We are already six months into the year 2020! Unless you live on Mars, there was no avoiding terms like COVID-19, Corona Virus, Black Lives Matter, Pandemic, and Recession. Amidst all of the chaos that has been 2020 thus far,  there are some good things that have transpired as well, see here to see the list of macro level-good and here for a list of day-to-day good! At a personal level, Mr AVI is also thankful for having a healthy-family, a safe-haven we call home and a stable job!

I digress, the topic for today’s post is not about the good or the bad in 2020, rather mundane review and health-check for Mr AVI investment portfolio. Portfolio health-check is usually an annual task for Mr AVI, however, given the fact that so much has transpired in the investment world in short-four months since February of 2020, Mr AVI felt it was a necessary exercise to do a portfolio review to figure out if any major changes are warranted.

AVI Portfolio and Performance

Let us begin by reviewing performance of Mr AVI portfolio for the year to date!

The chart traces the performance of Mr AVI portfolio (AVI) and VTI, which is an ETF that tracks the performance of a cap-weighted index representing overall US markets.  Suffice to say, its not been a pretty showing for Mr AVI portfolio, down -8.85 % for the year relative to -3.86 % drop in US stocks.

The table below presents the performance of various asset-classes and the percent of asset class present in Mr AVI portfolio

• AVI portfolio has a healthy international equity exposure at ~15 %, which certainly has been a major drag given its sub-par performance for the year to-date.
• The bench-mark for alternatives is equal mix of VNQ (real-estate ETF), DBC (commodities ETF) and IAU (gold ETF).  This does not reflect the distribution of alternative assets in Mr AVI portfolio, as Mr AVI has very minimal exposure to commodities. A significant portion of alternatives for Mr AVI has been in gold and gold (IAU) is having a spectacular run thus far, up >15% for the year so far.
• VTI also is not a good proxy for the US equity exposure in Mr AVIs portfolio.  Mr AVI has heavy exposure to individual US equity stocks. Infact, top 10 equity positions account for about 48 % of US equity exposure for Mr AVI, which equates to about 65 % of net US equity exposure in Mr AVI portfolio.

The chart below shows the distribution of top 10 individual equity positions in Mr AVI portfolio.

Some observations are warranted here:

• Top two individual equity positions happen to be tech, which as surprising as it may seem, have been the shinning asset class of COVID-19 pandemic. Both AAPL and FB are still cheap relative to markets (S&P 500 index PE: 25.62) and may have further room to grow.
• Mr AVI holding in BRK.B has steadily grown through COVID-19 crisis. As it happens, two of Mr AVI top 5 stock holdings, AAPL and WFC are also a significant component of BRK-B holdings.
• WFC was already struggling as a result of the fake-accounts crisis, and COVID-19 only exacerbated the banking woes. The entire financial sector is now trading at a discount to intrinsic value, that too in times when most big banks are scoring high marks on the FED stress test, and are flush with cash to easily weather the COVID-19 storm.
• In a recent interview on the investor hour podcast,  Rupal Bhansali, CIO and Portfolio Manager at Ariel Investments, presented a convincing bearish and non-consensus view on AAPL as an investment. Given the great run that AAPL has had through the past 4 months, and given the fact that I am already exposed to AAPL to BRK-B, I may trim some of my position in AAPL to take some profits off the table!
• Small-Cap value stocks were decimated in this pandemic and unlike tech they have hardly recovered (down -25 % for the year). EAF and MMP are two small-cap value stocks in Mr AVI portfolio, and the pain is evident!
• Mr AVI purchase of BA, was a pure contrarian play! The 786-max fiasco had impacted the stock quite a bit, and though not trading at valuation multiples, I thought the crisis was eminently solvable and the Boeing/Airbus duopoly was sufficient moat to sustain the market valuation over long term. Boy, did I make a mistake! Air travel was massively hit in this pandemic and BA was one of many air-travel related stock casualties of the this crisis.

Given the heavy US equity exposure (as can be seen from above), Mr AVI portfolio is certainly quite aggressive. How aggressive?, well we can look to the efficiency frontier curve for an answer.

While Mr AVI portfolio sits on the efficiency frontier curve (which is a good thing), the level-of risk as measured by portfolio volatility is rather high! Given the fact that Mr AVI is still actively pursuing a working career, and has a reasonable cushion of emergency funds, he is at present quite comfortable with the level of risk in the portfolio!

Taxable vs Non-Taxable Accounts

The chart below provides a break down of AVI portfolio in terms of assets in taxable and non-taxable accounts.

To clarify, non-taxable accounts include, individual (and spouse) IRA accounts (traditional and Roth) and company sponsored 401K account.

What are some observations?

• Taxable account of AVI portfolio has a very strong equity bias, with very minimal exposure to bond or alternative assets.
• Taxable account represents a greater portion of AVI portfolio, standing at almost 60 % of AVI portfolio.
• Unsurprisingly, with very little bond or alternative asset diversification cushion, the performance of taxable account has suffered more so than the non-taxable account. Surprisingly though the divergence is not much, given a some what higher percent exposure to equity assets in the non-taxable accounts as well.

Finally, a snapshot of overall AVI portfolio is presented in the two charts below:

The losers have been disproportionately in individual stock holdings in value bets or contrarian bets! With the exception of M and CRTO, I am comfortable with other loss bets and should the markets tank from here on, I may even increase asset allocation in these holdings (not to exceed 5 % threshold, exception being BRK-B).

Finally, the cash assets in AVI portfolio currently stand at about 2 % of the portfolio.

Synopsis

• Markets have recovered quite a bit from the March lows and so has Mr AVI portfolio. Given the fact that pandemic is still raging, there is no saying when Mr Market will catch a cold. Mr AVI is therefore considering using the cash assets in the portfolio to purchase portfolio insurance in the form of put leap options on index-fund that closely mimic AVI portfolio.
• Multi-bagger gains can only be achieved by being right on equity bets and this remains goal for Mr AVI for a foreseeable future.
• Contrarian value investing remains Mr AVI strategy to achieve multi-bagger wins. Position sizing, ability to hold through multi-bagger gains and betting big when odds are in favor are all attributes that Mr AVI still need to work on!
• AVI portfolio remains on the high end of efficiency frontier and Mr AVI remains comfortable with the expected returns for the level of risk he is willing to take.
• If anything, some exposure to alternatives in AVI portfolio taxable accounts may be warranted. Real-estate investing may be a path to pursue in the later half of 2020, should the interest rates remain as low as they are.
• Overall though, I am quite satisfied with AVI portfolio diversification and concentrated bet on a subset of individual stocks and do not feel any drastic changes are warranted at the moment.

Video/Book/Article/Audio for the Week

• Podcast: Rupal Bhansali interview on the investor hour podcast, highly recommended
• Video: David Rubenstein interview with Bill Ackman, yet another must watch (may be I am simply biased to Bill’s way of thinking on investing).
• Article:Fascinating article on the search for life in universe through the lens of Great Filter, and why the filter being behind us may be a good news!
• Book: The Biggest Bluff by Maria Konnikova. I came across this book in listening to the latest Freakonomics podcast. The topic of the book was quite apropos, given the fact that I recently had a chance to learn how to play poker. Maria offers a fascinating perspective on how poker mimics the game of life!
• Book: The Complete Tightwad Gazette, by Amy Dacyczyn. Yet another book recommendation, this one on the topic of frugal living in pursuit of financial independence.
• Book: Finally third book recommendation for the week, Pitch the Perfect Investment, by Paul Sonkin and Paul Johnson. As one of the reviewers of the book on Amazon put it best, the book accomplishes two goals: (i) synthesizing investment theory to create practical analytical tools and (ii) teaching readers to select a security appropriate for the fund s/he is pitching to and to deliver a well-organized and effective pitch.