Investment strategy 2019

Guiding principles
This document describes my investment strategy.  The portfolio return will, going forward, likely serve as the main source of income throughout my remaining life. According to the best of my judgement, the portfolio size is large enough for a life-long support of the standard of living I have got used to the last two decades, probably even with a continued capital growth. But as the size is not large enough to know this for certain, down-side protection together with diversification must be essential parts of the strategy. 

Over the years I have learned that my previous investment style was ad-hoc and way too risk-willing, resulting in high volatility and a mediocre return. Starting 2013, I switched over to rules-based investments, based on diversification and recognized market anomalies, mainly value and momentum. The reward, so far, has been a better and more consistent performance. 

The strategy should be based on publicly available research and have a long performance history. The underlying principles should be understandable (to me) and make sense. 

It should be straightforward and not too time consuming to execute the strategy. I want to execute the strategy myself, and I am willing to spend a few hours per week for evaluation, planning, execution and documentation of the trades, preferably at one occasion per week.

The portfolio can be split into several sub-portfolios following different rules. This will further increase the diversification. In order to allow for contionous development of the portfolio strategy, up to 10 per cent of the portfolio is allowed to be used for real time tests of new ideas.

Portfolio goals
The overall goals for the Idun Portfolio are:

• to perform at least as well as the global stock market (measured by comparing performance of the portfolio with Global stock index)
• to do this with less yearly variations than the global stock market ( measured by comparing Sharpe and the worst year return for the portfolio with the Global stock index)
• to be able to run the portfolio using only a few hours work per week, on average max 5, (measured by keeping track of the hours spent)

Evaluation

The entire investment strategy including the goals will be evaluated and updated on a yearly basis. Changes in-between the yearly evaluations will be documented separately.

The Portfolio rules:
Global momentum portfolio
The idea is to invest in global stock market when stock market is strong, otherwise in global bond market. Should bond market be weak as well, stay in cash or cash-equivalents.

The rationale behind this approach is the fact that stocks has historically provided the best risk reward, and bonds the second best.

Source: Stocks for the long run

To test if stock or bond is strong, compare its performance with the safe rate (short term treasury bill). The performance is measured by comparing  1-18 months performance with the 1-18month safe rate. This gives 18 individual signals. The method to use the past performance to determine what to invest in is called momentum, and is a very well documented market anomaly.

For global stock ETFs' the following regions are used:
- US
- Europe
- Japan
- Asia Pacific ex Japan
- Emerging Markets
This spans the majority of the investable global stock universe.
For each of the 1-18m lookback periods, invest in the stock ETF with the best performance above safe rate, otherwise in bonds.

For bonds use the following ETF's:
- Global Aggregate bond
- Emerging Markets bond
Also for bonds the idea is to invest globally, but the full range of region bond ETF's are at present not available. 
For each of the 1-18m lookback periods, invest in the best performing ETF above safe rate, given that stock market is not invested.

For Cash and similar the following funds/ETF's are considered:
- Cash fund USD
- Cash fund EUR
- Cash fund SEK
For each of the 1-18m lookback periods, invest in the best performing ETF above safe rate, given that stock and bond market is not invested.

Evaluate weekly and apply changes to 25% of the portfolio if a change is signaled and keep this part of the portfolio unchanged for at least four weeks. This approach is meant to lower the volatility by reducing the whipsaw losses typical for this type of momentum based strategies.

Practical considerations:

The portfolio is scattered over four different accounts at Avanza and Degiro.

For the Degiro accounts suitable USD-based ETF's are available, and the performance tests are USD-based, while at Avanza only SEK-based ETF's are available and the performance tests are SEK-based. This provides a further diversification. 

There is at Avanza a more limited availability of low cost bond/cash/commodities funds/ETF's, hence a smaller set of SEK-based funds/ETF's is used. I might also hold up to a quarter of the SEK based portfolio in a SEK Bond ETF even if other bond funds are signalled, in order to faster and more easily be able to change over to a stock ETF.

At Avanza I also run a simplified SE/Global version with fewer funds to select from, which is identical to the portfolios I administer for my children.

This means that the Global Momentum portfolio is split in three variations:

- Dual Momentum USD
- Dual Momentum SEK
- Dual Momentum SE/Gl

ETF's/funds can be changed any time, should I find more suitable ones. 

Current investment universe and signals are found here. 

Trending value portfolio
The main idea is to buy stocks that appears cheap compared to recent fundamentals.
I have run this portfolio with great result since late 2013. It started out as a magic formula investment, evolved over EBIT/EV with stop loss into trending value with trailing stop loss.

Trending value uses a combined measure of value, called Composite value 2, using a combination of EV/EBITDA, P/E, P/S, EV/FCF and shareholder yield. This is actually a change compared to the original CV2 and described here. Then, the best 10% are sorted in falling 6 month price momentum. The top of the list are bought and held for a year.

Going forward I will still rely on trending value on the global stock market and hold 10-20 stocks (minimum market cap $200 million and minimum daily trading volume $1000 thousands), but with some tweaks:

1. Filter out the 10% worst performers in earnings growth, debt to equity (inspired by this post) as well as 6m volatility. Also remove stocks with failing Beneish M-score.
2. Keep the 5% best CV2 and sort in falling 3/6/12 month price momentum.

Long term portfolio
This portfolio consists of 8-12 value based stocks available at the Stockholm stock exchange. The intention is to keep the holdings long term and to maintain a low portfolio turnover.

Opportunities portfolio

This portfolio is not necessarily rules-based. It can include new ideas and in general anything that appears to be lucrative. Historically it has been used to test spin-off investing, high-yield preferred stock, and various momentum or value based ideas.

Size

Portfolio	Limits
Global Momentum	> 50%
Trending Value	5-30%
Long term	5-30%
Opportunities	<10%

Other
Leverage is allowed up to 1.5.
Currency hedging will normally not be used.