Microsoft Portfolio: Report Halftime - Microsoft Corporation (NASDAQ: MSFT)

Microsoft stand at the Consumer Electronics Show 2010 (photo via Seattle Post-Intelligencer).

A wallet covered around an MSFT position

Last August, I wrote about the performance of a bulletproof, or hedged, portfolio built around a position in AT & T (T) in 2017 and presented a new one, completed last month (each wallet lasts six months ). Later, I started presenting cover portfolios built around other conservative titles, including Microsoft (MSFT) in mid-December. Let's see how the three months go, given the excitement with MSFT and the market in general since then. First of all, a reminder of how the portfolio was built and what it consisted of.

Construction of the MSFT Hedged portfolio for December 2018

We used the covered portfolio method to build a concentrated portfolio around MSFT in November, starting from these premises:

  • You had $ 2,000,000 to invest.
  • You didn't want to risk a withdrawal of more than 12% over the next six months, so you wanted to be protected against any greater drop than that.
  • You wanted to invest in a handful of names, including MSFT, with the aim of maximizing the expected total return, net of coverage costs.

These were the necessary steps for those who wanted to do it manually (your returns would obviously have changed based on the approach used).

Step 1: estimate of potential returns

The goal of this step was to find names that could generate high overall returns to be included with Microsoft, regardless of whether those returns came in part from dividends or were not relevant (separate tax considerations). Our site, Portfolio Armor, calculates your potential returns by analyzing the adjusted price history (which takes into account dividends) and the options market opinions, but you may have derived yours from Wall Street price targets or from the objectives of price given by the Seeking Alpha contributors you follow. Your initial universe could have been as big as Portfolio Armor (about 4,500 stocks and exchange-traded products with options traded on them in the US) or something smaller, like the Dow 30.

Step 2: calculation of coverage costs

As you were about to hedge, potential gross returns were less important to you than potential returns net of hedging costs. To understand them, it was necessary to understand the best or least expensive way to protect each name. We have written about finding the optimal hedges here. For this example, you would have looked for the cost of coverage against the 12% or higher declines. The lower the decline you were trying to cover, the smaller the list of names you could have used.

Step 3: ranking names for potential net return

For each of the names in the initial universe that had a positive potential return, the cost of coverage calculated in step 2 would have been subtracted to obtain a net potential return.

Step 4: Buy and Hedge

Here, you would have simply bought and covered a handful of names with the highest potential returns net of coverage costs. The automatic approach that we will show below has included a fine-tuning phase to minimize your money, and another tuning step to decide whether to cover with put or collars, but these four steps were the basics.

The MSFT Hedged portfolio for December

Using the process described above, this was presented by Portfolio Armor's automated portfolio building tool:

In addition to Microsoft, the site included Amedisys (AMED), Casey & # 39; s General Stores (CASY), Church & Dwight (CHD), Eli Lilly (LLY), McCormick (MKC) and Spirit Airlines (SAVE) as primary titles, based on their potential net returns in the event of a hedge against a 12% decline. The site attempted to allocate approximately equal amounts in dollars to each of these names, but rounded down the dollar amounts to ensure that you have rounded up a lot of each action.

In its finalization phase, it selected Twilio (TWLO) to absorb the cash left over from the rounding of the primary securities. TWLO has been covered with an optimal, or less expensive, collar, with a limit set at the seven-day (annual) return on the Fidelity Government Cash Reserves (FDRXX) money market fund. The cost of covering this was negative: the idea was to obtain a higher return than liquidity, while reducing the overall cost of hedging the portfolio and limiting the risk of falling in accordance with its tolerance at risk.

Performance of the underlying securities from

This is how the underlying securities in the covered portfolio have been executed since then, without coverage:

GraphicYCharts data

Microsoft has had the worst name here since mid-December, with a 10.09% drop. Assuming that, for the sake of simplicity, your portfolio was equally weighted and that you had held every position from December 13th until Thursday's close, you would have earned up to 1.9% so far.

Performance of The Hedged Portfolio Da

Here's how the hedged portfolio has gone so far.

The hedged portfolio decreased by 1.54%, while the SPDR S&P 500 ETF (SPY) recorded an increase of 6.58%. This is the third of the 2018 vintage wallets that I presented in free articles late on the market halfway, thanks to the market rebound from the second half of January. One thing that differs from this portfolio compared to the previous ones is that, in this case, the covered portfolio is underperforming its constituent securities, without coverage. In this case, it is because the highest performing security so far, TWLO, is the one that has been collided with maximum precision. You can see the impact of this in the call option value column for TWLO in the table above.

Late, but less than a December dive

Our MSFT December portfolio is still lagging behind SPY, but had a calmer December than the index ETF, as exemplified by the instantaneous comparative table below on December 24th.

As you can see above, from December 13th to Christmas Eve, this portfolio was down 5.54%, while the SPY was down 11.17%. Let's go back in a few months and see how this portfolio ends up compared to SPY.

To be transparent and responsible, I send a performance update for my Bulletproof Investments service every week. Here's the last one: Performance Update – Week 67.

Revelation: I / we do not have positions in any of the mentioned names, and we have no plans to start any positions within the next 72 hours. I wrote this article myself, and expresses my opinions. I'm not getting compensation for this (other than Seeking Alpha). I have no business relationship with any company whose shares are mentioned in this article.

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