Diving into turbulent waters

I bought shares in two tranches today, under very different circumstances.

High yield ETFs
Last week I arranged to invest in two sorts of high-yield ETF: IDVY (Europe) and IAPD (Asia-Pacific). The trade was executed on a fixed day to keep commission charges low. These ETFs are mechanically traded, and have reasonable charges (<1%). The main thing I'm looking for is geographic diversity. Before buying these 70% of my portfolio was invested in UK stocks. I don't have the time to research companies all over the world - the UK occupies all the time I'm prepared to spend researching shares. I like the idea of high-yielding shares, especially in the current market mood - I think they have a certain amount of downside protection. Mechanically traded ETFs and trackers appeal to me more than actively managed funds, mainly due to the low commission.

I expect to invest more in these two ETFs in the future - this is just the first chunk of investment.

Royal Bank of Scotland
Yes, again :-) Since seeing the share price plummet from just under £4 when I made my last investment, my fingers have been itching to pick up more. It's gone ex-dividend since then, which means my previous purchase price was effectively £3.76. Today it dropped down to £3.05 due to the concerns about Bear Stearns, and at this point I pulled the trigger. This was not a planned trade, but as soon as I heard the Bear Stearns news I thought there was a possibility of Mr Market giving me a good price.

Mr Market is clearly worried by the Bear Stearns fiasco, but I am not. I believe my valuation of RBS already takes into account the downsides, and RBS is a very different beast from Bear Stearns. I think there are three points that give me confidence in RBS:

• It is well diversified. There is less chance of a total wipeout, since it is very unlikely that all of its divisions will simultaneously lose money, or that one or two will lose enough to overwhelm it.
• It has assets that it is the process of disposing of. These will strengthen its capital position significantly.
• UK banks do not have to mark-to-market in the same way as their US counterparts. RBS will not have to declare massive writedowns due to the vagaries of the market, and therefore it is unlikely that other banks will become spooked enough that they will stop lending to it.

My risk-weighted valuation of RBS puts it at a market cap of about £50bn. Mr Market values it at about £30bn. I like that margin.

In £ terms, my latest investment in RBS is half of my previous total. In terms of shares, it's about 64% due to the drop in price. I have the same amount again waiting in case the market goes even more crazy over the next couple of weeks. In the new tax year there is a whole lot more coming on stream.

Summary

(all percentages are at cost price)

IDVY - European high-yield ETF - 17/3/08 - 2208p - 12.5% of portfolio

IAPD - Asia-pacific high-yield ETF - 17/3/08 - 1616.8p - 12.5% of portfolio

RBS - Royal Bank of Scotland - 17/3/08 - 305p - 12.5% of portfolio, for a total of 37.5%

So the cost-price make-up of my portfolio is now:

• 12.5% small-cap UK software
• 6.25% small-cap UK-listed chemicals
• 18.75% emerging markets ETFs
• 25% high-yield international ETFs
• 37.5% Royal Bank of Scotland