A New Strategy

I have written on many occasions about the lack of value in many investment markets and how this has been driven by ultra-low interest rates; these conditions have led many investors to more esoteric strategies in the search for yield and gains. Now I am not usually a big fan of this, however in the current climate I am not averse to taking a more flexible approach and looking for alternatives. However I couldn’t resist taking some profits from the Index Linked Gilt holdings that have risen handsomely of late and reallocating a small proportion to an investment in two currency ETFS!

Foreign Exchange is tricky and there are lots of factors at play and trying to second guess what Central Banks or Politicians may do is not a sensible investment strategy; however mean reversion is and hearing the news of Sterling £ falling to 30 year lows got me thinking that there could be an oversold position and a simple reversion to the norm at some point in the future should see the pound recover. Take a look at the long term charts for the pound versus the Yen and the Euro (I selected these as the Dollar still remains a safe haven in time of volatility and I would not want to short it) and how they are at low levels in comparison to even recent history.

GBPJPY LT    GBPEUR LT

Then looking at the shorter term trend both are almost 2 Standard Deviations (SD) away from their mean – less than 5% of events are outside 2 SD in a normal distribution – in other words things dont tend to stay outside theses levels for prolonged periods. The graph below shows how this worked as the GBP/JPY exchange rate moved outside the trend in early July before reversing upwards.

GBPJPY

The same thing happened with the pound against the Euro over the same period

GBPEUR

I am not and will never claim to be an expert on Foreign Exchange this strategy was simply exercising an opportunity in what I perceive as an oversold position for sterling and to act on it I bought two leveraged ETFS that offered returns of 3x the movement in Sterling against the Yen and Sterling against the Euro – this means I invested 1% of the portfolio in each but gained exposure to returns as if it were 3%, think of it this way……

  • GBP recovers 1.36 where I bought it on the 13th July to 1.55 where it was prior the EU Referendum the return is 13.97% but….
  • The leveraged ETF is up 41.91% so the return on a £500 investment is £209.55 and the upside unlimited
  • The downside is that a decline in value would be accentuated but the maximum loss is £500

This may only be short term, but in the current climate it will hopefully pay to be flexible and act on any oversold opportunities.


New Shares for Portfolio

At present I am researching two shares in the support service sector that I am planning to add to the portfolio based on some “contrarian criteria”; however I am mindful that the broader UK Market – and more so the US – looks overvalued and possibly facing a reversal.

Therefore I may look to use a “short” ETF to provide some protection against this event; hopefully the shares that I have selected would not decline too much (being contrarian one of them has fallen in value over 50% already) but the risks are too high at present not to consider this type of protection.


Portfolio Composition

I am perhaps morphing the investment strategy into a more multi-asset approach but I don’t see anything wrong with that if there is limited value in the equity market.

Here is where the model portfolio is currently invested

considered investing portfolio Jul

Despite poor performance from Brown Group and Amec-Foster Wheeler returns have remained consistent and in excess of the FTSE-All Share Total Return.

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