Because exceptional investment opportunities are rare, we aim to construct a concentrated portfolio of up to 15 stocks. Individual portfolio weightings will typically reflect a balance between the following factors:
The greater the positive gap between the assessment of the intrinsic worth of a target company and its market price, the higher its weighting.
The more we believe we understand the risks to the assumptions, the higher its weighting.
We view position sizing in two different lenses. Firstly, at the individual stock level and secondly, at a portfolio level. Although we don’t have a well-defined maximum position limit, we approach it from a capital wipe-out perspective.
We’re of the view that if a stock runs and becomes a larger portion of your portfolio, the chances are it has earned that right. If the thesis still stacks and the risk/reward remains considerably favourable, we generally won’t reduce the position. Having said that, we would define this wipe-out threshold at about 30% of the portfolio size, but it is case by case.
At the portfolio level, although individually a position may not represent a large portion of the total fund, collectively if a bunch of existing positions operate in the same industry or have end users (Customers) that are similar, then the overall exposure can become large and much bigger than one individual position alone. Importantly, the 30% wipe-out threshold can be reached fairly quickly in this regard.
However, the level of exposure each business has to a particular end user varies with some being more defensive than others (for example, dental expenditure vs gym expenditure in relation to consumer exposure). For this reason, we wouldn’t necessarily apply the 30% wipe-out rule here and prefer to think more subjectively at a portfolio level in this instance.