Adjusting my portfolio - Planning for 2021

Hi guys,

I am reviewing my portfolio and I would like to make some changes but I need some help to choose the best step forward.

Currently I have invested 117k and they are split in:

  • VWRL (26%)
  • Multiple SICAV (11%)
  • Company stocks (7%)
  • ARKK (5%)
  • Finpension Equity 100 (11%)
  • 2nd Pillar (40%)

Background
When I was working in Italy I bought some SICAVs and they have been performing quite well (+39% in three years). The funds are in EUR so I would retain them and use eventually EUR when I am going to help my parents with the downpayment for their new house.

In my company we have scheme where you can make monthly purchases of company stocks. If you keep them for at least 30 months, the company gives you a 30% match on the number of shares you hold.

I am contributing 250 CHF each month, nothing crazy, the stock price has struggled in the past two years so I am going to gain something but nothing huge. Also whenever I will decide to sell the company match stocks I am going to have to pay income taxes on them, while no capital gain taxes are going to be applied to the shares I bought during the accumulation period.

As I said in the introduction post, my company has a pretty generous second pillar scheme. This means that with my current salary I can expect them to contribute around 16/17k to the 2nd pillar for 2021.
Because of this my bond exposure is pretty high (43%) and I would like to be completely invested in stocks.

I started only investing in 2020 on IB with something very simple just VWRL. I then added SMMCHA at the bottom of the coronavirus dip and sold it in January (+31%) and bought ARKK (I wish I knew about this fund before).

2021 Plan
In January I have invested 5k on ARKK but now I need to figure out what to do for the rest of the year.
I am planning to invest 2k on IB each month plus at least half of my bonus in March.

I would like to keep it relatively simple and these are the funds I am considering to add:

  1. iShares Edge MSCI World Quality Factor UCITS ETF
  2. SSON

The objective is to focus more on value/quality and maybe add some exposure to small/mid cap which is currently missing in my portfolio.

Next steps
What I am struggling to figure out is the Target Asset Allocation and maybe if I am overlooking something in my strategy.
Maybe some more Emerging Markets? I have them in one of my SICAV but I know I am going to cash out those by the end of the year so I need to think about that.

Do you have any suggestions or advice?

Thank you so much in advance!

I’ve touched upon this here.

In short, this iShares ETFs tracks a “sector neutral” index that retains sector weights according to vanilla MSCI World.

I think it’s a good idea to invest reasonably diversified across sectors. And while I think that it might be academically interesting to, ceteris paribus, isolate that “quality” factor, I see no reason whatsoever why that would be desirable as a fund to invest in. Sector weights on stock markets aren’t a representation of the “true” economy. It’s more or less just a random number - or a function of what companies go public (which might differ greatly between different countries, for accessibility of equity markets, regulatory reasons, etc.).

MSCI World Quality
MSCI World Sector Neutral Quality Index
(Side note: I hate it how MSCI always choose different start dates for the graphs and annualised comparisons in their factsheets)

Completely agree, actually I got to know about that fund by reading your post above.

What about the correlation between that and VWRL? Does it make sense to have both of them or just going with the quality one based on its past performances?

Have a look into AVUV and AVDV from Avantis, that might be a good fit for what you are looking for.

Also have a look at AVEM from Avantis or even FEET from Fundsmith if you don’t want China in the mix.

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  1. I think Julianek has laid out very well the fundamental case to prefer “Quality” in the thread linked. He is a much better writer than me to do that. And I agree with his points).

  2. There’s basically three categories of stocks:
    The ones that I actively would want to hold.
    The ones that I am somewhat indifferent to or don’t know too much about (but would hold for diversification).
    And then, there are some that I would not want to hold.
    MSCI Quality happens to align with my personal views and weed out the undesirable elements remarkably well - while retaining the constituents I’d want to keep and/or overweight them.

  3. The MSCI Quality indices have outperformed the “vanilla” ones over longer periods of time

For these reasons, I am making my recurring investments mainly in MSCI Quality (at finpension). Or US Quality and Europe quality - since there seems to be no MSCI World Quality ETF that can be bought as a personal investor (though you can in finpension).

I am not investing in VT or VWRL/VWRL.
I prefer the Quality funds.
Just my personal opinion.

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Do you know if there is any research material to read about their strategy? Everybody seems very positive about them

I definitely agree with your point above, I had to re-read to entire thread you posted above to avoid asking other stupid questions.

There was one question in the thread that didn’t get an answer, if the MSCI Quality index is so good why do companies use the sector neutral adjustment?

If I can ask are you still invested in the MSCI US and Europe Quality (the Amundi and UBS funds)?

As a starter I recommend you this Rational Reminder podcast:

also available as video if you prefer:

Then if you want to more details you could read this PDF:

https://www.pwlcapital.com/resources/five-factor-investing-with-etfs/

True there is mostly positive comments except the usual (high TER, low AUM, new ETF/company, etc) and I would also be interested to read some more critical comments if any are available.

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Thank you, I guess I know how I am going to spend my day tomorrow :slight_smile:

I don’t know. If I remember correctly, iShares even switched from one to the other on their US-domiciled Quality ETF.

One consideration might be sector biases. What if the sector itself has low return and bad economic prospects? You don’t necessarily want to overweight these sectors - according to your “factor”, and there are other factors than “Quality” - just because stocks in one particular sector are relatively cheap, small or have had momentum. I wouldn’t.

Superior operating characteristics (“Quality”) of companies operating in particular sector though would be the one factor and reason to overweight a sector - as long as I don’t overpay.

Also, if you read that PDF linked by mabi (chapter 6.1), Ben Felix…

…makes a point that retail ETFs often provide relatively little factor exposure while being relatively expensive. Tracking difference, costs, portfolio turnover (which, inevitably, can often be higher than in market cap-weighted funds)…

Yep - just thinking if I should the US with a US-domiciled fund (tax).

EDIT: actually… maybe not, unless I can find an MSCI Quality ETF with U.S. domicile

I listen to the podcast, it was super interesting, thank you again for the suggestion.
I read the white paper as well and I like the theory behind the diversified portfolio with the factor tilt proposed by Ben.

I am starting to get a clearer picture regarding the next steps, in particular:

  1. I have changed my strategy on finpension to invest in MSCI World Quality ETF.

  2. I am going to introduce in my portfolio the value/size factor through either the Avantis fund or SSON. I need to read more about Fundsmith before taking a decision here. Further resources on Fundsmith are welcome :slight_smile:

  3. I think I want to add to my alpha by increasing my exposure to ARKK to 10%, still a bet but I believe that they are investing in growth companies that will become value companies in the future and have monopolies in their respective sectors.

  4. I am not going to introduce any home bias given my situation with the 2nd pillar (I consider this to be invested mainly in bonds and with a CH focus).

Completely agree with the statement below, however and I know @San_Francisco you have stated before that the iShares Edge MSCI World Quality Factor UCITS ETF USD is not ideal because it still keeps the same sector weights of its parent index. But don’t you think it is a pretty easy way to get some exposure to quality? I know it might not be the best but I think I should still consider it given that it seems to capture some of the alpha returns.

In the end, excluding my 2nd and 3rd pillar holdings, I am leaning towards:

  • 50% VWRL
  • 20% IWQU
  • 10% ARKK
  • 20% AVDV/AVUV or SSON

Any comments?

Funds that had excellent performance in the recent past usually achieve it with taking high idiosyncratic risk and be lucky with it. There is a good chance that ARKK will underperform the market by quite a bit in the next 10 years. You can’t expect unexpected returns to materialize.

I wouldn’t recommend the quality fund as they may or may not capture profitability and investment factors. I would rather stick to someone who has a sound methodology that is based on the most recent research on factors.

If you are able to buy AVDV and AVUV, why not use VT instead of VWRL?

Here is my recommendation for someone who wants a factor based portfolio:


https://docs.google.com/spreadsheets/d/1yJSF7tBZpJPvRf7tja-7X_TFkyGRXpy_rR_HondhF10/edit?usp=sharing

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I know that and it is a very valid point, however I like the theory of hunting in the market what could become the next Amazon/Apple and revolutionize a sector.
I have subscribed to all the newsletter, I listen to their podcast, I am tuning in for all the market update and quarterly call and I really like all the pieces of research they put out.
At the moment the 10% doesn’t represent a big amount in dollar terms so I am okay with risking a more to have exposure in something I find interesting and it could have some nice gains in return. To be honest I feel less secure in having almost 10% invested in my company than ARKK from a pure diversification point of view.

Yeah I think you might be right. I need to understand better the definition of Quality. In the MSCI doc it is mentioned only “Sound Balance sheet stocks”.

Nothing in particular really, when I started I think I got spooked when I read that access to US was going to be restricted in 2022 and only UCITS were going to be available. I started investing in VWRL for simplicity, no need to convert CHF in USD and kept going that way.

Now I am just planning to do the rebalancing between February and March (hoping that March’s bonus is at least the same as last year :slight_smile: ).

Investing in technological revolutions doesn’t seem to give investors good returns.

What would you do if it falls 50%? Would you rebalance? Would you find the next thing where you can invest 10% of your portfolio? What if you have bad luck again?

Two 50% falls over the next 10 years would cost you 7.5% of your porfolio. This would add a performance drag of 0.78% per year or around 15% of the expected equity premium of global stocks.

From what I have researched end of last year about Fundsmith there is not so much available about the company itself or I am looking at the wrong places. Know that Fundsmith is a small company with just a bunch of employees and a charismatic CEO named Terry Smith, nothing more and maybe that’s the whole strength of it but can also be scary. I’ve watched a few shareholders annual meeting and other videos of him presenting at conferences. I like the guy but this is just my gut speaking and nothing really rational based on facts. For the basic facts their website present all you need to know really.

If you haven’t read that post yet on the forum have a look through it:

If you find anything exciting or less biased about Fundsmith feel free to post the resources on that forum thread.

There is also a recently released book of Terry Smith which is “just” a collection of articles written by him:

https://www.amazon.co.uk/Investing-Growth-companies-anthology-investment/dp/0857199013

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If you are interested in quality have you read one of the annual letters to shareholder’s on Fundsmith’s webpage? I had underwhelming experiences with factor ETFs personally [EDIT: just saw the post from Mabi so see you are getting multiple pointers to FS]

It should definitely give you a quality „tilt“ and less sector bias. In the end though, sector weightings are just a meaningless number. I see no point in adhering or being constrained by that.

Though I think one should be aware of sector bias - and have an opinion on it.

Well said. Personally, I don’t want a factor based portfolio. What others call sound methodology based on research, I tend to consider overengineering in the face of uncertainty.

I‘m also not much of an index investor.
Though do I do believe MSCI World Index is a good starting point for portfolio.
And that it can (hopefully!) be enhanced by emphasising or de emphasising certain stocks.

PS: There’s not necessarily anything wrong with factor investing and the logic behind it :wink:

I still have to watch Ben’s video but I know how he feels about these funds (I am halfway through his last podcast and there he is also talking about ARK Invest).

Currently I have just invested 5k on ARKK, I would consider going up to 10k if I see the opportunity. The objective of the next rebalancing it is going to be the focus on value through the Avantis/Fundsmith funds.

I completely see your point but again, I don’t consider that target 10% to be that material if the amounts we are talking about aren’t so big. If such big drops were to happen I would expect to see a systematic issue in the broad stock market as well. In the end ARKK is quite concentrated but on 30/40 holdings and I wouldn’t expect them to materially underperform for a prolonged period of time the market.

I could be terribly wrong and maybe I am, however I would still be inclined to increase my exposure after having adjusted the portfolio for a factor tilt. I am not rushing it, I want to read and document myself more and I could come to a different conclusion in the next weeks/months :slight_smile:

Thank you for the resources above, I am going to go and spend more time to read everything and report back

Definitely, I was just considering still IWQU due to the fact the MSCI World Quality index can be bought only with Finpension.

For sure the sector neutral is going to have its shortcomings, however I am still thinking it add some value over the foundation of my portfolio which is VWRL. I am still open to other options but I am not discarding the one of adding it to the portfolio.

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