Note that I cannot give personalized advice over a general blog post such as this. The following portfolio is one I would be comfortable with, but my situation might be quite different from yours. The information here is illustrative and you should consult with a financial advisor before making any decisions. Please also see disclosures at the end of this post. While I’m generally an advocate for focusing an equity portfolio on the most compelling investment ideas, within reasonable bounds, I can empathize with clients who prefer a more diversified approach. This post considers how I might design such a portfolio. Legendary investors such as Warren Buffett have long advocated for a concentrated equity portfolio. In 2008 Buffett said “It’s crazy to put money in your twentieth choice rather than your first choice.” His business partner Charlie Munger has the majority of his money in only 3 stocks. For me, the sweet spot is approximately 20 position, which can offer the majority of the diversification benefits of an index, assuming that holdings are not overly concentrated within a single sector, industry, or theme, while being focused enough to “move the needle” if a few of the positions perform well over time. You can find my investor letters discussing my “concentrated” portfolio here. Nonetheless, the fact remains that a large number of investors find it challenging to cope with the volatility inherent in such a focused portfolio. While I personally feel at ease with volatility due to my thorough research and comprehension of its holdings, I can empathize with clients who prefer a more diversified approach. When asked how I would design such a portfolio, my response is as follows. Below, you will discover a well-diversified portfolio comprised of five distinct funds, with each (excluding gold) containing a substantial number of underlying stocks. As an investor who meticulously investigates companies and performs in-depth fundamental analysis, I believe I possess the aptitude to assess other funds and comprehend their strategies beyond merely examining their returns. In general, I perceive such a portfolio as being divided into "growth" and "income" components. The growth components include the following: Akre Capital is an exceptional fund that has consistently outperformed the S&P 500 since its inception in 2012. The fund's strategy is grounded in a "three-legged stool" approach, which involves investing in companies with strong management, high returns on invested capital, and a long-term focus. This method has enabled the fund to deliver impressive performance, as it embodies true value investing with a highly refined process. The portfolio is relatively concentrated, with the majority of the fund's assets allocated to just 16 holdings. The fund managers remain unafraid to maintain positions almost indefinitely, as long as their original thesis holds true. Oakmark is another well-regarded fund with an appealing long-term performance record. With approximately 30 holdings, the fund is not hesitant to alter its investments more frequently, offering a slightly different style yet still maintaining a history of success. Gotham's fund, managed by Joel Greenblatt, is intriguing. Mr. Greenblatt earned recognition in investment circles after generating remarkable returns over a 10-year period, compounding capital at around 50% annually, with an ultra-concentrated portfolio that endured extreme volatility. Mr. Greenblatt now oversees a range of more diversified funds. The Gotham Index Plus fund closely tracks the S&P 500, investing long in top-performing stocks and shorting underperforming stocks based on a proprietary formula, which considers valuation and ROI. The fund has successfully achieved its objective of delivering returns close to the S&P 500 while significantly reducing volatility. Gold serves as a general hedge against monetary debasement, having been valued as a store of wealth for millennia. Given the growing prevalence of financial manipulation in today's economy, I like a modest allocation to gold. Its 8% annual appreciation against the dollar over the past 20 years makes it an attractive hedge, providing a real return to investors. The income components include the following: The WisdomTree Large Cap Dividend ETF is an affordable, passive fund invested in companies boasting a long-standing history of consecutively increasing dividends. Although its initial yield of 3% may appear modest, years of compounding can generate a growing cash flow that keeps pace with inflation. Historically, a collection of dividend stocks has outperformed inflation over extended periods, and I expect this trend will persist. While share prices may vary, dividend streams tend to exhibit less volatility, as companies are often hesitant to reduce dividends once established. This results in a stable and expanding cash flow stream. Lastly, I believe there is scope for incorporating a curated selection of alternative investments, managed by highly competent professionals with notable long-term performance records. For illustrative purposes, I have selected the JLL Property Income Trust, given its more extensive track record on the platform I utilize. In practice, I would not distribute the 25% allocation across several opportunities. This serves as an example of potential returns within the context of our discussion. Alternative investments, encompassing private equity, private debt, and real estate, have sparked much debate regarding their advantages and drawbacks. These investments can offer enhanced income prospects, lower correlation to overall market volatility (we can have a separate lengthy discussion on mark to market issues), and protection against inflation.. Alternative investments can provide these benefits, but also present risks such as illiquidity and elevated fees. While past performance does not guarantee future returns, the attached portfolio has historically outperformed a passive portfolio allocate 75% to the SPY (S&P 500) ETF and 25% to the BND (Vanguard Total Bond Market) ETF, with reduced volatility. Chart presented net of assumed taxes, and net of both underlying fund and net of assumed Alphyn Capital fees of 1% of AUM. See disclosures at end of this post. Past performance is not a guarantee of future results. The final chart showcases the potential growth of a portfolio, after accounting for taxes and fees, even when the investor withdraws 4% of the total value annually for living expenses. It is crucial to note that while we cannot predict the future, we can strive to make informed assumptions based on historical performance, fully acknowledging that these estimates are not guaranteed. Chart shows theoretical results, presented net of assumed taxes, and net of presented net of both underlying fund and net of assumed Alphyn Capital fees of 1% of AUM. See disclosures at the end of this post. While no portfolio is perfect, this one has been designed to offer a blend of expanding cash flows and value, with the aim of building a substantial nest egg for clients. The illustration demonstrates how this objective could potentially be accomplished. If you would like to explore further, please feel free to reach out to me. I would be more than delighted to discuss the specifics and address any questions you may have. DISCLOSURES:
Alphyn Capital Management is a registered investment adviser. Each investor’s situation is unique so please work with a professional financial adviser, tax accountant or legal representative, as applicable, to develop an individualized plan or address any questions you may have.Investing involves risk including the possibility of loss of one’s investment. The Alphyn Master Advantage portfolio presented here is based on theoretical backtested performance. Backtested results are shown over a 6 year period. This period was chosen as this was the longest duration for which performance data was available for all the selected funds. Back tested performance is the application of a strategy to market data from prior periods when the strategy was not actually used during these periods. This information has the benefit of hindsight and do not reflect actual results. These results are shown net of advisory fees, and include the reinvestment of dividends, or other earnings, and assume the portfolio is rebalanced annually. The advisory fee used for this report is 1% and will be based upon the assets under management. Other expenses are not included these may include trading costs, transaction costs or other fees charged by the custodian. The backtest was conducted with www.portfoliovisualizer.com. The interactive analysis tool used are the “Backtest Portfolio” tool. Portfolio model information represents a blended portfolio consisting of the model's underlying positions and assigned weights provided by the user and rebalanced at the specified schedule. The results were constructed using net of fee mutual fund performance. Portfolio Visualizer does not provide preferential treatment to any specific security or investment. The results are based on information from a variety of sources Portfolio Visualizer considers reliable, but we do not represent that the information is accurate or complete. Full details of the methodology used are available here: https://www.portfoliovisualizer.com/faq#methodology The material conditions, objectives and investment strategies used to obtain these results are: the selection of mutual funds that employ a value investing methodology, passive dividend ETFs, and private investment funds available on the Charles Schwab platform. These funds were chosen based on the advisor’s judgement and experience. Benchmarks are used for comparisons based on the similarities of the portfolio holdings and those within the depicted indexes. The portfolio is has a mix of equities to fixed income or alternative income assets in the ratio of 75% equities and 25% income/alternative assets and is presented alongside the comparison of a combination of 75% SPY and 25% BND ETFs. The SPDR S&P 500 ETF Trust (SPY) is an exchange-traded fund that is designed to track the performance of the S&P 500 Index, which is a widely used benchmark for the U.S. stock market. The Vanguard Total Bond Market ETF (BND) is an exchange-traded fund that is designed to track the performance of the Bloomberg Barclays U.S. Aggregate Bond Index, which is a widely used benchmark for the U.S. bond market.This overall comparison was chosen to show how the ACML portfolio might compare to a passive portfolio. The results for both portfolios are after tax and net of advisory fees, which are 1% of assets under management.
0 Comments
When selling a business, the sooner you start planning, the better. Even if your exit stage is a few years away, engaging in strategic planning and budgeting now will help maximize value and future income potential. Not only can this increase the chances of a successful sale, but any extra income generated in the meantime can be invested back into the business, so you don’t have to sell to engage our services.
Just as growing a business takes time and effort, so does exiting or selling it. It is essential to develop an exit plan that accounts for financial and non-financial goals, such as avoiding legal fees and protecting proprietary information. This plan should also include tactics for maximizing value over time by investing in areas like talent retention, marketing, automation, and scalability. Plus, you should consider factors like taxes, legal requirements, and other contingencies that may occur during the sales process. Perhaps most importantly, entrepreneurs should remember that preparing for a sale involves more than just financial planning; it also requires building relationships with potential buyers who will understand your company's value and pay accordingly. To do this effectively requires getting to know key players in your industry beforehand so you have an idea of who might be interested in purchasing your business down the line and how they will respond when presented with an offer. Setting Growth Metrics for Your Business The first step to growing your business is to set clear and achievable goals. This begins with identifying what metrics you wish to improve. Examples of metrics include:
Businesses should also develop strategies for achieving these goals. These strategies include diversifying into new markets, creating incentives for customers or employees, investing in technology, or working with partners who can scale up your operations. Maximizing the Value of Your Business When Exiting When it comes time to sell your business, it's essential to maximize its value by researching potential buyers and preparing an attractive package of assets that appeal to them. It's also important to assess any potential liabilities that may impact the sale price since they will likely be included in the purchase agreement. Additionally, entrepreneurs should consider whether they would like to transfer ownership through a sale or liquidation of assets. By understanding these factors before approaching buyers, businesses are more likely to maximize their value when exiting the market. Plus, even if you aren't selling, expanding your cash flows provides investment opportunities sooner. Remember, compound interest affects everything, and the sooner you reinvest, the more time your money has to grow. Strategies for Paycheck Replacement When transitioning out of the business world, many entrepreneurs want a reliable source of income during retirement. You must work out your living expenses ahead of time and backsolve for the amount of assets you will need in order to provide enough income to maintain your lifestyle. At Alphyn, in addition to regular bond and dividend investing, we can provide access to private real estate and debt funds run by some of the most recognized and respected names in the private equity world. When used judiciously, these can increase yields, and diversification and reduce volatility. Additionally, setting up trusts or other investments that provide income streams may increase financial security and safeguard family wealth for future generations without compromising current lifestyle choices. Building a Legacy with Asset Positioning One of the most important decisions when selling a business is how to utilize the proceeds wisely. We highly recommend asset positioning to ensure that owners and their families are well-positioned for success in the future. This process involves making strategic investments that are positioned to gain in value and provide income over time so you can enjoy the benefits of financial freedom in retirement or pass on an inheritance to your heirs. Most business owners have the majority of their net worth tied up in their business. This is understandable; after all it is where they have dedicated their time and energy for years, what they understand best, and what they know how to manage and control. nevertheless, positioning should involve diversifying your investments into carefully chosen securities. to minimize risk while maximizing returns over time. Capital Appreciation Investments to Consider At Alphyn, we focus on Investing for capital appreciation, as we believe it is an excellent way to increase personal wealth over time. With 25 years in the markets, we have honed the process to carefully select what we believe are excellent high-quality public equities, hand-selected funds run by proven investors with strong track records. It would be our pleasure to share these ideas with clients who are so inclined to learn more about our portfolio thesis and discuss their financial objectives. Compounding Income Options for Long-Term Profitability Compounding income is another great way for savvy business owners and entrepreneurs to grow wealth without taking on too much risk. One of the most popular compounding income options is dividend investing, where investors buy stocks that pay a steady stream of dividends each quarter or year from companies they own a piece of. This allows investors to reinvest these dividends back into the stock market at minimal cost and create long-term growth without breaking the bank. One advantage of dividends is that they are less volatile than share prices and typically do a good job of keeping ahead of inflation. Other we can discuss the relative merits of dividends vs. other income options, including Treasury bills, CDs, or bonds, which provide guaranteed returns over a fixed period minus some risk since there is no potential upside. Leveraging Expertise and Experience for Maximum Return on Investment Having been involved in finance, investing, and business operations over 25 years, I understand that proper planning is critical to getting the maximum return on investment. When it comes to growing and selling businesses, there are a few areas where extra attention needs to be paid:
First, research is essential. Knowing who your competitors are and their success strategies will help you develop strategies that can be used to stand out from the crowd. Additionally, researching industry trends and ensuring you're up-to-date with the latest news can help you stay ahead of any potential issues or opportunities. An in-depth knowledge of your industry's ins and outs will help you make more informed decisions when it comes time to negotiate with buyers or investors. Second, setting up a strong foundation is essential for businesses seeking growth. This involves having a clear mission statement that will guide all future decisions made by management and staff alike; diversifying revenue streams in case one sector takes an unexpected hit; leveraging technology such as AI or automation to increase productivity; implementing effective marketing strategies that reflect current trends; and having access to reliable external sources such as debt or equity financing should cash flow becomes strained. Thirdly, developing an exit plan is key for business owners looking to maximize their return on investment when selling their business. Exiting a business requires understanding prospective buyers' or investors' needs entirely so that you can accurately discuss how your company meets those requirements. Additionally, doing due diligence upfront can help ensure buyers are fully aware of any risks associated with purchasing your company before they sign on the dotted line. Lastly, knowing when it's time to walk away from negotiations is equally important: if either side isn't achieving what they want from the deal, then both parties should look at other options instead. Final Thoughts: Get Maximum Value Out Of Your Hard Work! Growing and selling businesses is difficult, but careful planning and leveraging experience in finance, investing, and business operations can result in significant returns on investment. Doing extensive research before entering negotiations will give you leverage over buyers or investors while also helping you identify potential opportunities or issues down the road; setting up a solid foundation through diversification of revenue streams and implementation of effective tactics like automation or marketing will make sure that you're maximizing efficiency before sale; finally laying out a detailed exit plan including knowing when it's time to walk away from negotiations will ensure that both sides are happy with any agreements reached resulting in maximum value out of all hard work put into growing and selling businesses safely!
I’ve used “synthetic leverage” to describe when a company employs someone else’s resources, like capital or operations, to generate additional income. An example is Warren Buffett’s use of insurance float at Berkshire Hathaway – he used the money from insurance policies to invest in stocks and buy businesses. In other words, he borrowed the money instead of using his own resources!
As you know, using borrowing money to make investments, otherwise called using leverage, can be extremely risky. If your investments lose enough value, the bank or brokerage can force you to post margin (put up more collateral) or call the loan at the worst possible time, forcing you to realize a catastrophic loss. Crucially, Buffett’s insurance float is non-recourse and not marginable. No one can force him to pay back the loan. So while he still has to make suitable investments, he can be much less worried about catastrophic drawdowns, the kind that has happened to many intelligent and sophisticated investors over time. For example Long Term Capital Management in 1998 (which was 2 Nobel laureates no less) and more recently, Archegos Capital that made financial headlines in 2021. Some analysts published a study on Buffett’s 40-year performance and found that his underlying investments grew at 15% per year. That is a fantastic long-term track record. However, this is the special part: with his NON-RECOURCE leverage, his returns moved up to nearly 25%. Over 40-something years, that can make a massive difference, between making around 250x your money and making 7,500x your money. There is a reason Warren Buffett is so revered in the investment community. Most investors can’t access these kinds of situations. And I don’t use any leverage in money that I manage. But I try to fill the portfolio with other large public companies with synthetic leverage. Focusing on companies that can take advantage of synthetic leverage can increase our chances of success and make more money from our portfolio. We don’t need to make Buffett-like returns to still be very happy, as focusing on companies with synthetic leverage can help us get more bang for our buck! If you’d like to find out more, please don’t hesitate to reach out. People often say that investing has become much harder in recent years.
With the internet, the democratization of information, advanced analytical tools, and armies of sophisticated and driven analysts chasing alpha, I agree that it has become much more competitive. But what if the increasing importance of different styles, such as algorithmic trading, global macro, trend following, passive ETF flows, risk parity, etc., and the ever-shortening time horizon of investors, all combine to move prices faster and further for non-business-fundamentals reasons? Perhaps the long-term fundamentals-based investor still has the occasional opportunity to find temporarily mispriced great businesses. I was honored to be invited on the Value Hive podcast to discuss the investment merits of Ashtead Group Plc (LSE: AHT).
Thanks to Brandon Beylo for a fun discussion. We discuss Ashtead's history, business, competitive advantages, unit economics, value, and why I believe there is potential for future free cash flow margin expansion and revenue growth. (Plus, I share some of my investment journey such as how I managed to own a Caribbean supermarket) https://podcasts.apple.com/us/podcast/value-hive-podcast/id1492171651?i=1000587476466 |
AuthorFounder and Chief Investment officer of Alphyn Capital Management, LLC. Archives
May 2023
Categories |