Diary of a private investor: relishing volatility

Whatever the explanation, there was a marked shift in sentiment away from equities. There was some relief in the second half of the month, with equities rallying on the back of the Bank of Japan moving interest rates to negative and more emollient noises from the Federal Reserve on the outlook for interest rates, following December's first hike in nearly 10 years. China bore the brunt of the selling, with the FTSE China A All-Share index down 24.9 per cent, dropping below last September's lows. The German Dax fell 8.8 per cent, the Japanese Nikkei 8.0 per cent and the S&P 500 5.0 per cent.

In the UK, the FTSE All-Share (Total Return) Index fared better, falling just 3.1 per cent. The FTSE 100, which at one stage had been down 9.6 per cent, briefly entering bear market territory (down 20 per cent from last May’s peak), rallied strongly to finish the month off down just 2.5 per cent. Incidentally, you could time the bottom of the market to the day when "billions are wiped off shares" were the opening words on BBC News at Ten. Mid- and small-cap stocks, which had initially held up reasonably well, eventually succumbed to market weakness and struggled to keep up with the FTSE rally; the FTSE Mid 250 was down 5.4 per cent, FTSE Small Cap 5.8 per cent and the Aim All-Share 6.1 per cent.

Brent Crude fell 4.5 per cent on the month to $35.91 per barrel, having rallied 32 per cent from the 20 January low. Gold acted as a nice hedge, gaining 5.5 per cent over the month.

Portfolio performance

A poor start for the portfolio; like the mid and smaller indices it held up relatively well until mid-month, but then failed to keep up with FTSE's rally. It was down 5.4 per cent, so that since January 2012 it is up 109.8 per cent compared with +34.3 per cent for the FTSE All-Share (TR) Index. It was not its worst month in the past four or so years; that accolade goes to the 8.4 per cent drop of May 2012, during one of the early chapters of the Greek debt and euro crises.

The top performers during January were: Avation (AVAP), the aircraft leasing company, +9.9 per cent; Fairpoint (FRP) the legal services group, which recovered 9.2 per cent after a reassuring trading update and, believe it or not, BP (BP.), which benefited from the late-month rally in the oil price, gaining 6.2 per cent.

The other end of the leader board was not a pretty site, with XLMedia (XLM) down 23.0 per cent, despite a very strong trading update, a 61 per cent increase in the dividend and it announcing the initiation of a strategic review to "evaluate opportunities to maximise value for the company's shareholders". I used the weakness to add to my holding. Vislink (VLK) dropped 19.1 per cent on no news, continuing last year's downward trend, Biotech Growth Trust (BIOG) fell 18.5 per cent as the sector sold off in the US, and AdEPT Telecom (ADT), one of the larger holdings in the portfolio, was off 16.8 per cent; it seems to have been hit by some profit-taking and, as so often happens with smaller companies, the market makers tend to stand back and lower their prices until the buyers appear. On 20 January I was able to nip in and take advantage of a spike down in the share price, picking up stock at 210p. AdEPT has been buying back stock on a regular basis and did so later on the same day.

Attribution analysis, which takes into account the size of the holdings, shows that the largest positives over the month were Avation, BP and Fairpoint, each contributing between 0.2 per cent and 0.3 per cent to the portfolio return of -5.4 per cent. Clearly the positives were heavily outweighed by the negatives, with AdEPT Telecom costing 0.96 per cent, followed by Worldwide Healthcare Trust (WWH), -0.43 per cent and Vislink, -0.42 per cent. This again serves to demonstrate the importance of position sizing; XLMedia was the biggest faller, but owing to it being only 1.5 per cent of the portfolio, had limited impact, while AdEPT's 16 per cent fall was by far the biggest hit to performance. It is just one month and I'm confident that AdEPT will bounce back, hence my topping up.

Portfolio activity

Ideally I would have raised cash towards the end of December and entered the new year with some firepower to deploy into market weakness; pick up some of those stocks having a bad day when panic sets in. Unfortunately, on this occasion I did not have the necessary foresight and was pretty much fully invested.

On 8 January I raised some cash, selling Communisis (CMS), thus realising a loss; this was one of those situations where I did not have the confidence to add and had found another stock where I felt more assured about its prospects. On the same day I added Character Group (CCT) to the portfolio; initially just 1.0 per cent at 484p. It designs and markets toys, principally for the pre-school market, and has the rights to the likes of Peppa Pig, Fireman Sam and now the Teletubbies. The owners of the brands license these rights to Character Group, which has a long history of designing appropriate and successful products. It had a strong 2015 and its latest trading statement confirmed that Christmas trading was solid. It is strongly cash generative and on consensus forecasts is valued at just 11.0 times current-year earnings.

I also added to my position in Next (NXT) at 6,858p; it had been weak following its Christmas trading statement. Unseasonably warm weather had impacted sales so that profits are now expected to be at the bottom end of its previous guidance; hardly disastrous, but still a little disappointing. I have long been a fan of Next's management; it really seems to understand what creating shareholder value is all about and rather than squandering excess capital on value-destroying acquisitions it returns it to shareholders. If it makes financial sense it buys back shares and, if not, pays special dividends. It sets out very clearly in its annual report the criteria it uses for fixing the price below which it buys back shares. Over the past 10 years or so it has bought back more than 30 per cent of its share capital, significantly enhancing earnings per share. I'm counting on a continued benign outlook for consumer spending and a return to more seasonal weather next winter, when the year-on-year comparatives for Next will be much kinder.

I sold my position in Melrose Industries (MRO) at 272.4p just ahead of its return of capital and share consolidation; while I recognise that management has a long record of building shareholder value through its business model of "buying, improving and selling" businesses, I felt that it was looking a little pricey. I will look for an opportunity to re-enter later in the year. I used some of the proceeds to add to Fairpoint following its trading update (at 144p), BP (at 329p), Character Group (at 484p) and, as mentioned earlier, AdEPT Telecom and XL Media. With BP I am backing the view that the dividend will be maintained, giving a dividend yield approaching 8.0 per cent. If the oil price stays weak well into 2017 then perhaps my optimism around the dividend might prove unfounded, but for now it feels as though there are not many bulls of the oil price around. I think, as in the past, the solution to low oil prices is low oil prices.

Looking forward

It was good to see the market regain its poise in the second half of January, but as we have seen so far in February, we are not out of the woods yet. These are testing times, with the siren voices warning of the 'great unwind' becoming shriller with each passing day - and who knows, they could be right. I struggle, however, to share their pessimism; the UK market does not seem especially expensive, the economy is ticking along and I think interest rates will remain on hold for the foreseeable future. The past five years has been a long hard slog up the proverbial 'wall of worry' and I anticipate more of the same. Sadly, the market doesn't care what I think, so my energy is best focused on stock selection; looking for new opportunities as well as reassuring myself of the merit of my existing holdings, especially with regard to their valuation, balance sheets, cash flow and dividend-paying capacity.

John Rosier's portfolio - end of January