But what matters most isn t the stock in the abstract but the actual position held within your portfolio. When our holdings do rally that means having enough firepower in place to actually have a beneficial effect.
(Asian) Real Estate Rising
DWS Rreef World Estate and Tactical Fund - one year
Still on Sale for Now
Discount to Net Asset Value (NAV) for DWS Rreef World Estate and Tactical Fund (DRP)
At the time, the fund traded at a 17% discount to its underlying net-asset-value, a margin that has since narrowed to 11% and down from 20% when we first highlighted the fund last summer. The stock itself has jumped sharply over the past year and paid out 7% in dividends.
And while I ll never turn down a winner, the problem is that, although the position has gained in value, it has shrunk as an overall percentage of my portfolio. Other holdings, most recently names like Sony and Mitsui & Co have gained even more becoming more dominant weightings. New cash has been deposited. And because it s a relatively smaller holding, the gains are having a positive but largely muted effect. I risk wasting a winner.
One approach many investors choose is to simply hang on to their original shares. While I applaud the willingness to let a winner run, the problem in this case is the size. As we ve written before, positions that account for less than 1% of your portfolio become largely ornamental as even a big gain has an insignificant impact on your bottom line. Tiny positions eat up capital while providing scarce upside. A 1% position would need to rally 100% to add even 1% to your pre-tax returns.
I see three plausible options in this case:
One option is to add additional shares of DRP, bringing it up to at least my standard trading unit of around 3% of assets. While the stock has already rallied sharply, establishing the holding as a full position at least gives me the opportunity to succeed should the stock continue to press higher toward the levels it traded in 2007 and 2008.
Another option is to add an additional position in a similar asset, expanding the size of the risk while also broadening it to holdings within the same asset class. As we often point out, markets tend to move in trends. If one fund focused on Asian and world real estate is strengthening, other holding similar assets are likely leading as well. One to consider in this case is (IFAS),
A final option would be simply to exit the trade, determining that given my portfolio, risk budget and all other available alternatives, the idea no longer merited the continued use of my capital.
If the trade was held at a loss that s exactly the path I d take. But the fact that DRP is poised to challenge its multi-month highs above $16, yet still trades at a double-digit discount to its underlying NAV, leads me to think this is one trade to try and develop rather than dump.