Monday 12 January 2015

Look East, Young Man! (Portfolio Buy)

Following my recent review of income-oriented ETFs, it seems only fitting that I should buy one.

With such a wide choice, how do I decide what to buy? It turns out that it was quite straightforward...

I start off with the strategic objective of boosting the proportion of ETFs in the portfolio, with the proviso that the yield of what I buy should be 'attractive'. The average current yield of the portfolio is running at around 6.3%. which is quite high historically. I have to be practical, though - there aren't going to be many ETFs of the type I would buy with that sort of yield: I'll have to settle for something around the 5 to 6% mark. I'm trading yield for diversification (and hopefully a measure of safety).

The next decision point is around the split in the portfolio between dividend-oriented securities and fixed-income. These two types of investment behave quite differently; although they are correlated to some extent (and can therefore move together price-wise some of the time), broadly speaking bonds tend to do better than equities in an economic downturn (and vice versa). Worldwide QE has complicated the relationship too, with fixed-income securities being used as a tool by central banks to stimulate the economies of the US, Japan, the UK - and shortly the EU.

To keep it simple I aim broadly for a 50/50 split between dividend and fixed-income securities - whether they be directly owned or in ETFs. However, I think that QE has skewed the market and I don't want to buy too much fixed-income at the moment.

At the moment I have nearly half the portfolio in directly-held dividend shares but, by contrast, I have relatively little (around 12% of the portfolio) in 'dividend' ETFs. I therefore need to run down the directly-held dividend shares and put more into ETFs.

Given the above considerations, I looked at possible 'dividend' ETFs. The biggest yield I could find in my trawl of worldwide 'dividend' ETFs was one I hold already - IAPD: iShares Asia Pacific Select Dividend 30 UCITS ETF with a yield of 5.56% (according to the FT; Bloomberg has it slightly lower, at 5.3%). The (relatively) high yield is an indicator of being 'out of favour' - the Market is wary of this region, no doubt because of fears of worldwide economic slowdown and the implications for mineral producers. Being a long-term investor, I can buy when the market is fearful (as Buffett recommends). I'm prepared to hold for years - but I'm also prepared to take a nice profit in months, if that should materialise. I suppose that makes me an opportunist buy-and-holder.

I think this may be the pattern for the beginning of the New Year: selling directly-held dividend shares showing a nice gain and replacing them with more diversified 'dividend' ETFs.

[Purchase price: £19.81]

I am not a financial adviser and the information provided does not constitute financial advice. You should always do your own research on top of what you learn here to ensure that it's right for your specific circumstances.

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