Europe - personal portfolio review request

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Topic Author
Kingswood
Posts: 22
Joined: Fri Sep 04, 2020 5:00 am
Location: Czech republic

Europe - personal portfolio review request

Post by Kingswood »

Dear all,
as I quite value the opinion of a lot of long term users here, I would like to kinldy ask you for help with the review of my forming portfolio with context of my personal situation and possible issues I am missing with my investments or ways, how to do the asset allocation better.

Personal background:
I am 32, citizen of Czech Republic (EU post-soviet country but with local korona currency controlled by local central bank. we are however highly related to Germany, so the currency is quasi EUR driven. Bank rates are in positive 0,25% rates with prospect to increase during 2H2021).
I am full time employed in financial / private equity business with quite low risk of losing job, unless our shareholder/UBO gets out of business by default.
I own a residential property purchased by mortgage, remaining debt is approx 85% of value of property. Property value is rising by 4-8% annually. Debt is in local CZK currency.
No other debt, no life insurance, no children.

Tax consequences:
We have high taxation of salaries, however all citizens have free healthcare, university education and pension scheme (which is eroding and will be in troubles in post 2030 due to demographics and decreasing natality). Dividends are taxed 15%, we have W8-BEN with 15% taxation on US dividends. Capital gains are taxed by 15% with 0% rate if equities are held more than 3 years. Interest is taxed by 15%.

Portfolio:
I am trying to divide the risk into high risk uncorrelated assets. I do not use leverage.

I invest regularly every month, I try to keep the balance that half of my investment is NAV of real estate (which is increasing due to mortgage repayments) and second half consists of investments below but I am off balance right now in favor of stocks due to high returns in 2020 (I invested significant amount of annual bonuses a the end of March).

30% - Developed Markets Quality ETF based on MSCI World Quality Factor. Factor filtered ETF which rates the constituents based on combined score of ROE, low Debt/Equity and earnings variability. 300 constituents. Developed markets exposure, tilted now to US and Swiss (72% and 6%). There is a possibility of trading a part of this into BRK.B, but I am not convinced yet.

25% - Developed Markets Momentum ETF based on MSCI World Momentum Factor. factored filtered ETF based on price momentum score of last 6 and 12 months. Risk weighted, 350 constituents, developed markets exposure, currently tilted to US and Japan.

10-15% Czech stocks nominated in CZK - we have very small equity market and index is not tradeable, basically this should consist of 3 stocks - all three high value (PE around 15) and dividend (5-7% p.a.) and domestic revenue - retail bank, national electricity provider with 2 nuclear power plants and telecommunications provider on oligopoly market. This portion covers east european emmerging markets with no currency risk exposure.

10% Chinese market ETFs - I own x-Trackers MSCI Chine ETF, which includes both Mainland and Hong-Kong stocks as well as foreign traded Chinese companies. This basically represents my exposure to Asia EM. I am thinking of diluting this by small portion of Taiwan MSCI Index ETF and Chinese sovereign mid/long term bond ETF.

5-10% small/mid cap growth stocks - I use Lyxor Disruptive tech ETF based on MSCI index which tracks 200 companies oriented on disruptive companies and is not weighted by market cap, but on disruptive potential. Current index composition includes basically 40% IT (AI and cloud), 40% healthcare (genome, biotech) and 20% energy (solar/wind). ACWI exposure (60% US).

15% cryptocurrency (dominantly bitcoin) - I prefer this to gold, same fundamental, but higher potential to grow due to low adoption. If the price increases, I will trade this off partially and replace it by gold miners ETF.

I am also thinking about adding Value factor ETF into the mix, as it is negatively correlated to momentum, but I am not 100% convinced about it, as it seems that my positions in china and czech market is already value heavy. I am also thinking about commodity producers sector ETF for the very same reason, but again, not convinced about it yet.

@Bonds - I am not sold at all in long term treasuries, as their rate is low, and I am also not convinced in TIPS as their inflation return is based on consumer inflation, which will not increase much (unlike the inflation in capital and real estate). Only exception is China, but the position there would be marginal.
vsquid
Posts: 76
Joined: Sat May 18, 2019 2:24 pm

Re: Europe - personal portfolio review request

Post by vsquid »

I think you should simplify. Have you read about the three fund portfolio?

You can omit the bonds if you want but there is no reason to invest separately in momentum, value, China etc. Just buy it all with a single fund like Vanguard FTSE All-World UCIT ETF or split it in two with a developed worl etf + emerging markets etf.

Crypto is a purely speculative play and I wouldn't call it investing. I don't gamble, I don't buy Yen or USD just in case EUR loses value (stocks are the best inflation hedge). I don't speculate in crypto.

TIPS are a complex investment are very few people understand how they actually work. The sad fact is that they don't promise you "at least inflation". Rather the promise is "inflation + interest rate" and the interest rate can be negative. If you check the current TIPS auctions etc you see that TIPS buyers are locking in a negative interest rate. Do you want to lock in inflation-adjusted negative returns if you can get 0% or more on a bank account? I don't think so.
DJN
Posts: 762
Joined: Mon Nov 20, 2017 12:30 am

Re: Europe - personal portfolio review request

Post by DJN »

Hi,
welcome and well done. A few points from me.
I would list out the actual names and tickers of the ETFs that you are proposing and in addition I would add the TER or expense ratio for completion.
I would consider carefully whether you might include some global aggregate bond allocation in your calculation for ballast and for reallocating once or twice a year. The only other scalable alternative to bonds is ....?
EUNA / AGGH are the first bond choice for me (hedged to euro, I guess that would be the best bet for you?).
Personally I would look to reduce your mortgage percentage gradually over time to nearer 60% or 50% as a target. Might happen in any case with value increase.
Your tax regime is nice and simple. I assume that you will use accumulating funds, is that the best route?
I would simplify as much as possible and ditch the factors etc and go for a global equity fund + emerging markets fund + if you are exotic a small cap fund.
See:
https://www.bogleheads.org/wiki/Simple_ ... portfolios
DJN
PS look at Bogleheads Wiki for non-US investors starting here:
https://www.bogleheads.org/wiki/Getting ... _investors
Yah shure. | Have a look at the Bogleheads Wiki in the first instance.
Anon9001
Posts: 707
Joined: Fri Dec 20, 2019 9:28 am
Location: भारत

Re: Europe - personal portfolio review request

Post by Anon9001 »

For the speculation part of portfolio it is good that you chosen Bitcoin over Gold in that the former has given much higher returns than Gold and I believe will continue to do so as the amount of suckers who put money into Gold is very large compared to the same people putting money into Bitcoin even though it is in-famous/famous in the Internet and also due to the volatility being so high you can put very tiny percentages into it like 1-5% and still have a meaningful boost to performance unlike Gold. The problem with factors is that while they are un-correlated long-short if you are using long only the correlation tends to be very high to Market and every factor tends to be cyclical to my knowledge in that your factor might under-perform another factor. If you do choose too much factors however you are essentially getting Beta as the factors (Quality and Value tend to be inversely correlated long-short) tend to cancel each other out. I personally would not play this game if you are not highly patient as factors can under-perform for very long periods of time in relation to Beta.
Topic Author
Kingswood
Posts: 22
Joined: Fri Sep 04, 2020 5:00 am
Location: Czech republic

Re: Europe - personal portfolio review request

Post by Kingswood »

thank you for reply guys. as for the questions:

reasons why factors instead of full market etf:
Factors are (based on the research) outeprforming the all market funds due to capturing smart beta margin. Momentum is doing the best returns with highest volatility and is especiallygood for growth cycles of economy. Quality is working well in all of the economic cycle conditions. Further to that, each factor portfolio is quite low-correlated to each other which reduces the total volatility of portfolio if more of them is included + some of them (especially value and momentum) tend to have negative corelation.
I made quite a lot of research on them and the question for me is not "if" but "how". But if anyone posses any knowledge of papers researching equity factors proving that they do not posses excess returns, than please share, because I am building this on so far known knowledge that they actually do work.
The proposed ETFs are X-Trackers tradeable on Xetra (tickers XDEQ and XDEM) with TER 0,25%.

accumulating / distributing:
yes, I am in accumulating funds only, it is much better option from tax perspective.

mortgage:
I am pying the mortgage regularly down, i can even offset the interest with cash balance, however I am not willing to speed up the repayment cycle, as the intrest rate is much lower than average rate obtainable from equity investments. Mortgage will be repaid before my retiement though even if I do not speed up the process of repayments.

TERs of other funds:
China is the bigest issue, as there are either high TER or low TER but synthetic, low AUM/liquidity or other issues. I have Xtracker XCS6 with TER 0,65%
Lyxor Disruptive has 0,15% (ticker UNIC)

bonds:
I do not care much if the rate is positive or negative, but the issue is, that they are on the bottom. EU bonds are either from countries almost in default (Italy) or on total bottom (Germany), where you really can not decrease the rate any further, as it would absolutely wipe out bank sector. To top of that, yield curve is quite flat also. US is quite similar. If there is no possibility, that rates would go down and the yield curve is flat, than the treasuries value will never increase = no point in investing in them. Finally, bonds are absolutely same trash as cash as an instrument of protection against inflation. I am not willing to touch US/EU bonds by a 10 feet pole until the FED/ECB policy changes and rates go up to some decent level around 300bps on 25+ treasuries.
Corporate bonds do not have correct risk premium in my opinion (due to QE manipulations affecting the rates even in corporate bonds).
Only exception is China, where the rates are on at least some decent levels, but I am not overconfidient about their inflation rate relative to my country.

Thank you all for the links, I will go through it.
My biggest concerns of global indexes is that they are dominantly US tilted and large growth cap tilted. I do not like the overexposure of risk to these areas, as they predominantly overperformed already for decade. Especially US tilt, as I have nothing to do with US dollar and it will hurt the effective performance of my portfolio if dollar will weaken (and I do not see any possibility, that us dollar would maintain its strength in next 40 years). Both factor ETF funds I propose will tilt me out from large growth US stocks if they start to underperform without necessity to make a rebalance of portfolio on my side and potentially triggering taxable events.
Valuethinker
Posts: 41424
Joined: Fri May 11, 2007 11:07 am

Re: Europe - personal portfolio review request

Post by Valuethinker »

Kingswood wrote: Fri Nov 20, 2020 8:03 am Dear all,
as I quite value the opinion of a lot of long term users here, I would like to kinldy ask you for help with the review of my forming portfolio with context of my personal situation and possible issues I am missing with my investments or ways, how to do the asset allocation better.

Personal background:
I am 32, citizen of Czech Republic (EU post-soviet country but with local korona currency controlled by local central bank. we are however highly related to Germany, so the currency is quasi EUR driven. Bank rates are in positive 0,25% rates with prospect to increase during 2H2021).
I am full time employed in financial / private equity business with quite low risk of losing job, unless our shareholder/UBO gets out of business by default.
I own a residential property purchased by mortgage, remaining debt is approx 85% of value of property. Property value is rising by 4-8% annually. Debt is in local CZK currency.
No other debt, no life insurance, no children.

Tax consequences:
We have high taxation of salaries, however all citizens have free healthcare, university education and pension scheme (which is eroding and will be in troubles in post 2030 due to demographics and decreasing natality). Dividends are taxed 15%, we have W8-BEN with 15% taxation on US dividends. Capital gains are taxed by 15% with 0% rate if equities are held more than 3 years. Interest is taxed by 15%.

Portfolio:
I am trying to divide the risk into high risk uncorrelated assets. I do not use leverage.

I invest regularly every month, I try to keep the balance that half of my investment is NAV of real estate (which is increasing due to mortgage repayments) and second half consists of investments below but I am off balance right now in favor of stocks due to high returns in 2020 (I invested significant amount of annual bonuses a the end of March).

30% - Developed Markets Quality ETF based on MSCI World Quality Factor. Factor filtered ETF which rates the constituents based on combined score of ROE, low Debt/Equity and earnings variability. 300 constituents. Developed markets exposure, tilted now to US and Swiss (72% and 6%). There is a possibility of trading a part of this into BRK.B, but I am not convinced yet.

25% - Developed Markets Momentum ETF based on MSCI World Momentum Factor. factored filtered ETF based on price momentum score of last 6 and 12 months. Risk weighted, 350 constituents, developed markets exposure, currently tilted to US and Japan.

10-15% Czech stocks nominated in CZK - we have very small equity market and index is not tradeable, basically this should consist of 3 stocks - all three high value (PE around 15) and dividend (5-7% p.a.) and domestic revenue - retail bank, national electricity provider with 2 nuclear power plants and telecommunications provider on oligopoly market. This portion covers east european emmerging markets with no currency risk exposure.

10% Chinese market ETFs - I own x-Trackers MSCI Chine ETF, which includes both Mainland and Hong-Kong stocks as well as foreign traded Chinese companies. This basically represents my exposure to Asia EM. I am thinking of diluting this by small portion of Taiwan MSCI Index ETF and Chinese sovereign mid/long term bond ETF.

5-10% small/mid cap growth stocks - I use Lyxor Disruptive tech ETF based on MSCI index which tracks 200 companies oriented on disruptive companies and is not weighted by market cap, but on disruptive potential. Current index composition includes basically 40% IT (AI and cloud), 40% healthcare (genome, biotech) and 20% energy (solar/wind). ACWI exposure (60% US).

15% cryptocurrency (dominantly bitcoin) - I prefer this to gold, same fundamental, but higher potential to grow due to low adoption. If the price increases, I will trade this off partially and replace it by gold miners ETF.

I am also thinking about adding Value factor ETF into the mix, as it is negatively correlated to momentum, but I am not 100% convinced about it, as it seems that my positions in china and czech market is already value heavy. I am also thinking about commodity producers sector ETF for the very same reason, but again, not convinced about it yet.

@Bonds - I am not sold at all in long term treasuries, as their rate is low, and I am also not convinced in TIPS as their inflation return is based on consumer inflation, which will not increase much (unlike the inflation in capital and real estate). Only exception is China, but the position there would be marginal.
1. You are offly sure of your macro calls. What gives you confidence that you can, for example, call the USD better than the markets?

It's not like the US is some small private company you are trying to buy. It's a huge and highly studied capital market.

"Smart beta"-- well, yes. Doesn't smart beta smell of consultant alchemy to you? When the average pension fund client would just be better off in a global equity index fund? Massive backtesting against datasets.

Cryptocurrency. I don't see it. I don't see why there is anything inherently great about something whose main use is to bypass official, recorded channels and *that* is precisely why its usage will be restricted over time. And blockchain itself is, by design, not feasible at the sort of scale that an international financial system requires.

There is no underlying cash flow in cryptocurrency. No investment thesis other than "someone else will want it more than I do".

Gold has other attributes. Dense. Transportable (see the original of "the Italian Job" with Michael Caine ;-)). Thousands of years history as a store of value. Not reliant on technology.

David Swensen will take you through why holding the inflation-linked bonds of other currencies is really a mugg's game - to be avoided. That said, when Canadian Real Return Bonds got scarce, Canadian pension funds bought TIPS bonds (and made out like bandits). But the satellite-dependency situation of Canada vis a vis US dollar is perhaps unique.

China? Consider the size of their asset bubble - arguably the largest in all of world history. It is going to be interesting to see how they unwind this, particularly when the demographic winds are very much the other way.

To summarise. I think your portfolio is too complex, and risks "de worsification". You can laugh at me, because I am roughly 75% global index and 25% value, and that value has underperformed by c 30% so it's an even more attractive strategy ;-).

If you are really into investing, I suggest reading Lars Krojer's 2 books, and also his Monevator blog.
Laurizas
Posts: 131
Joined: Mon Dec 31, 2018 4:44 am
Location: Lithuania

Re: Europe - personal portfolio review request

Post by Laurizas »

Kingswood wrote: Fri Nov 20, 2020 11:42 am I made quite a lot of research on them and the question for me is not "if" but "how". But if anyone posses any knowledge of papers researching equity factors proving that they do not posses excess returns, than please share, because I am building this on so far known knowledge that they actually do work.
until it does not. In theory, theory and practice are the same, in practice, they are not. As you know, past performance is no guarantee of future results. Research shows that factors had worked in a certain period in the past. You take this research and extrapolate it into the future despite of changing demographics, accounting standards, access to investing (Robinhood), declining interest rates, changes in companies ownership structure (shifting from tangibles assets which are easy to price to intangibles) and many other factors.

As regards your portfolio, I would get rid of Czech stocks.
Topic Author
Kingswood
Posts: 22
Joined: Fri Sep 04, 2020 5:00 am
Location: Czech republic

Re: Europe - personal portfolio review request

Post by Kingswood »

Why to get rid of czech stocks? My expenses are in czech currency, so the income is important after conversion to czech currency. we have high value stocks here, currency is now undervalued as always during crisis (right after the crisis it weakened by 15% against EUR and 20% against USD and is slowly getting back, but it will take time and all the non-czk invetsments done since March are losing return due to this now). Can you elaborate what is your issue? Is it because of stockpick (index is not tradeable and it includes 8 companies anyway, 3 of them are banks).

TIPS: ok, point taken. I am not much into them and want to do more research about them, however your bogleheads wiki introduction videos here are promoting tips and I bonds as viable investment method to be honest.

as regarding the factors - @ Valuethinker - you have 30% in value (which is a smart beta factor), but you are against factors? I do not get it. My issue is, that there is extensive research on this matter (starting with nobel prize laurelate Eugene Fama who is deep in factors, following by other economists who were researching and backtesting factor excess margins in later years) and I am not aware of any evidence that factors would not overperform in longterm.
The introductionary relevant recent paper on five factor model by French and Fama is here: https://papers.ssrn.com/sol3/papers.cfm ... id=2287202
The backtests are robust on datasets since 1920s and also they remained and persisted even in periods after the publication. Especially for momentum and quality, which overperform especially well recent decade. Size and value had some weak years recently, but it is still too early to tell, because factors can underperform for longer time but they do tend to overperform market in long term. We already were in situation like this in late 90s and value and size dominated the market in next decade.

Quality world index: https://www.msci.com/documents/10199/34 ... a8fd024b65
- higher annualized return (calculated since 1994), lower std. deviation and higher sharpe.

Momentum index https://www.msci.com/documents/10199/90 ... 373446dffa
- same as above

Value index https://www.msci.com/documents/10199/25 ... b56eca8e0d
- slightly better return, but worse volatility and sharpe, however value had now really bad decade.

I understand that not everyone has to be into factors, but factor theory is based on quite extensive research, so the criticism should be based on some similarly backed data and not only dogmatic - invest into broad market index. I am open-minded on this matter, but please support the points you make by something. I am aware of Bogles book and investing approach, but his book do not explain, why would not factors work.

Thank you very much in advance for any replies, I mean this discussion seriously as I want to avoid traps.
Topic Author
Kingswood
Posts: 22
Joined: Fri Sep 04, 2020 5:00 am
Location: Czech republic

Re: Europe - personal portfolio review request

Post by Kingswood »

As for crypto - I suppose this would be really long debate which does not make much sense here.
I understand the risks, I see potenial return and I think, they are linked well. There is actually nothing bad in regulating bitcoin. Stocks are regulated, gold is regulated, regulating bitcoin would increase its security and accesability through ETFs etc. Illegality would be an issue, but I really do not see any reason why to ban a form of independent digital asset in a democratic open society. You can not pay taxes with it, so there will always be state currency and a legal requirement to accept fiat.

Value of bitcoin is in its decentrilised autonomy. You can not perform monetary policy in bitcoin, there is no need for intermediary in bitcoin (banks) and you are responsible and in full controll of your liquid digital asset, which highly secures your freedom. To top of that, all transactions in bitcoin are perfectly traceable, so after regulatory requirements to disclose ownership of bitcoin adress (like there are now on crypto exchanges) you can perfectly overview anyones income and therefor tax liability - this is certainly plus for governments.

Gold has only two advantages against bitcoin - history and that it works without internet. If the internet is down, we will be in so big troubles, that my concern will be more in my other 85% part of portfolio which is invested through online broker and cash in online banking system and not in my bitcoin saved safely in my offline hardware wallet under my control.

China - the macroeconomics data says otherwise. China is representing sixth of the global population and is rapidly growing closer to US and EU. Recent deal on free trade zone in SE Asia (covering 2bln. people) further shows Chinas potential for the future growth and prosperity despite the trade war with US... I am not a China fanboy and I hate communists, but emotions aside, I really think, that 5,6% share of China in ACWI is not representing current global economical strength of China market (Chinas share on global GDP is 17,5% and rising) and I am giving China more weight to the prejudice of US. I am not living in USA and there is no reason for me why to have so high exposure to US market and USD as I can not offset if US is doing poorly in future.
Valuethinker
Posts: 41424
Joined: Fri May 11, 2007 11:07 am

Re: Europe - personal portfolio review request

Post by Valuethinker »

Kingswood wrote: Sat Nov 21, 2020 4:48 pm Why to get rid of czech stocks? My expenses are in czech currency, so the income is important after conversion to czech currency. we have high value stocks here, currency is now undervalued as always during crisis (right after the crisis it weakened by 15% against EUR and 20% against USD and is slowly getting back, but it will take time and all the non-czk invetsments done since March are losing return due to this now). Can you elaborate what is your issue? Is it because of stockpick (index is not tradeable and it includes 8 companies anyway, 3 of them are banks).

TIPS: ok, point taken. I am not much into them and want to do more research about them, however your bogleheads wiki introduction videos here are promoting tips and I bonds as viable investment method to be honest.

as regarding the factors - @ Valuethinker - you have 30% in value (which is a smart beta factor), but you are against factors? I do not get it. My issue is, that there is extensive research on this matter (starting with nobel prize laurelate Eugene Fama who is deep in factors, following by other economists who were researching and backtesting factor excess margins in later years) and I am not aware of any evidence that factors would not overperform in longterm.
The introductionary relevant recent paper on five factor model by French and Fama is here: https://papers.ssrn.com/sol3/papers.cfm ... id=2287202
The backtests are robust on datasets since 1920s and also they remained and persisted even in periods after the publication. Especially for momentum and quality, which overperform especially well recent decade. Size and value had some weak years recently, but it is still too early to tell, because factors can underperform for longer time but they do tend to overperform market in long term. We already were in situation like this in late 90s and value and size dominated the market in next decade.

Quality world index: https://www.msci.com/documents/10199/34 ... a8fd024b65
- higher annualized return (calculated since 1994), lower std. deviation and higher sharpe.

Momentum index https://www.msci.com/documents/10199/90 ... 373446dffa
- same as above

Value index https://www.msci.com/documents/10199/25 ... b56eca8e0d
- slightly better return, but worse volatility and sharpe, however value had now really bad decade.

I understand that not everyone has to be into factors, but factor theory is based on quite extensive research, so the criticism should be based on some similarly backed data and not only dogmatic - invest into broad market index. I am open-minded on this matter, but please support the points you make by something. I am aware of Bogles book and investing approach, but his book do not explain, why would not factors work.

Thank you very much in advance for any replies, I mean this discussion seriously as I want to avoid traps.
If you see Czech as a value play, then great. Just beware the degree to which you are concentrating bets: your human capital, your home equity (if relevant), and possibly your career. Then add to that your financial portfolio? But I am all for value plays.

China does not look like a value play to me. Given the valuation of the top tech stocks etc anything but. On the other hand, I do hold a Far East Small Cap companies ETF (iShares). It's just this amazing list of companies (many Chinese) that I have never heard of -- and that does get me excited, a belief that it's far more likely that the market has misunderestimated one or more of those companies, rather than some big cap stock.

TIPS. Read David Swensen's book on personal investing. Actually read that one and the endowment investing one. Both pretty good reads.

The book to read on asset classes is Anti Illmanen "Expected Returns". Endlessly interesting.

The evidence against smart beta is:

- if there's smart beta, the funds don't seem to capture it very well
- when any anomaly is published about, its premium is then reduced (that is a well researched property, in academia)
- in the long run, things have always converged back to zero. That is, and Bogle shows lots of good examples (but he is not the only one), all of these factors have a tendency to provide above median performance, then below median, and to average out to zero (less additional costs of strategy implementation)

Re me and my 25% value. Value I always see as anchored in well-understood truths about human behaviour (see David Dreman's books). That stock market, like human beings, likes new & attractive, think Tesla, and dislikes dull and boring and old. But performance of the former tends to fade back to the median - inside every fast moving entrepreneurial company there is a bureaucratic slow moving industry incumbent waiting to get out. And the performance of the latter tends to fade back to the median from the other direction - to a large extent, Private Equity is about exploiting the small cap value premium.

Also there's the lottery ticket effect. People prefer right-skew bets -- on average a losing proposition, but there's a chance for the life changing win. See the anti-value stock of all stocks, in this bull market -- Tesla.

But that of course doesn't mean I am right. It's also a form of risk aversion. In at least some types of bear markets (but not 2008-09 or 2020) value falls less than the market as a whole. 2000-03 obviously the canonical example. But maybe that was value's "last hurrah".

Momentum would be the one I really wouldn't pick - and that might just be philosophical. Negative momentum (screening) works well with Value.

Quality? Low Volatility is another one that has quite a good explanation in the real world - that investors, unable to leverage, invest too much in high risk stocks, thus making Low Volatility stocks relatively "cheap". It would seem that that is what Warren Buffett has been doing all these years- -by intuition rather than academic research (which did not exist at the time).

However both Low Vol and Quality have been bid up in this market.

Size? If there is a size premium, it's not there in the recent data. Rolf Banz's original research was actually incorrect - he didn't understand how stock prices were set and reported pre (from memory) 1950. Then a lot of firms launched small cap funds, and they got killed post the 1987 Crash and into the 1990s. When you strip out dealing costs & market impact costs, I am sceptical there really is a small cap effect.

Note you can have an effect, but not be able to exploit it. Again this I think is the problem with a lot of smart beta - and I've certainly seen that argument that you can't mechanically pick value. Or that much of the value premium is, in fact, the gain from shorting the most expensive stocks, rather than from going long on the cheapest.

With Small Cap Value, I think you have to be Dimensional Fund Advisors. You need to go "active" and be smart about dealing costs & market impacts, and (for the EM products) screen out companies with bad accounting.

I come down to the thought that Factors is probably a zero sum game, over time. Factors outperform and they underperform, and in the end you wind up with market performance -- but with higher expense ratios and tax costs. I happened to be loaded into value around the 2000-03 (although I lost 80-90% of my money in my employer's stock) so did very well, but of course 2010-2020 I have given much of that outperformance back.
cz_raven
Posts: 8
Joined: Sun Nov 17, 2019 4:49 am

Re: Europe - personal portfolio review request

Post by cz_raven »

vsquid wrote: Fri Nov 20, 2020 8:42 am I think you should simplify. Have you read about the three fund portfolio?

You can omit the bonds if you want but there is no reason to invest separately in momentum, value, China etc. Just buy it all with a single fund like Vanguard FTSE All-World UCIT ETF or split it in two with a developed worl etf + emerging markets etf.

Crypto is a purely speculative play and I wouldn't call it investing. I don't gamble, I don't buy Yen or USD just in case EUR loses value (stocks are the best inflation hedge). I don't speculate in crypto.

TIPS are a complex investment are very few people understand how they actually work. The sad fact is that they don't promise you "at least inflation". Rather the promise is "inflation + interest rate" and the interest rate can be negative. If you check the current TIPS auctions etc you see that TIPS buyers are locking in a negative interest rate. Do you want to lock in inflation-adjusted negative returns if you can get 0% or more on a bank account? I don't think so.
Ahoj!
I agree with opinion above. Simplification is good first step. Especially if you are at the start.
If you like stock-picking and a bit of speculation then it is fine to do so but with very small portion of your portfolio (10% max at the beggining and it can grow after you will get more experience). However I would still kept at least 20-30% in diversified ETFs even after you will became decently skilled investor.
Do not make some mistake which I did - do not start with speculation and don´t do stock picking if you don´t understand the sector you are investing into.

Valuethinker provided very good insights here. I can provide also some in Czech language as I am also citizen of the Czech Rep. ;)
Topic Author
Kingswood
Posts: 22
Joined: Fri Sep 04, 2020 5:00 am
Location: Czech republic

Re: Europe - personal portfolio review request

Post by Kingswood »

@Valuethinker - thank you very much for long answers and tips for literature! Very much appreciated.
I understand your points on factors and I still see factors as OK-ish solution. If J. Bogle was correct and factors are zero sum game, than gross return is on broad market level and I will lose 0,15% annually (difference between Vanguard Global ETF and Factor World ETF TERs), but I still get lower standard deviation due to low correlation of factors (sometimes factor A goes down, sometimes factor B goes down, but the volatility is dampened). Also, if the theory of factors is correct, I still have skin in the game to capture the possible margin.
I understand though, that spcific ETFs has to be chosen carefully.

@cz_raven: Ahoj :) thank you for the intro, I am not so new into investing, I have the economical degree and I am working in the private equity industry and I kept it simple for several years now and moving forward. I am alsonot into stockpick at all. However I believe there is possibility to optimise own portfolio based on quantitative analysis and some presumptions about the market (and its not justa ll about the return, but also about taxes and volatility and risk of non.recoverable losses), which gets very close to smart beta funds for me as optimal vehical for this approach (low turnover of your own portfolio + relatively low cost). But I will think about the possibility to merge some of the different areas I want to invest in, into some available fund to simplify down.
glorat
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Joined: Thu Apr 18, 2019 2:17 am

Re: Europe - personal portfolio review request

Post by glorat »

Kingswood wrote: Fri Nov 20, 2020 11:42 am thank you for reply guys. as for the questions:

reasons why factors instead of full market etf:
Factors are (based on the research) outeprforming the all market funds due to capturing smart beta margin.
Momentum is doing the best returns with highest volatility and is especiallygood for growth cycles of economy.
Quality is working well in all of the economic cycle conditions. Further to that, each factor portfolio is quite low-correlated to each other which reduces the total volatility of portfolio if more of them is included + some of them (especially value and momentum) tend to have negative corelation.
I made quite a lot of research on them and the question for me is not "if" but "how". But if anyone posses any knowledge of papers researching equity factors proving that they do not posses excess returns, than please share, because I am building this on so far known knowledge that they actually do work.
Hi,

Hope you don't mind if I flag they way you have phrased some of the things above. I'm not into factor investing so I may be wrong... but would the following statements be more accurate than what you wrote?
  • Factors based on historic research have outperformed in the past
  • Moment has had the best returns in the past
  • Papers show that factors will possess excess returns IF the papers assumptions still hold in the future (e.g correlations). Whether those assumptions hold is a matter of investor conviction and belief
Hope you see where I'm going. I consider extrapolation from the past a sensible thing. For example, I believe that the lowering of volatility by low-correlated factors has and will continue to hold - but then that can be said of the total stock market, which holds all factors. However, the jury is still out on whether individual factors will in themselves produce better risk adjusted returns (e.g. the whole small cap value debacle). While there is a sensible debate to be had on this topic (which I'll avoid since I'm not educated), I'm only here to suggest that claims that factors are outperforming in the present tense you have used is not valid. (And maybe it is just a native English thing and maybe you already agree with this)
Laurizas
Posts: 131
Joined: Mon Dec 31, 2018 4:44 am
Location: Lithuania

Re: Europe - personal portfolio review request

Post by Laurizas »

Kingswood wrote: Sat Nov 21, 2020 4:48 pm Why to get rid of czech stocks?
Czech stocks is less then 0,1 % of world's total stock market. Having 10-15 percent of portfolio in these stocks means giving them unproportional weight.
Valuethinker
Posts: 41424
Joined: Fri May 11, 2007 11:07 am

Re: Europe - personal portfolio review request

Post by Valuethinker »

Laurizas wrote: Mon Nov 23, 2020 5:26 am
Kingswood wrote: Sat Nov 21, 2020 4:48 pm Why to get rid of czech stocks?
Czech stocks is less then 0,1 % of world's total stock market. Having 10-15 percent of portfolio in these stocks means giving them unproportional weight.
It's really a value play. I don't think there are any particular tax advantages to a Czech resident?

The idea is that he (she) knows the companies in his sector very well. Probably the Czech market is not well covered by equity research analysts as investment banks have cut back so much on coverage. Thus, there is the greater potential for mispricing.

In his/her case though:

- he works in Private Equity. Would there be any compliance concerns? (when I worked in financial services, I basically could not hold any number of stocks due to client relationships/ conflicts of interest)

- he's increasing his bets on the Czech currency and economy. Given his job, income, housing equity (if any) are all in Czech currency, does he need to "double up"?
Topic Author
Kingswood
Posts: 22
Joined: Fri Sep 04, 2020 5:00 am
Location: Czech republic

Re: Europe - personal portfolio review request

Post by Kingswood »

@Glorat: sure, your changes are correct, with one notice from ym side. Factors are not new idea. They were first published in 1993. MSCI indexes I referred too were established in around 2005. Except value and small, which is actually really heaving a trouble and there is a debate if the value margin is persistent and we are just in bottom period (factors tend to be on really long cycles), the rest of the factors are overperforming the market even after the research was published, the index was created and ETFs used them to trade the idea on the market for a decade. It of course, as you correctly pointed out, does not mean, that the future returns will continue to overperform, but there is at least some hint, that the overperformance survived the publication.
Further to that, as I noted, even if the return would be on market level in long term - rebalancing of negatively or low positively correlated portfolio will result in market return on lower standard deviation.

@Laurizas: ok got the point now. You are right but this is actually the question of risk for myself due to fact, that I live in open small economy with own currency. This will be little bit longer., sorry..

First point is, that my debt is nominated in CZK. My salary is also nominated in CZK, but performance of my salary (bonuses specifically) are dependent actually on the assets we have under control and their main sources of revenue are from high net worth individuals from Russia and Middle East, and from low income retail in China (this source is getting weaker and it should be gone away after planned IPO on Hang Seng, which was obviously delayed) and utility sector in Balkan. We are not holding anything significant in Czech actually (therefor also no issue with compliance).

This means, that my liability and spending are nominated in CZK, but my income is actually not much related to CZK and local currency performance. Czech is closing the gap between post-soviet country and developed market in EU (in the same way as east Germany is getting closer to west Germany) and the local currency is getting stronger against USD and EUR over the time. Just for the reference - I was working 16 years ago in UK for a while after high school and the exchange rate to GBP was 40+CZK to 1GBP, current rate is below 30. The very same is valid for EUR and USD.
There is also quite clear pattern, that with crisis, local currency weakens, and gets back to normal once the situation is solved. This happens despite the fact, that we have small public debt (it was 30% of GDP pre-covid and now 40% post-covid) and the interest rates are higher than on EUR (base bank rate is 0,25% and was above 2% in March - so its not any close to ECB policy with negative rates longterm), QE is also much smaller here than with FED and ECB.
The rate to EUR in February was 24,50 CZK/EUR, in March post covid 28 CZK/EUR and now 26,3 CZK/EUR with outlook to get stronger again... That was actually also the reason I started to buy Czech equity this year. I know very well what I am holding - my equity has insanely good balance sheets with actually almost no risk of bankrupcy, extremely high dividend yield on spring/summer valuations when I was buying and no currency risk. The situation turned around a lot since April/May - fx rate is better and valuations of czech equity is higher, so czech stocks are not important for me again, but I am convinced, that the risk to reward ratio was extremely favorable for me and until the situation is back to normal, I do not think the reduction of my position here should happen

However I get the point and will think about if 15% is reasonable for the future once covid is away and most probably get rid of the major part of it again.
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