% of Portfolio Allocation Clarification

Hi Nick,

It’s a good question and our answer relates only to what we do. We have target weights in the portfolio though in practice, things will move around. While there is no hardline rule here, we regularly monitor the portfolios we manage for excess movements away from the targeted level and will amend accordingly, with our tolerance more like ~1% variance.

When we reduce a holding, as we did with CBA early this week in the Income Portfolio, the important number is the target weighting. We write that our target weight is down from 6% to 5%, which in practice this was more like 7% down to 5% given how strong the stock had been. The target weighting is our north star, not the amount that is being trimmed.

Regarding positions that are down a lot, we still hold them because we believe they are undervalued, and we will get a higher price to exit them. We try our hardest to assess a position here and now and not anchor it to its open P&L. The other side of the question would be, why don’t we just sell our positions that are up 50%, and the same logic applies.