Trading and investing performance - year five

Hard to believe, but it has been five and a half years since I had to go to an office to manage other peoples money, and exactly five years since I began systematically trading my own. Time then for another annual review. Perhaps it is confusing for overseas readers, but these reviews follow the UK tax year which runs from 6th April to 5th April, rather than any logical period like a calendar year (or even 1st to April to 31st March would make more sense, frankly).

Previous updates can be found here, here, here and here.

Overview of my world

My investments fall into the following categories:

• In my investment accounts:
• 1 UK stocks
• 2 Various ETFs, covering stocks, bonds, gold and property
• 3 Usually some uninvested cash
• In my trading account:
• 4 Various ETFs, covering stocks and bonds
• 5 A futures contract hedge against those long only ETFs in 2.1, so that the net Beta is around zero
• 6 Futures contracts traded by my fully automated trading system
• 7 Cash needed for futures margin, and to cover potential trading losses (there is also some cash in my investment accounts, but it's pretty much a rounding error)

Excluded from this analysis is:

• Net property equity in my PPR (primary private residence, i.e. the bricks and mortar I am currently writing this in)
• My 'cash float', roughly 6 months of household expenditure that is kept separately from my investment and trading accounts. This is used to smooth out lumpy income arriving from multiple sources and means I can sleep easily at night.

For the purposes of benchmarking it makes most sense to lump my investments in the following way:

• A: UK single stocks
• Benchmarked against ISF, a cheap FTSE 100 ETF (FTSE 350 is probably a better benchmark but these ETFs tend to be more expensive).
• B: Long only investments: All ETFs (in both investment and trading accounts) and UK stocks
• Benchmarked against a cheap 60:40 fund. This is the type of top down asset allocation portfolio I deal with in my second book.
• C: Equity neutral: The ETFs in my trading account, plus the equity hedge. 
• Benchmark is zero.

• D: Futures trading: Return from the futures contracts traded by my fully automated system. This is the type of portfolio I deal with in chapter 15 of my first book. The denominator of performance here is the notional capital at risk in my account (usually close to, but not exactly the same as the account value).
• Benchmarks are a similar fund run by my ex employers, or the SG CTA index, adjusted for volatility.
• E: Trading account value: This is essentially everything in my trading account, and consists of equity neutral + futures trading. 
• No relevant benchmark.
• F: Everything: Long only investments, plus futures hedge, plus futures trading. I include the value of any cash included in my trading or investment accounts, since if I wasn't trading I could invest this. 
• For the benchmark here again I use a cheap 60:40 fund.

If you prefer maths, then the relationship to the first set of categories is:

A = 1
B = 1 + 2 + 4
C = 4 + 5
D = 6 + 7
E = 4 + 5 + 6 + 7 = C + D
F = 1 + 2 + 3 + 4 + 5 + 6 + 7 = B + 3 + 5 + D

Performance contribution

The figures shown are the contribution of each category to my total investment performance (on an XIRR basis):

A, or 1) UK equities -0.45%
2) ETFs +4.35%
B) Long only investments +3.9%
C) Equity hedge -0.2%
D) Systematic futures trading +1.0%
E) Trading account: +0.8%
F) Total 4.4% (won't add up exactly because of XIRR effects)

UK Equities

This is effectively a 'trading' portfolio, using a mechanical system described here. Since I published that post I have added a new twist in that I enforce sector diversification.

Mostly it's held inside SIPP and ISAs, to avoid paying CGT. There are also a couple of legacy stocks with larger positions, which are held outside tax shelters. I have been gradually reducing their position tactically over time.

Start of the year:

ICP 18.8% (legacy)
STOB 17.1% (legacy)
BKG 10.4%
VSVS 9.5%
RMG 8.9%
LGEN 7.6%
GOG 7.5%
HSBA 7.4%
IBST 6.9%
BP 6.0%


I sold some STOB to crystallise a CGT loss, and all the other trades were mechanical:

Bought and sold Babcock, for a 26% loss.
Sold RMG for a 31% loss
Sold IBST for a 20% loss
Bought CEY
Bought PTEC

So now the portfolio looks like this:

ICP 20.98%
VSVS 10.79%
BKG 10.59%
CEY 8.91%
STOB 8.76%
GOOG 8.69%
PTEC 8.66%
LGEN 8.47%
HSBA 7.21%
BP 6.94%


Although the yield was 4.4% the total return was negative; an XIRR of -2.3% to be precise. This compares badly with the FTSE 100 tracker I use as my benchmark coming in at 7.6%. Looking back over the years since I started doing being this anal about my performance, this is the first year I've underperformed. Apart from the losers I sold Stobart also underperformed (though it's still up 100% from my original purchase price), and both CEY and PTEC have lost money since I bought them. On the upside BP and GOOG (which is Go-ahead, not Google in case you didn't know) both earned around 20% over the year.

I have been a net seller of UK equities for many years now, but my allocation is now about right. I reinvested the dividends earned from all UK stocks back into the UK, but they are still a smaller proportion of my portfolio due to the relatively poor performance. I'll return to questions of portfolio allocation later.

ETFs and funds

All my non UK and non equity exposure is in ETFs, with a smattering of investment trusts. As usual trading was done for tax optimisation, to generate funds for SIPP and ISA Investment, and to get the right risk exposure (discussed later). I don't look at the performance of my ETF portfolio seperately, only in conjuction with UK shares.

Long only

Performance here was better, but still not fantastic. Dividends on the whole piece were identical to the UK share, with a yield on starting value of 4.4%. The aggregate XIRR was 4% exactly, hence a small capital loss was made. This under performed a benchmark Vanguard 60:40 fund, which came in at 7.2%.

Systematic futures trading and equity hedge

The systematic futures trading system I run is effectively what you can in find in "Systematic Trading", and code-wise is an older version of the implementation in pysystemtrade.

For my trading account as a whole the breakdown looks like this (all numbers are as a % of the notional maximum capital at risk, which happens to be a bit less than the trading account value):

Hedging futures: -1.1%
Hedged stocks, total return: +2.0%
Net equity neutral: +1.0%

Futures trading-
MTM: 5.7%
Interest: 0.08%
Fees: -0.04%
Commissions: -0.6%
FX gain/loss: +0.02%
Net futures trading: +5.2%

Grand total: +6.1%

Some more statistics (futures trades only):

Profit factor: 1.0
Win/loss ratio: 1.31
Profit factor: 1.0
Hit rate: 43.2%
Avg holding period, winners: 39 days
Avg holding period, losers: 29 days

So is this good or bad? Let's look at benchmarks.

 'Bench1' is this AHL fund, using monthly returns from April to March in each year, and a new benchmark 'Bench2' is the SG CTA index, with matching daily returns. Both have returns scaled up to match my volatility. Remember the benchmark should only be compared against futures trading, not the equity neutral component of the portfolio.

Year:    14/15   15/16   16/17   17/18  18/19

Total:   57.2%   39.6%    0.3%    0.4%   6.1%
Hedge:   -1.1%   16.3%   14.4%    4.1%   1.0%  
Futures: 58.2%   23.2%  -14.0%   -3.7%   5.2%

Bench1: 106.9%  -10.6%   -6.2%   16.4%  10.3%
Bench2:          -6.7%* -21.9%   -3.8%   0.7%

* From 13th April 2015

A very good performance from 'Bench1' here, but against the entire industry (bench2) my performance is more respectable.

You will be used to seeing pretty pictures and more detailed analysis here. Unfortunately I couldn't run my normal annual performance attribution in the increasingly creaky old legacy code that my system runs on (after all it's five years old now). I am gradually building up to replacing this with pysystemtrade, however this is a slow process (interrupted by the new book I am finishing off, plus various random side projects like writing this blog post).

Total investment return

My total return on all my investments, including cash held for futures margin, came in at an XIRR of 4.4%. Once again Vanguard 60:40 seems an appropriate benchmark (since if I wasn't trading futures I could throw all my cash into that fund), at 7.2%. All in all then a slightly disappointing year, although unlike the last two years my futures trading added to rather than detracted from my performance.

Risk

My investment portfolio asset allocation at the end of the year in cash terms stood at 22.7% in bonds, 65.1% in equities, 9.5% in cash and 2.7% in other (Gold and commercial property).

This is more cash than I normally have. About 2.6% (of the 9.5%) was transferred to ISAs and will be invested shortly. I am toying with the idea of starting another little portfolio which will invest in investment trusts using some simple filters around discount and yield. I also have a little more than usual in my current account, and in my trading account. In practical terms this just means I have more of a cushion against the rather lumpy arrival of income in the form of dividends and royalties.

My allocation in my preferred risk weighted terms looks like this:

|Asset    |Strategic|Start of year|Current|
-------------------------------------------
|Bonds    |   22%   |   13.1%     | 12.0% |
|Equity   |   50%   |   59.4%     | 60.7% |
|Futures  |   25%   |   24.5%     | 24.7% |
|Other    |    3%   |    2.9%     |  2.5% |


As usual the lower allocation to bonds reflects a mechanical trading rule that uses the last 12 months of relative risk adjusted performance; bonds are down around -0.5% and equities up 5.5%. See the relevant chapters of "Smart Portfolios" for more detail.

Regional exposures, should you care (each row adds up to 100%):

|      | Asia | EM   | Euro |  UK   |  US  |
------------------------------------------------
|Bonds | 0%   | 22%  | 19% |  18%  |  41% |
|Equity| 26%  | 27%  | 17% |  27%  |   3% |


The 0% weight in Asia reflects a lack of decent bond ETFs, whilst the 3% in US equities is because they are frightfully expensive (again there are mechanical rules lurking behind these numbers, this time based on relative valuation metrics: dividend yield and PE ratios).

Thoughts and plans

There are enough numbers in these posts that there will always be good news (relative futures trading, equity hedge) and bad news (everything else). Naturally none of it is statistically significant. So there are no conclusions to draw in the shape of "Oh my gawd, this is awful, I need to change everything right now".

But gradual improvement in a sensible way is fine. I haven't yet got round to implementing any serious changes to my futures trading (waiting for my code migration to finish first), but in the mean time I've started a very small portfolio which buys investment trusts trading at a large discount and with large yield, with some minimum liquidity requirements. So far this constitutes PGIT and VSL.