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A year in investing

The UK's first Isa millionaire, John Lee, guides us through the investments he's made in his most successful ever year on the markets - and looks ahead to what he expects to be a more difficult 2014
January 17, 2014 (Lord Lee of Trafford DL FCA)

"For me 2013 was a great year the like of which I may never see again. Against a favourable backdrop - a relatively stable international economic and financial climate, thankfully no new serious military conflicts involving Iran and North Korea, and a steadily recovering UK economy - I achieved an overall 48 per cent capital appreciation - twice as good as 2012's 24 per cent and beating my previous best performance of 44 per cent in 2003. Adding in a 3 per cent dividend return gives a total figure of 51 per cent for 2013. Within all this my Isa performed rather better than my main portfolio, showing 57 per cent capital growth.

In many ways it was a text book year - a goodly number of significant successes and above all no serious losses. It is of course the absence of such losses which is the key to overall performance. As I point out in my recently published book, How to Make a Million - Slowly, there is a parallel between golf and the stock market - I speak as a poor 28 handicap golfer! It is the shot out of bounds or in the wood which ruins one's round - similarly with investing it is the losses that cancel out the profits and drag down annual achievement levels, hence my conservative defensive approach.

Turning to specifics, 2013's star was unquestionably Aim-traded animal natural feed additives company Anpario (ANP), where the double whammy of profits growth and an upward re-rating saw the shares rise from 130p at the start of the year to end 2013 at 325p (they've since retreated to around 270p as a result of profit taking). In addition, five other holdings doubled: niche software specialist Delcam (DLC), finally succumbed to a US bid; showers and tiles seller Norcros (NXR); mini-Aggreko Northbridge (NBI); flavours and fragrances business Treatt (TET); and Harrogate plant hire specialist VP (VP.). While most others usefully appreciated, only three holdings ended the year in modest negative territory - Concurrent Technologies (CNC), which ran into government/European licensing problems with some overseas orders; Park Group (PKG) in incentive vouchers, where half-year profits just marked time; and monitoring systems Vianet Group (VNET) over possible legislative restrictions on its beer monitoring technology. I judged the falls in Concurrent and Park as excellent buying opportunities to pick up more stock on a 4.6 per cent yield in both cases.

Having campaigned hard at Westminster for Aim shares to be eligible for inclusion in Isas, I was delighted when this came to pass in August; I immediately decided to move my large Christie Group (CTG) holding into my Isa to shelter hoped-for future capital growth. This reversed the 2005 transaction when I had to 'sell' my Christie shares out of my Pep/Isa when they moved from main market to Aim. I have long regarded leisure business services/stocktaker Christie as being significantly undervalued - indeed the shares were originally 'floated' in the 1980s at 145p when it was a considerably smaller business - today they hover around 80p. However, to finance the 'purchase' in my Isa I had to raise funds, thus out went some of my Dairy Crest (DCG) and all my short-term lender S&U (SUS), Primary Health Properties (PHP), and property company Daejan (DJAN), mostly at a profit.

M&A activity picked up during 2013 with me on the receiving end of two takeovers - the aforementioned Delcam and industrial textiles manufacturer Fiberweb (FWEB) - I was very fortunate with the latter, only having held the shares for a matter of weeks. I was less fortunate with pawnbroker Albemarle & Bond (ABM), having bought in January at 205p; investors, including myself, were shocked at its subsequent near total collapse through a combination of a falling gold price, competition, and too high a level of debt; I did well to scramble out mostly at 177p.

During the year I made two new serious investments: safe storage Lok'n Store (LOK) and building services Carillion (CLLN). I made 11 separate purchases of Aim-traded Lok'n Store between 127p and 155p, as it looked very good value at a substantial discount to net assets of approximately 250p together with a useful yield. It seemed ideally placed to benefit from the improving housing market activity in the south east. Today the shares trade at around £2.

I have never been particularly attracted to - or successful with - construction shares. In fact, I took a small loss on Balfour Beatty (BBY) during the year, but felt that Carillion had been overlooked on a 6 per cent yield and single figure PER, and that investors were not valuing it correctly given its increasing emphasis on outsourcing/management contracts as compared with basic construction. I paid around £3 towards the end of 2013 for both my main and my Isa portfolios - pleasingly, they are now 10 per cent higher. I also bought back niche cash-rich engineer MS International (MSI) at 185p; I last bought into its shares in late 2009 at 115p, selling out two years later at just short of £3. Since then, pressures on defence budgets have made life more difficult for their key division manufacturing stabilisers for naval guns, etc, but against this anti-piracy and anti-drug/people smuggling activities should continue to provide significant business. Meanwhile, the company's two other divisions in petrol forecourt canopies and forklift truck arms should experience better trading, so the shares' 4.6 per cent dividend yield looks very safe.

Looking ahead to 2014, there is no way I expect a repeat of last year's performance - in fact, I will be well satisfied just to hold present levels. Most commentators forecast a year of modest progress and on present evidence I wouldn't disagree, but the world remains volatile and unpredictable. While I remain pretty fully invested, the cash takeover of Delcam should deliver very useful liquidity in a few months' time, thus providing a degree of defensive cover. Currently, I see few attractive buying opportunities - prices are rather high for me and dividend yields miserably unattractive - but there will always be special situations and encouragingly M&A activity is probably likely to increase. Nevertheless, 2014 has actually started quite brightly for me with Air Partner (AIP) joining those that have doubled since January 2013 and marine services James Fisher (FSJ), at an all-time 'high' of £13.50 - I started buying into the shares in 2000 at below 80p but sadly sold too many too soon.