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Diary of a private investor: a testing February

Former City fund manager John Rosier’s portfolio was 0.5 per cent down at the end of February, but he has reasons to be optimistic
March 24, 2016

Another volatile month, although, following the sharp falls of January, there were some signs of stability returning to markets. Oil gained a little, with Brent crude up 2.1 per cent to $36.65 (£25.42) per barrel, which in turn helped the Russian equity market rise towards the top of the leader board, with a gain of 2.7 per cent. Most other equity markets showed negative returns, ranging from the -0.4 per cent fall for the S&P 500 to the 8.5 per cent drop in the Nikkei 225; investors were disappointed with the lack of economic growth and stubbornly low inflation, despite the best efforts of the Japanese Central Bank with its massive quantitative easing program and the introduction of negative interest rates.

In Continental Europe, the German Dax slipped 3.1 per cent, but in the UK the FTSE All-Share (Total Return) Index managed a gain of 0.8 per cent, mainly down to its high exposure to commodity stocks, where there were some spectacular gains; Anglo American (AAL) up 75 per cent, Glencore (GLEN) up 49 per cent, Randgold Resources (RRS) up 30 per cent, Rio Tinto (RIO) up 11 per cent and BHP Billiton (BLT) up 8 per cent. Gold continued to move up, gaining 11.0 per cent and some industrial metals showed signs of life, with copper, for instance, gaining 2.8 per cent on the month.

 

 

JIC Performance

February proved another testing month, with my portfolio ending the month down 0.5 per cent compared with a total return of 0.8 per cent from the FTSE All-Share. Since the turn of the year, my portfolio is down 5.9 per cent compared with -2.3 per cent for the All-Share and, since inception in January 2012, is up 108.7 per cent against 35.4 per cent for the index. Disappointing, but perhaps not surprising, given the predominant exposure of the portfolio to mid-sized and smaller stocks and, despite the holding in BlackRock World Mining Trust, a limited exposure to commodity stocks, particularly the big FTSE 100 names.

Who would have guessed that on 1 February BlackRock World Mining Trust (BRWM) would be the best performing stock in the portfolio over the month, gaining 17.5 per cent? Clearly, the recovery in many of its underlying holdings and its 20 per cent exposure to gold companies were the main factors behind the move, but a chunky dividend yield for 2015 of around 10 per cent and a 15 per cent share price discount to NAV would have helped.

St Ives (SIV) gained 9.7 per cent, hitting its highest levels since April 2008, XLMedia (XLM) bounced back 9.2 per cent, I think on further consideration of its decision to initiate a "strategic review" (in other words, put itself up for sale) and Safestyle (SFE), the Bradford-based manufacturer of replacement windows, added 8.5 per cent, hitting new highs for the company, which floated on the Alternative Investment Market (Aim) in December 2013. Other notable gains included Conviviality (CVR), up 7.8 per cent following strong results on the 1st of the month, Fairpoint (FRP), up 7.1 per cent, and Vislink (VLK), up 6.1 per cent.

Now to the laggards; Matchtech (MTEC) was friendless, dropping 17.9 per cent on no news, but I guess on concerns that faltering economic growth in the US and UK could, given the high operational gearing in recruitment businesses, put pressure on profits. I am reluctant to sell the shares before results in early April; I think expectations are so low – on consensus forecasts the shares are on a 5.5 per cent prospective dividend yield and 9.2 times July 2016 PE – that a fairly benign statement could see the shares recover.

Centaur Media (CAU) fell 14.1 per cent, again on no news, and Crawshaw (CRAW), my favourite Northern butcher and hot prepared food chain, was down 8.2 per cent. It is difficult to argue on a short-term view that it is screamingly cheap, but the potential to increase shareholder value over the next six years or so, as it expands from the current 41 stores to 200-plus nationally, under the guidance of ex-Lidl UK chief operating officer Noel Collett, is what is keeping me in the stock. Mr Collett has vast experience of rolling out a national store portfolio; he oversaw a decade of double-digit store growth at Lidl, during which it expanded from 200 stores to 615, with annual turnover growing from £700m to £4.5bn.

Attribution from Statpro, which takes into account the size of the holdings in the portfolio, shows that the biggest positive contributors were pretty much the stocks listed above, but that Baillie Gifford Shin Nippon, which gained 2.6 per cent during the month, was the fourth biggest overall contributor, up 0.3 per cent, on account of it being the largest holding in the portfolio, at 9.9 per cent.

As far as the detractors were concerned, Centaur Media did not cause much damage, as, despite its 14.1 per cent fall, it is one of the smaller holdings in the portfolio. For the second month in a row, my third largest holding, AdEPT Telecom (ADT), appeared in the top ‘detractors’ list following its 5.3 per cent drop. It was hit by some knock-on selling following the profits warning from Alternative Networks, blamed on the impact of regulatory changes on its mobile telephony business; AdEPT has an insignificant exposure to mobile and, since 2010, has weathered its own regulatory pressures in the fixed-line business. Given its strong cash generation and my expectations of further strong dividend growth, I’m sticking with it and look forward to its March year-end trading update.

My investment trust holdings currently comprise 29.5 per cent of the portfolio and, given the exposure to overseas markets through Baillie Gifford Shin Nippon, European Assets Trust, Fidelity Asian Values and to a great extent Biotech Growth Trust and Worldwide Healthcare Trust, provide some useful diversification. The first three trusts all focus on smaller and mid-sized companies, my preferred area of investment for long-term growth, and have impressive long-term records of adding value against both their benchmarks and larger companies. For example, Baillie Gifford Shin Nippon’s share price is up 26 per cent over one year and 79 per cent over three years, compared with 11 per cent and 36 per cent for Japanese Smaller Companies and -10 per cent and +36 per cent for the Nikkei 225 Index.

 

Portfolio activity

I added one new holding to the portfolio, the leading designer and supplier of smoke and carbon monoxide (CO) detectors, Sprue Aegis (SPRP). I bought just a small holding on 10 February at 261.8p a share. After a few years of strong performance, the share price has been weak over the past couple of months, falling 25 per cent from its December high. The main trigger for the fall was the 20 January trading statement in which it reported on a strong 2015 and, while confirming it was happy with 2016 market expectations, it reminded investors that results are expected to be strongly weighted towards the second half of the year with “sales into Continental Europe, UK retail and UK trade anticipated to be significantly stronger than in the first half”.

I guess the market wanted more than that, but in any case it gave me the opportunity to get into what I hope will be a good long-term growth story. Growth is driven through a mix of ‘awareness’ campaigns and also legislation; 2015 sales benefited hugely from French legislation requiring all homes to have at least one smoke alarm. Future growth should come from geographic expansion, legislation and product development. On consensus forecasts, the shares are valued at around 17 times 2016 earnings and, with an expected 20 per cent increase in the dividend, a

4.0 per cent 2016 dividend yield. Its return on capital is in the 30s and it generates plenty of free cash flow. It should update on current trading with its full-year results in mid-April.

I trimmed the holding in St Ives by around 20 per cent, reducing it from 6.0 per cent to 4.7 per cent; I sold the shares that I added, 20 per cent lower, in July last year. It has held up well this year and by selling the stock I locked in some profits as well as it giving me a little cash to spend on some of the juicy bargains being presented in the current market turmoil.

I added to easyJet (EZJ) on 4 February at 1,539p, just ahead of it going ex-dividend at 55.2p per share, to BlackRock World Mining Trust on 16 February at 184.4p and to Bioventix (BVXP) at 1,149p on 23 February. Bioventix is another stock in the portfolio that generates a very high return on capital – 46 per cent in 2015 – and throws off prodigious amounts of free cash; I look forward to half-year results on 21 March.

Looking Forward

After a tricky start to 2016, the rally has continued into March and, although prospects feel a little better, there is, as always, much to worry about. Until markets regain all the lost ground from last year’s highs, I think it will continue to be hard going. I am reasonably happy with the shape of the portfolio; stripping out the investment trust holdings, the prospective dividend yield is forecast at 3.6 per cent, with forecast dividend growth of 10 per cent on average.

My focus will be on weeding out those stocks where I have any doubts about the forecast dividend being paid, while focusing on those companies with strong and sustainable free cash flow.

For more on John’s portfolio visit: johnsinvestmentchronicle.com