Portfolio rebalancing: Aggreko in, United Drug trimmed

The Obliquity London portfolio has seen its first sale: the United Drug holding was trimmed down back to initial size after hitting a more than 50% price increase (sale of 1/3 of the holding), according to the systematic rebalancing rule designed to avoid overweights, and incidentally capture bubbles.

I don’t even know why it’s going up that frantically, the main news seems to be that the Irish company’s primary listing is being transferred to London (where it had a secondary listing) from Dublin, which means it will be included in “UK” indices — which are really indices of London-listed companies. I don’t think the “index effect” is that big and can alone justify the price jump — or else I’m clearly in the wrong business.

The momentum seems solid and the automatic rule of selling back to size every time something goes 50% up should capture it, without introducing excess risk, and minimising the downside in case of reversal, which is unavoidable for idiosyncratic bubbles.

Image of containerised electrical generators

Aggreko’s kit (Credit: corporate PR)

The proceeds of this sale and ongoing dividends raised enough cash to have one “mid cap” amount available for a new member. I have chosen Aggreko, a steady boring power rental business which happens to have fallen 20% today due to a 2013 earnings warning. It has been on the shortlist for a while, passes the Obliquity criteria comfortably; and the long term case remains identical, seasonal variations of earnings over a couple of years horizon being no concern. It seems opportune to take the discount even if it might now be on a down trend for some time.

This will probably be the last trades of the year. Standard Chartered and Reckitt Benckiser are still on watch for the reasons discussed earlier.

The worst performers of the portfolio so far: First Group, Intel, and Balfour Beatty have no changed fundamentals of relevance to the strategy and the poor performance of some value plays in the short term is normal. To avoid the value trap though, the rebalancing rule does not buy up to initial weight. If cash becomes available it’s deemed to be better to find a new holding, which helps diversification.

The total return performance of the portfolio so far is pleasing: up 10.8% versus 4.5% for the reference ETF (iShares MSCI World), in sterling terms since inception. The FTSE 100 is up 6.5% on the same time frame so the London-listing bias is not quite an explanation for the outperformance. I don’t think there’s much to be read in short term performance, but it’s always pleasing to start with a tail wind. I certainly don’t expect to beat the benchmark by that much on a regular basis.

Disclosure: sold some UDG on 29. November; bought AGK on 17. December.

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