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Private investor's diary: Onwards and upwards

Former City fund manager John Rosier says 2016 was a good year for equity markets, but not, alas, for his portfolio
January 13, 2017

My first and most important priority is to make money and, after that, to beat the market. I use the FTSE All-Share (Total Return) Index as my market benchmark, given that it covers around 98 per cent of the UK listed market by value. Unfortunately, in 2016 I failed on both counts. My portfolio was down 4.1 per cent, including dividends, compared with the +16.8 per cent return of the FTSE All-Share (Total Return) Index.

June stood out as a particularly bad month, the worst in the 60 months since I initiated this portfolio in January 2012. The ‘leave’ result in the European referendum, with the accompanying collapse in sterling, saw the FTSE 100, dominated by overseas earners, motor ahead. Smaller, UK domestically-oriented companies were sold off on concerns that the economy would take a hit, with consumers being squeezed by higher inflation. The portfolio was not positioned for that result and, in June, fell 6.1 per cent versus the 2.8 per cent rise of the All-Share. My Top 10 Portfolio, which only holds 10 stocks, performed a little better over the year, scrambling into positive territory with a return of +0.7 per cent.

Over the five years since the inception of the portfolio, it has gained +112.4 per cent, giving an annualised return of +16.3 per cent. This compares with +61.8 per cent – +10.1 per cent annualised – from the All-Share. This is a long-term game and if I achieve a similar annualised return over the next five years I will be more than happy – +16.3 per cent annualised up until December 2021 would leave the JIC Portfolio up 350 per cent over the 10 years.

Despite the poor performance, I quite enjoyed last year. Equity markets suffered the worst start to the year on record. The FTSE All-Share index and the S&P 500 both lost 9 per cent during the first six weeks of 2016, culminating in one City economist advising his clients to “sell everything”. Even in my case, that would have led to a worse performance than I achieved. In January, oil dropped to a 14-year low of $27 per barrel and a well-known investment bank suggested it would fall a further 20 per cent or so to $20 per barrel.

I found the European referendum campaigns rather tedious, seeming to go on forever. While the result clearly caught investors by surprise, the subsequent recovery in markets after the initial sell-off was met with disbelief. Markets then shifted their attention to the US election and despite the opinion polls getting the Brexit result so wrong, people continued to put their trust in them. The result surprised again, with Donald Trump winning the race and, again, the reaction of the markets confounded conventional wisdom. After a sell-off in the futures market which lasted no more than a few hours, equity markets recovered and powered ahead to new all-time highs.

 

 

StatPro Revolution's analysis of the portfolio over the year, which incorporates the size of the holdings as well as their performance, shows that of the top five positive contributors, three were investment trust holdings. Fidelity Asian Values (FAS) added 4.1 per cent to performance, BlackRock World Mining (BRWM) +3.3 per cent and Baillie Gifford Shin Nippon (BGS) +2.3 per cent. The overseas exposure of these stocks undoubtedly helped. For instance, despite recent weakness, the yen still gained 19 per cent against Sterling over the year, boosting the value of my holding in Baillie Gifford Shin Nippon.

Number four on the list was aircraft leasing company Avation (AVAP), +1.5%, where I was at last rewarded for my patience. I originally bought in November 2014, but it was not until the late summer 2016 that the market started to recognise the value in its shares. This was given further impetus by the announcement in November that it was considering an offer for its fleet of turboprop aircraft. Ithaca Energy (IAE) contributed +0.9 per cent to performance, with strong share price performance continuing after I added it to the portfolio in October.

Unfortunately, the negatives outweighed the positives. As alluded to earlier, I was too slow cutting losing positions. Some of those were longstanding profitable positions that had run into headwinds - easyJet (EZJ), Next (NXT), Dixons Carphone (DC.), Crawshaw (CRAW) - and others were new holdings which were hit by a slowdown in their operations - Interquest (ITQ), Gattaca (GATC), Fairpoint (FRP). Five of those seven stocks were in the top five detractors from performance, with Crawshaw costing -4.4 per cent, Fairpoint -2.8 per cent, Gattaca -1.6 per cent, easyJet -1.5 per cent and Next -1.3 per cent.

Of the those five, I still hold Crawshaw and Gattaca, and I was slightly nervous ahead of Crawshaw’s trading statement on 6 January. It looks as though it has steadied the ship, but there is much more to be done to get the growth story back on track. I think that management has learnt from last year’s mistakes and the business will come out stronger for it. I am sticking with my holding in anticipation of improved performance and, crucially, the shares’ valuation is now much more on my side. I am also giving Gattaca a little more time. The balance sheet looks fine and unless the UK economy takes a real dive in 2017, I think the business should see a better year ahead and the dividend, yielding a prospective 8.4 per cent, should be safe. In short, if I did not already hold it I would consider buying it at this level.

 

 

Lessons from last year

Discipline, discipline, discipline. Back in April, I reviewed The Art of Execution by Lee Freeman-Shor. The author revealed his findings from studying 30,874 trades, covering 1,866 investments, over a period of seven years. While at Old Mutual Global Investors he had appointed 45 managers to look after $20m-$50m chunks of a $1bn-plus fund for which he was responsible. Interestingly, he found that all the managers had a similar success rate at picking winning stocks, but that what separated the winners from the losers was execution. The winning fund managers were those who acted like “assassins”, unemotionally cutting losing positions quickly and not being tempted to snatch at profits, but running their winners. The losers tended to act like “rabbits”. Unfortunately, while in previous years I had been good at putting this into practice, in 2016 I let my discipline slip. Stocks such as Fairpoint, easyJet and Next should have been cut long before they did so much damage.

I was given a sharp reminder of the importance of valuation by Crawshaw. Having bought very well in November 2013 in the low- to mid-teens, I was guilty of falling in love with the stock. Last year, when the share price was in the 90s, I justified the extremely high valuation by convincing myself of the longer-term growth story. Simply, there was no room for disappointment, which came in the form of poor trading in the early summer. With no valuation support the share price was hit hard.

The portfolio’s poor performance wasn’t all due to poor execution of trades. It was always going to be difficult to beat the index with little exposure to the mining and oil & gas sectors. They are well represented in the FTSE 100 and were up more than 100 per cent and 50 per cent respectively. Being underexposed to these sectors and the FTSE 100 served me well in the preceding four years, but was painful in 2016.

 

 

Looking forward

That’s enough of the ‘hair shirt’. New year, lessons learnt, time to look forward. The most dramatic move in recent months has been the sell-off in US Treasury bonds and the commensurate rise in bond yields to a 26-month high. Many commentators suggest that the 30-year bull market in bonds is over, a view towards which I have much sympathy. In the short term, the move may have gone too far, but if Trump can put most of his expansionary plans into action, further weakness in bonds during 2017 is, I think, likely. If bonds retreat in an orderly fashion that should present a reasonable environment for equities. On balance, I think the oil price will remain firm, helped by increasing demand and Opec’s recent agreement to trim production. There is much scepticism that this accord will stick, but for the likes of Saudi Arabia and non-Opec member Russia it is imperative that they achieve a higher oil price. I currently have around 10 per cent exposure to oil stocks through Hurricane Energy (HUR), Ithaca Energy and Royal Dutch Shell (RDSA).

Biotech has bounced since the US election and hopefully will have a better year. If big pharma repatriates much of its overseas cash at the lower tax rates that Donald Trump has promised, I suspect some of that will be used to buy growth by acquiring smaller biotech companies. I am playing this theme through the Biotech Growth Trust (BIOG).

I hate making forecasts as none of us knows what the future has in store and often you end up with egg on your face. In Continental Europe, there are elections in the Netherlands, France and Germany and possibly Italy, each of which has the capability of causing a major upset, while in the UK Brexit rumbles on. However, as things stand, I am happy to be almost fully invested and as an equity investor look forward to 2017 with renewed optimism.

 

 

NameEPICMarket cap (£m)% of portfolio
Fidelity Asian Values PLCFAS234.27.8
AdEPT Telecom PLCADT61.86.8
TR European Growth Trust PLCTRG3855.8
BlackRock World Mining Trust PLCBRWM593.85.8
Baillie Gifford Shin Nippon PLCBGS230.64.9
Conviviality Retail PLCCVR372.24.8
Renew Holdings PLCRNWH277.34.7
Cash depositCD 4.7
Biotech Growth Trust (The) PLCBIOG393.74.7
Ithaca Energy IncIAE410.64.5
Avation PLCAVAP115.84.3
Bioventix PLCBVXP68.84.3
Royal Dutch Shell PLCRDSB187486.94.2
Character Group (The) PLCCCT107.83.3
SafeStyle UK LtdSFE240.33.1
XLMedia PLCXLM186.33.1
Inland Homes PLCINL121.42.8
Dixons Carphone PLCDC.4086.32.3
Serco Group PLCSRP1574.22.2
Crawshaw Group PLCCRAW17.92.1
Revolution Bars Group PLCRBG111.32.1
Imperial Brands PLCIMB33962.31.9
Hurricane Energy PLCHUR598.41.6
Gattaca PLCGATC85.71.5
Patisserie Holdings LtdCAKE3151.5
India Capital Growth Fund LtdIGC82.11.4
Accrol Group Holdings PLCACRL113.91.3
RedstoneConnect PLCREDS19.31.1
Geiger CounterGCL 1.0
StatPro Group PLCSOG680.3
Fidelity Asian Values PLCFASS 0.1

 

 

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