This Christmas season, we’ve decided to build a festive portfolio from the perspective of everyone's favourite gift giver: Santa. Although most investment related posts around this time of year revolve around retail shopping stocks, we've stepped into the shoes of Santa and created a portfolio based on his goals, risk tolerance and constraints:
So, based on a start date of 3 January 2022, we look at Santa's balanced risk portfolio and compare it to a typical balanced ETF. This is what the original portfolio looked like as of 3 Jan 2022.
TL/DR: Although Santa's performance this year outperformed a Balanced ETF (iShares Core Growth Allocation ETF) by 11%, that performance was largely driven by 1 stock. If Santa checked his portfolio more regularly and rebalanced more frequently, he could have captured even more return. His speculative foray into Crypto crashed and burned, he picked the wrong bonds and he could employ some options strategies to enhance his returns. That said, he had better risk adjusted returns and a shallower and shorter drawdown than his benchmark.
As of Friday 16 Dec 2022 close, this is a high-level overview of Santa’s portfolio. Ahead of Santa’s annual January rebalancing, our CIO, Sarang Karkhanis, provides his thoughts:
Santa outperformed the Balance ETF Benchmark. The S&P 500 was down almost 20% and the Global Bond Aggregative index down ~15% YTD, while Santa’s portfolio dropped by 2% only.
Looking at the overall portfolio, we can see the Net Worth Insight that 25% of Santa’s positions make up 50% of his portfolio. This tells me there is some risk, but a manageable amount of concentration risk. From the Asset Class P&L chart, it’s evident that Santa has a stellar stock picking ability. The Income chart reveals a 2% yield which is a little low given the current interest rate environment and could warrant further scrutiny on his bond positions. We can also see his overall Portfolio Volatility is low which fits in with Santa’s risk profile and his portfolio Environmental score is strong, which we’d imagine reflects his green credentials.
The Net Worth screen allows me to check how Santa’s original asset class allocations have moved over the year. We can see that he is now slightly overweight Equities, slightly underweight Fixed Income and his foray into Cryptos has seen a 90% drop from the original allocations. This is clearly a result of the equity outperformance highlighted in the Dashboard Asset Class P&L.
Looking closer into Santa's concentration risks, we would expect the top 5 allocations to be around 10% each. However, we can see that he has one position that is almost 20% (highlighted by the Portfolio % column). This is his sole allocation to Forestry, so he might have done this on purpose, however he needs to be aware that this single position will be a major driver of his future performance.
Let’s deep dive into the overall P&L and take a closer look at some of the positions.
The equity position in JAKKS Pacific has contributed the most P&L with smaller positive returns from 3 other stocks. However, his bonds have lost money which is to be expected in a year where yields have risen. Notably, the original 1% allocation to the Avalanche crypto coin has lost almost as much in dollar terms as the much larger allocations to individual bonds.
Diving into the P&L of JAKKS, we can see there was a sharp upturn in July, almost doubling over the course of two months. Santa really should be monitoring his portfolio more than once a year as it would have alerted him to this position. It would be interesting to see how much of the overall portfolio’s return was driven by that one position. Nevertheless, the Insights tell me that JAKKS is extremely volatile – moving almost 5% per day. Stocks with such high volatility need to be monitored more closely as they tend to offer increased trading opportunities either from trading the stock directly or via derivatives. With a volatility of 75%, hedging JAKKS using put options would be prohibitively expensive. There are other option strategies that Santa could consider involving put spreads or shorting calls. However, often when a stock performs really well, the simplest solution is to sell and rotate into something else.
Looking at another stock, Build-a-Bear had a breakout in November on the back of strong earnings, Santa made a gain of $8.4k over the year. Given it has broken up over the year’s previous highs and noting that the Volatility Impact Insight reveals a 66% vol, there are a couple of strategies that Santa could consider. One is simply holding onto the 5% exposure and not rebalancing as the breach of new highs has been recent and there may be further price momentum. However, the One Day Impact Insight tells me that if history was to repeat itself, then there could be a one day down move of -$8.8k, wiping out his entire gains. As such, another strategy is to consider selling calls. Six month calls can generate over 15%, hedging out Santas P&L (protecting the downside) and at the same time effectively allowing Santa to sell his shares 15% higher near the 1y high (upside participation via options being exercised).
Looking at Santa’s bond positions, it is normal to expect a loss given the higher rate moves during the year. However, paying closer attention Santa’s bond selection shows he doesn’t have the same gifts when it came to picking stocks. In a rising interest rate environment, longer dated bonds are more sensitive than shorter dated bonds, as shown in his P&L below highlighting his largest losses coming from the longer dated bonds.
For example, there is a Disney 8.5% 2025 bond that could be a potential replacement candidate for the existing 7.125% 2028 bond. Below I mimic what could have happened if Santa had chosen the 2025 bond from the beginning: he would have lost less than half as much as he actually did.
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The Crypto fall out this year has been well documented, but Santa doesn’t have a crystal ball to predict such matters. The question for Santa is whether he continues to allocate 1% of his overall portfolio to Avalanche and thus buy more Crypto coins at these depressed prices or if he cuts it out altogether. I would point Santa to the Insights which highlight that the largest one-day move was -30% which would practically wipe out his original position. However, the same insights engine also highlights that Avalanche is currently trading at its 1yr low.
Although Santa hasn’t retired quite yet, he still needs to generate some income from his investments. Looking at the Insights, we can see that his bond holdings should generate a yield of 4% over the next year, which is only marginally higher than what he could get in lower risk assets like Treasuries. Unsurprisingly, equities and Santa’s investments in forestry has generated little income and has pulled the overall yield of the portfolio to around 2%.
Santa’s outperformance this year has been pretty good. However, as with all portfolios, the devil is in the detail. If we carve out the first 8 months of the year, the outperformance is clear to see. What’s more interesting though, is looking at the P&L table below the chart where the outperformance can be largely attributed to the JAKKS position. In short, Santa owes his good fortune to the perhaps lucky selection of one stock.
This reliance on one position is starker when looking at the relative performance from 1 Sep 2022 where Santa’s portfolio performed in line with the market, with JAKKS contributing to the largest P&L loss. One suggestion I would give to Santa is to consider rebalancing more frequently than just once a year, or at least monitor his positions more regularly so that he can keep abreast of any outliers and lock in that profit. For example, if he had rebalanced every quarter, he could have locked in more of that $45k profit from JAKKS; without rebalancing, he ended up with just $25k.
As I mentioned in my blog post, I prefer looking at forward-looking Risk to see what could happen to my current portfolio and see what the potential P&L impact could be based on my current holdings. That said, historical risk is useful in this review of Santa’s portfolio to put his returns in context.
The Insight in Santa’s Largest exposure Position mimics what I earlier pointed out in terms of over exposure to the Forestry fund. However, the position has low volatility so I am not too concerned about its potential future portfolio impact other than its concentration risk and low income yield.
The Drawdown comparison to the Balanced ETF benchmark paints a rosy picture with Santa’s portfolio spending less than a third of the time underwater and only ever fell half as much as the benchmark. The Insight on Portfolio Volatility also highlights that Santa’s daily gain or loss of ~$7k implies a general low level of risk.
However, what I would show Santa is how his portfolio would behave if 2023 was a repeat of 2022 where yields rose, the stock markets fell, and the USD appreciated. I’d do this to help prepare his mental state in case there were similar large moves again. Reassuringly, even if the Balanced ETF fell by 20% and factoring in a 5% USD appreciation and bond yields rising by half as much as now, Santa could expect his own portfolio to fall less than his benchmark. One point of interest is that because of Santa’s geographic diversification, the predicted loss on his stocks is dampened by the positive FX impact.
Overall, it’s been a good year for Santa. Based on the illio Insights, suggestions for improvements would be to rebalance and monitor his portfolio more frequently, look at shorter duration bonds, consider other stocks in the industries he knows, reassess his position in the Forestry fund and look at enhancing his yield with option strategies.
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