How to manage a portfolio of shares

Unless you’re a buy-and-forget investor, managing a portfolio of shares is an ongoing activity.

In fact, for most people, it should be a lot like gardening. For example, you’ll probably want to:

• Choose strong, healthy companies
• “Plant” a diverse range of companies so the portfolio can thrive under a range of economic weathers
• “Plant” a diverse range of companies so the portfolio isn’t overly affected by any one economic “disease”
• Give them time to grow
• Give them a regular health-check
• Trim them back if they grow too big
• Remove them if they’re no longer attractive or healthy

So just like a garden, a portfolio of shares is a dynamic entity which changes through the economic seasons. And just like a garden, a portfolio of shares needs regular care and attention if it is to reach its potential.

I’ve written about buying shares (on multiple occasions), selling shares and diversification before, so in this post, I want to focus on how these aspects of portfolio management come together in the real world on a regular basis.

Most gardeners check their plants on a regular basis to make sure they’re healthy and attractive. For the same reasons, investors should regularly check the companies they’re invested in.

For me this means reading each company’s latest annual, interim and quarterly results.

I also want to know about major acquisitions, mergers or other materially significant events that could impact a company’s long-term future.

Fortunately there’s an easy way to get this information.

Most public companies announce this sort of news via the Regulatory News Service (RNS) and there are various ways to access this info.

A good free way to access RNS info is Investegate.co.uk.

You can see the RNS announcements page for BT below, and I’ve drawn a handy red arrow pointing to the related RSS feed link (RSS is an easy way to have website updates pushed to you):

There are also many other RSS readers out there.

Personally, I use the RNS reader integrated into SharePad, which allows you to set up a virtual portfolio and then get all the news for those stocks.

One feature you’ll probably want in an RSS reader is a filter to block the large number of “junk” updates that RNS feeds contain, such as updates on “Total Voting Rights” or “Short Selling”. SharePad does that automatically but other readers will vary.

Every weekday I check the RNS feed for all of the holdings in my model portfolio. What I do next depends on what those updates are:

Annual results:

If a company announces new annual results then I’ll create a new Company Analysis Spreadsheet for that company by copying last year’s spreadsheet and updating it for the newly announced revenues, profits and so on.

I’ll then read through the annual results and jot down a few notes on how the company’s performing and where it’s heading.

Interim results:

For interim results I don’t update the company’s spreadsheet, but I do look at how revenues, earnings etc. are progressing.

Again, I read through the results and make a few notes on anything I think is relevant.

Trading updates / quarterly statements:

These are shorter updates and I usually just skim-read them as they rarely contain anything material to a company’s long-term future.

Other material news (acquisitions, mergers, regulatory changes, etc.):

How much attention I pay to these depends on how large their impact is on the long-term future of the company.

For example, if the announcement is for a small acquisition, I’ll just skim-read it. But if there’s a major regulatory change that could have profound impacts on the whole industry, I’ll read it in more detail.

This process usually takes a few minutes each morning. When there are annual or interim results to review then of course it takes a bit longer; perhaps half an hour or so for each annual results review.

Although I do this daily, I don’t think it would hurt to do it weekly and most weeks this RNS review should only take five or ten minutes, assuming you’ve set up filters to filter out most of the junk.

Let’s return to that gardening analogy. Gardeners check the individual plants in their garden, but it’s also a good idea to check the health of the overall garden. And by health, I mean that the garden is not only healthy today but that it is likely to be healthy long into the future, regardless of what nature throws at it. For an investment portfolio, this means building in a layer of protection against these major risks:

Company risk: The risk that a company you’re invested in goes bust, or suffers a significant and long-lasting decline in its ability to generate revenues, profits and dividends

Valuation risk: The risk that a company you’re invested in suffers a significant and possibly long-lasting share price decline

Sector risk: The risk that a sector you’re invested in suffers a significant and long-lasting decline

Geographic risk: The risk that a country you’re invested in suffers a significant and long-lasting decline.

I’ve written about investment diversification before, so here I’ll focus on how I try to control these risks on a monthly basis.

The first thing I do is update the Portfolio Analysis Spreadsheet to reflect changes in the value of each holding. The spreadsheet can then work its magic and tell me how exposed the portfolio is to any one company, sector or country (the UK in my case).

For example, here are some charts showing the model portfolio’s current exposure to each of those three risks.

Of those risks, the only one that makes me (very) slightly uncomfortable is the portfolio’s UK weighting of slightly more than 50%.

That’s because I have an investment rule relating to UK exposure:

If that’s my rule, why is my model portfolio slightly over-exposed to the UK at the moment?

The answer is that over the last year or two UK cyclical stocks have, for fairly obvious reasons, become attractively valued relative to other companies.

And because I’m a value investor I go where the value is, and to an extent that’s in UK cyclicals, at least for now.

However, if things go badly and the UK has a lost decade or two, then investing heavily in UK cyclicals could be a bad idea. And that’s precisely why I have a soft limit on how directly exposed the portfolio can be to one country’s economy.

You can get data on the geographic source of company revenues and/or profits from SharePad, or you can often find it in the latest annual report.

Going back to the gardening analogy (again), gardens need to be trimmed and weeded to keep them healthy and a portfolio of shares is no different.

To give you an idea of why you might want to sell an investment, here are a few recent sales from the model portfolio along with the main reason why I sold each of them:

BHP Billiton: Sold because the company was no longer attractive (its growth rate had collapsed in recent years).

Beazley: Sold because the share price had grown too fast (up 100% in two years) and the share price was no longer attractive.

AstraZeneca: Sold because the company was no longer attractive (its growth rate had declined and its debts increased substantially).

Victrex: Sold half of this investment because it had grown by 80% in five months, by which time it made up more than 6% of the portfolio (I don’t like individual holdings to exceed 6%). As those examples show, there are three main reasons for selling:

Weeding (selling an unhealthy company): A company becomes unattractive because it’s growth, profitability, debts or something else has become significantly worse than when you invested in it.

Removing (selling a healthy company where the share price has grown too fast): A company has performed well, but that success has made the shares popular and expensive.

Pruning (selling half a holding to reduce its size): If a company has performed well the share price may have increased to the point where the holding is too big. In my case, I tend to cut positions in half once they grow to more than 6% of the portfolio.

In addition to the reasons listed above, my sell decisions are influenced by the portfolio’s current diversity.

So if, as is currently the case, the portfolio is overweight UK cyclicals, I would rather sell a UK cyclical holding than an international defensive holding.

And if I do sell a holding one month, I’ll buy something to replace it the following month. But here again, the portfolio’s diversity can affect my buying decisions.

Out of thirty holdings, my model portfolio currently has three companies in from the Support Services sector, so even if my stock screen‘s top-rated stock was a Support Services company, I would be somewhat reluctant to buy it.

Doing so would potentially leave the portfolio overexposed to risks that are specific to that sector.

However, I am willing to hold more than 10% in a given sector if the companies have little meaningful overlap (e.g. they operate in different countries or sell into very different markets despite operating in the same sector).

Having kept up to date with company news on a daily or weekly basis, and measured and tweaked the diversify of the portfolio on a monthly basis, the final portfolio management task is to measure performance.

Personally, I’m not interested in daily, weekly, monthly or even yearly performance.

That’s because in the short-term (i.e. anything less than about five years), the market’s random walk will overpower the underlying performance of the companies you’re invested in.

So although your portfolio’s total revenues, earnings and dividends might go up by 20% over three years, that can easily be wiped out by a short-term, temporary market “correction”.

But over five or ten years, such corrections are likely to be overpowered by the long-term, sustainable growth of the companies you own (assuming your investment strategy is sound).

I won’t belabour this point as it’s not overly complicated. You can just use a spreadsheet’s Internal Rate of Return function to calculate returns, including cash in and out. Or you can unitise your portfolio, just like a unit trust.

Here’s a quarterly performance review I made earlier which goes into some more detail on why tracking short-term performance is such a bad idea for most investors.

When it comes to portfolio management, a little goes a long way

So in summary, portfolio management is a lot like gardening.

Share portfolios require a small amount of work on a regular basis to keep them healthy, attractive, growing and robust.

None of this takes very long, apart from analysing new investments which you would probably be doing anyway.

And for me, the time spent keeping up to date with each holding, as well as the portfolio’s overall diversity and performance, is just another form of sensible investing.