUX, BHP, MCD, DGE and VW.  Some are legacy holds, and some are there for diversity and / or current income. Nonetheless, LULU’s decline really hurt my portfolio returns in 1H2024. 

  • I own stocks outside of the US, and as you might know, US stocks had far better returns than any other large stock market in 1H2024 with the exception of the Japanese stock market.  I also own a position in an ETF on the Shanghai Index, one of the only markets that was negative in 1H2024.

  • I have consciously tilted towards a more conservative portfolio, or at least I would like to think so, and this has a bearing on returns.  The current return (dividends + interest income) on my portfolio in the first half of the year was 1.23%, or around 2.5% / year annualised.  This compares to an annualised yield of 1.32%/year for the S&P 500 at the end of June.  The difference of nearly 1% in current return reflects my portfolio mix (inclusion of fixed income rather than 100% stocks) and the fact that a meaningful portion of my stock portfolio is tilted towards more defensive, higher yielding stocks e.g. MO, CSCO, SO, PG, WM and JNJ, to name a few, that are certainly not – and are unlikely ever to be – “runners.”

 

I like following companies and selecting stocks that I believe will be winners in the long term.  However, like even the best and most respected investors, I am far from always being right.  Although I cannot fret with a solid 8.3% return on my portfolio in the first half of this year (around 16.7% annualised), the reality is my portfolio far underperformed a 77.5/0/12.5/10 (S&P 500/USTs/HY bonds/cash) mix of an S&P 500 ETF, a diversified high yield bond fund ETF, and cash (or short-dated USTs).  At my age and situation in life, I am willing to give up some upside in capital appreciation in exchange for a better current return to an extent.  I am also comfortable with my stock portfolio skewed towards generally more defensive names, recognising though that even these “safe” companies can occasionally stumble.

 

What’s ahead

Stocks had a fantastic run in the first half of 2024, bonds less so.  But can this continue?  I don’t think so, and the start to the third quarter is suggesting this might be the case.  Already, we are seeing some rotation out of the “big tech” names into smaller cap stocks.  Whether or not this continues of course remains to be seen.  For my portfolio, it is probably time to cut some of the laggards, at least the ones in which my confidence is falling in their future.  I have owned some of these many years, and some for decades.  I do not intend to dial up the risk at this point of the cycle, and in fact should arguably be more proactive in positioning my portfolio for what I suspect will be choppy waters during the second half of the year due to a combination of rich valuations, earnings volatility/risk, and a contentious upcoming US election.   

 

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