This article is the update of my personal portfolio for the most recent quarter ended September 30, 2024. To provide context, I will start by looking at overall market performance during the recent quarter.
Market performance in the third quarter 2024
US equities
US stocks continued to march higher in the quarter, experiencing a broadening of the rally into non-tech sectors and small cap stocks. The Russell 2000 was the best performing index in the quarter (+8.9%), followed by the DJIA (+8.2%). The NASDAQ composite was the worst (+2.6%), as its tech concentration weighed on its performance. It was not all smooth sailing though, as the period from mid-July to the first week of August had poor sentiment and higher volatility. The S&P 500 closed below 5,200 on August 7 for the first time since early May, backing up over 8% in a matter of three weeks. However, this difficult three-week period ended, and US stocks clawed back their losses and more the rest of the quarter, closing at yet another record high of 5,762.48 on September 30.
Global equities
Globally, Chinese equities were the best performing index in the quarter (Shanghai index +12.4%), as investors piled into Chinese stocks in late September following the promise by the government of a set of comprehensive measures to improve economic growth. The worst performing index was the Nikkei 225 (-4.2%), which lost ground for the second quarter in a row. Chinese stocks pulled EM indices higher. European indices delivered modest gains during the quarter.
US Treasury bonds
US Treasury yields fell sharply across the curve in the third quarter, handing duration investors nice total return gains. Also, for the first time in 25 months, the 2y-10y yield difference returned to positive territory in August. The improvement in yields was largely in anticipation of further Fed easing, as inflation continued its steady march downwards. The intermediate and longer end of the curve was also anticipating a slowing US economy, which data is yet to fully support as the economy remains resilient. Total returns for intermediate and long-term bond indices were sharply positive in the quarter, the first positive quarter this year. The improvement in underlying yields also helped corporate bonds, which had juicy returns in both investment grade and high yield during the quarter.
Gold, US Dollar and other assets
Gold continued to edge higher, hitting record high after record high during the second part of the third quarter. Gold was up 13.2% in the third quarter alone, and 27.8% YtD (through Sept 30). The Yen was volatile especially in early August, strengthening strongly during the quarter in anticipation of the eventual normalisation of monetary policy by the Bank of Japan. This led to pressure on the carry-trade, the unwind of which was clearly one of the major contributors to shaky global risk markets in early August. The US Dollar sold off during the quarter, down 4.8%, although the greenback is up slightly YtD in spite of a barrage of rhetoric suggesting it would weaken. Keep in mind that FX is a relative game wrapped around things like future expectations of interest rates, outlook for economic growth and political stability, which vary country to country (and hence, currency to currency). Oil bounced around but was sharply lower in the third quarter in spite of the Middle East conflict worsening, with WTI ending the month at $68.17/bbl (–16.4% in the quarter). Bitcoin reversed its second quarter loss, up a solid 5% in the third quarter, and just over 50% YtD through September 30.
The table below shows returns for the five years 2019-2023, and through the third quarter of 2024, for:
The S&P 500 (total return),
MSCI non-US stocks (proxy for foreign stocks)
The 7-10 year (intermediate) UST total return index,
The USD investment grade corporate bond total return index,
The USD high yield corporate bond total return index, and
Cash (proxy is UST bills with maturity of three months).
I put together four model portfolios which have a mix of the six indices above. Keep in mind that these portfolios exclude some asset classes like commodities, cryptocurrencies, private debt and private equity, since getting credible return data for these is difficult. Each portfolio is tested for the full years 2018 to 2023, and for the first nine months of 2024.
I will address this later in this update, but I consider my portfolio somewhere between the third (C) and the fourth (D) model portfolios.
My portfolio attributes
Asset class mix
The table below shows the breakdown of my portfolio at the end of September, and the direction of change since the last quarterly update.
The changes in my portfolio mix at the end of the third quarter compared to the end of the second quarter were not material, mostly driven by changes in prices of stocks, bonds and gold. I consider my portfolio to be on the aggressive end in terms of the amount I have invested in equities overall. However, I consider my equity portfolio reasonably balanced, perhaps slightly defensive. And I also have out-of-the-money puts on the S&P 500 that cover around 40% of my portfolio.
Top 10 equity holdings
The table below shows my top 10 equity holdings at the end of September:
My top 10 equity positions accounted for 45.8% of my total portfolio at the end of the quarter, slightly more than at the end of the second quarter. Changes in portfolio concentration were primarily influenced by changes in stock prices rather than trades. Of the stocks in the table above, I did add small amounts of MFST and PG on weakness.
At the end of the quarter I held positions in 24 individual stocks, which in total represented 69.7% of my total portfolio. In addition to individual stocks, my other equity exposure (7.9% of total portfolio) was through stock ETFs, mainly in energy (XLE) and certain countries / blocs where I want exposure through indices including Japan (Nikkei 225), China (Shanghai Composite) and Europe (STOXX 600).
Major 3Q24 equity trades
Keeping in mind that I am mainly a long-term buy-and-hold investor, my equity trades during the third quarter of 2024 were as follows:
I added small amounts to existing positions in MSFT, PG, NVDA, ASML and NOVO during the third quarter. I also sold scraps of SBUX early in the quarter, before the shares dropped sharply (having since recovered most of their decline) and MCD.
I reduced more aggressively my position in LULU. I also completely exited VW and Diageo, the former of which has been a disaster nearly since I decided I wanted to buy an automotive company (for some stupid reason) three years ago. As far as ETFs, I further cut my position in the NIKKEI 225 ETF mid-quarter as Japanese equities were near their record highs.
Although I stayed well long stocks, I rolled my SPY hedges out to the end of December, end of January and end of February. I believe these out-of-the-money puts cover around 40% of my portfolio.
I selectively bought short dated (covered) calls/sold puts to protect SBUX and NVDA after big runs, both of which were flat trades and have now run off.
Equity sector breakdown
The table below contains a stratification of my equity portfolio by sector, including all 24 individual stocks and one sector-specific ETF. The two gold ETFs I own are in the "Materials" sector.
I reduced significantly my exposure to consumer discretionary stocks in the quarter, mainly by trimming existing positions. Most other changes were driven by changes in underlying stock prices, with of course gold (materials sector) continuing to push higher and energy stocks declining. Both of these sectors have somewhat idiosyncratic risks that drive their prices.
As far as geographic exposure, 84.8% of the stocks I own have their headquarters in the US or Canada, 11.3% in Europe (including the UK), 1.9% Japan (country ETF) and 2.0% 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 can matter.
Fixed income holdings (and cash)
My fixed income holdings including cash at the end of 3Q2024 are summarised in the table below:
Fixed income and cash is slightly less of my total portfolio than at the end of the second quarter. I also did some modest rebalancing in my fixed income portfolio in the third quarter, reducing the amount of cash / cash equivalents and increasing my exposure to UK government bonds (Gilts) and to UK corporate bonds. .
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 11.0% through the end of September, versus FY2023 return of 17.1%. My £ portfolio had a total return (£) of 3.8% through the end of September, versus 3.1% for FY2023. When my £-denominated holdings are converted into USDs, my year-to-date blended return across all of my accounts in USD-equivalent was 11.0%. With a return of 8.3% at the end of June, I gained some ground in a difficult third quarter, but not a significant amount. The return is admittedly still well below what I could have achieved by simply buying passive indices in a similar portion to my individual asset class holdings (although it would not be as intellectual challenging I suppose).
My portfolio mix is more complex than those I presented at the beginning of this update, but lies somewhere between portfolio C and D. On this basis, I would think an appropriate benchmark return would have been in the neighbourhood of of low/mid 16% area, so I have underperformed this hypothetical portfolio. The underperformance can be attributable to several things (and perhaps more):
The concentrated names in the Mag 7 had mixed results in the third quarter, but a broadening rally caused most names that are tech or tech-related to suffer. In particular, two of my largest Mag 7 holdings – MSFT and GOOG – lost ground during the quarter. Below the Mag 7, my best performing stock in the first half of the year – CRWD – became the worst performing in the third quarter (due to the glitch in its software update). I also suffered with ASML, a position I started to build in the second quarter, as semi-conductor-related stocks came down to earth.
Some of my first-half laggards improved, especially LULU (down but has come off of it lows) and SBUX (new CEO boosted shares). Generally, I reduced consumer discretionary names in the third quarter, although recent US economic activity is raising some doubts about this strategy since US consumers are continuing to spend, spend, spend!
As tech lost some lustre, other sectors improved. In fact, some of my best performers in the third quarter included more defensive “boring” names like SO, BRK, MO, CSCO and JNJ. Also, my China ETF gained ground along with everything else China the last week of the quarter, becoming my second best performing position in the quarter.
The current return (dividends + interest income) on my portfolio in the first three quarters of the year was 1.8%, compared to a running yield of 1.25% for the S&P 500 during the same period. The higher current return on my portfolio reflects the bond / cash component in my portfolio, but also the fact that I am slightly skewed towards more defensive (implying lower growth) higher dividend-paying stocks.
Carrying hedges in the form of S&P 500 puts on the index maturing in December, January and February is also a drag on my portfolio return, but I consider it a much better alternative – and always have – of trying to time the market by moving in and out of stocks or, more broadly, asset classes.
What’s ahead
As the fourth quarter kicks off, investors are recalibrating the outlook for equities and bonds, which can be attributed to three factors. Firstly, US economic news continues to point towards slowly declining inflation, opening the door for the Fed to focus on the jobs market. Although the Fed has shifted its focus, the reality is that the jobs market – and hence the US economy – remains solid, raising questions as to the trajectory of future decreases in the Fed Fund rate. This context is reflected in a backup in yields at the short end of the UST curve. The longer end has also seen yields increase, both a reflection of a slower decline in the Fed Funds rate, but also growing confidence that the US economy remains on solid footing. These factors are bullish for stocks as we look to the rest of the year, with a more uncertain outlook for fixed income. The fly in the ointment will be US inflation – any pause in the steady decline would inevitably rattle both the stock and bond markets.
Secondly, the Chinese government has finally unleashed a credible plan to address its slowing economy. Although I am not convinced the policy steps are comprehensive enough to cleanse the troublesome Chinese property sector, investors have reacted very positively to the measures announced by the government. In contrast to China, the Eurozone seems to be facing growing headwinds, which will probably cause the ECB to be more accommodative at future policy meetings. This will have follow-through effects on currencies, and I suspect the confluence of factors above will steady the US Dollar and put pressure on the Euro (and Sterling).
Thirdly, the geopolitical risk around the ongoing Middle East conflict, the Ukraine-Russia war and the upcoming US presidential election is present, but seems to be highly discounted at the moment. It is impossible to predict the future paths of wars, but I suspect the Middle East situation will worsen before it improves. In contrast and in spite of the news it garners, the US election will come and go, and regardless of which candidate wins the presidency, life will go on without radical change in economic policies (and in spite of the rhetoric). As a result, I am keeping my hedges on, but am staying invested (as always) as I know that good days nearly always follows difficult periods.
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