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Private investor’s diary: a summer Spree

Former City fund manager John Rosier took advantage of an indiscriminate post-referendum sell-off to top up several holdings in his portfolio
August 19, 2016

After the initial shock sell-off after the referendum result on Friday 24 June, markets staged a remarkable recovery. Initially, large cap, defensive, overseas earners led the way. As we progressed through July, early evidence suggested that the UK economy was not coming to a shuddering halt. The UK consumer seemed in fine fettle, continuing to buy new cars and visiting show homes. One area that did see softening demand was overseas holidays, impacted by July’s ongoing terrorist attacks on the Continent and rising costs due to sterling’s fall in value. As a result, more domestically oriented mid- and small-cap companies bounced back; in July, the FTSE Small Cap Index was up 6.8 per cent and the FTSE 250 Index +6.42 per cent, both nicely ahead of the +3.4 per cent return from the FTSE 100.

Overseas markets were also strong, with the German Dax gaining 6.8 per cent. In Japan, the Nikkei 225 was up +6.4 per cent in anticipation of further monetary stimulation from the Bank of Japan and the introduction of so called, ‘helicopter’ money. In the US, technology stocks led the way, with the Nasdaq 100 up 7.1 per cent. It’s taken over a year but the broader S&P 500 Index broke through the previous all-time high achieved in May 2015. Russia, down 1.0 per cent, was one of the few markets to fall during the month, impacted by the weak oil price. Brent Crude dropped 13.7 per cent to $43.5 per barrel and now stands some 20 per cent off the 2016 high of $52.7 achieved on 10 June. Gold had another solid month, gaining 2.5 per cent to $1,357.9 per ounce. and extending its recovery since 1 January to +28.0 per cent.

JIC performance

Fighting back! Helped by the recovery in small- and mid-cap stocks, July was a better month for the JIC portfolio. The JIC portfolio was up 5.6 per cent compared with the +4.0 per cent return of the FTSE All-Share Total Return Index but still has some catching up to do; since 1 January it is down 5.6 per cent compared with +8.5 per cent for the Index. Longer term, the picture remains healthy, with the portfolio up 109.3 per cent since January 2012, giving an annualised return of +17.5 per cent, compared with +50.3 per cent and +9.3 per cent for the All-Share.

Many of my holdings staged a strong recovery and the portfolio benefited from my adding to a number of positions at what looked like give-away prices in the panicky few days after the referendum. XLMedia (XLM) gained the most, up 21.9 per cent. It reported a strong first half with revenue up 39 per cent and earnings up 32 per cent. Given that it reports and pays it dividend in US dollars, UK-based shareholders should benefit from sterling’s weakness. On The Beach (OTB), the online ‘beach’ holiday company, gained 18.6 per cent after demonstrating the flexibility and resilience of its business model in a difficult market. In a trading statement ahead of its 30 September year-end, it confirmed that trading was in line with expectations. It has clearly gained market share and maintained margins. Conviviality (CVR), the alcoholic drinks distribution and retail company, was up 17.5 per cent after reporting forecast-beating results for the year-ended 1 April; earnings per share was up 27 per cent and shareholders were rewarded with a 14 per cent increase in the dividend. Even after the jump in the share price, on consensus forecasts the shares are valued at just 10.9 times earnings and a prospective dividend yield of 5.6 per cent for the current year ending April 2017. I hold in the hope and expectation that the shares will see a significant re-rating in the coming year. It has attractive growth prospects from expanding its franchised estate as well as the potential to widen margins by maximising the scale benefits from the recent acquisitions of Matthew Clark and Bibendum. Housebuilder, Persimmon (PSN), which readers of last month’s column will remember I bought in the post-referendum mayhem, gained 16.6 per cent and replacement window manufacturer, Safestyle (SFE) was up 13.8 per cent, helped by a decent trading statement. It reported order intake in the first half up 19.7 per cent on the previous year and an increase in market share from 9.5 per cent to 10.0 per cent. My two investment trusts with exposure to healthcare and biotech were strong; Biotech Growth Trust (BIOG) was up 17.6 per cent and Worldwide Healthcare Trust (WWH) rallied 11.2 per cent.

It wasn’t all plain sailing, though. Vislink (VLK) issued a profit warning early in the month and I did what I should have done a year ago. I cut the holding, realising a significant loss, and reinvested the proceeds into stocks that I think have better prospects. I experienced the usual feelings of tranquillity and relief at no longer having to see, or worry about, this dog in my portfolio. Other than Vislink, the worst performer was Interquest (ITQ), down just 4.9 per cent.

Activity

A quieter month on the dealing front, with most of the activity focused on adding to existing positions at what looked like mouth-watering valuations. I increased my exposure to Conviviality, (at 168p on 6 July), to Biotech Growth Trust, (at 687p on 25 July), Bioventix (BVXP) (at 980p on 27 July), RedstoneConnect (REDS), (at 1.28p on 28 July) and Lloyds Banking (LLOY), (at 53.04p on 28 July). Bioventix has fallen some 25 per cent so far this year with some uncertainty over next year’s forecasts, which seems to be troubling the market. What we do know is that it loses some revenue as a royalty agreement comes to an end, but we are not sure on the exact timing of revenue generation from its new ‘heart-attack detecting’ high-sensitivity Troponin blood test. I think this is a bit of a sideshow as it really makes little difference to the long-term value of the company and for this reason I was happy to add below £10 per share, when it was priced at an estimated 4.5 per cent prospective dividend yield.

In addition to the sale of Vislink, I also sold my holding in easyJet (EZJ). This was a difficult decision as over the last five years it has been one of the most profitable holdings in my portfolio. I think it is an excellently managed airline, but at the moment is faced by too many head winds. Currency, oil price, industrial action and terrorism are all impacting the business and it was clear from its third-quarter trading statement that it was facing a difficult summer. There is a risk that I was closing the stable door after the horse had bolted but it feels like further downgrades are likely.

I added a new holding, Patisserie (CAKE), the operator of coffee shops, principally under the name of Patisserie Valerie. Like Crawshaw (CRAW), I am attracted by the huge potential to grow the business through its new store opening program. What’s more, given the high operating margins and return on capital it is able to self-fund the growth. In the first half it opened 12 new outlets, taking the total to 177. It aims to open 20 a year and says it has identified 250 potential sites. Executive chairman Luke Johnson owns 38 per cent of the company and, having had great success in the past, particularly with Pizza Express, I have confidence he will deliver. The share price had fallen back 40 per cent from January’s high of 470p, presenting me with the opportunity to buy at around 21 times consensus earnings forecasts for the current year ending September 2016. This seems a reasonable entry point given that the rating drops quickly, with consensus forecasts of 19 per cent earnings growth next year, followed by 14 per cent the year after.

Recovery/management plays

I recently added two stocks to the portfolio, Serco (SRP) and RedstoneConnect, which fall into the ‘recovery’ camp. I like recovery stories, as so often a sceptical market is slow to appreciate the value on offer. The key is timing; it is important that the news flow has started to improve and that the share price chart shows some evidence of bottoming out. At the end of July, Serco was up 4.9 per cent since I bought on 23 June and was steady ahead of first-half results earlier this month. I was pleased to see management reassure the market that the group’s recovery was gaining traction and that, as a result, earnings forecasts for the full year were raised by around 30 per cent.

RedstoneConnect has issued a trio of encouraging announcements during the last month. It has won contract extensions from existing clients, including the rollout of its OneSpace product. This is a higher-margin, ‘Software as a Service’ product and I think, demonstrates that its ‘smart building’ solution is winning recognition. This gave me the confidence to add to the holding, although at the time of writing it remains the smallest in the portfolio.

Looking Forward

To the surprise of many, equity markets have been in a buoyant mood since the referendum. The US market closed at an all-time high on 28 July and the FTSE All-Share (TR) Index ended July just 0.8 per cent off the closing high achieved in the wake of David Cameron’s victory in the May 2015 general election. August is often a ‘jittery’ month, but so far markets have pushed on. Looking ahead to the end of the year, I find it difficult to be bearish. Monetary policy is extremely accommodative and all around the world there is pressure to loosen further. The Bank of England has just cut rates to 0.25 per cent and commenced a new round of quantitative easing and, in the US, expectations for further interest rate hikes have been pushed out towards the end of next year. Despite the poor showing from the Nikkei 225 this year, I remain happy with my exposure to Japan, through the Baillie Gifford Shin Nippon Investment Trust (BGS). Valuations in Japan look attractive and the government seems committed to doing whatever it takes to reflate the economy.

 

John Rosier's portfolio (end of July)

No.NameEPICMarket cap (£m)Per cent of portfolio
1Baillie Gifford Shin NipponBGS233.67.3
2Fidelity Asian ValuesFAS211.27.2
3European Assets Trust NVEAT343.46.7
4AdEPT TelecomADT55.66.2
5CrawshawCRAW64.35.3
6BlackRock World Mining TrustBRWM519.75.2
7Conviviality RetailCVR370.74.1
8Biotech Growth TrustBIOG415.34.1
9SafeStyleSFE216.73.7
10Renew HoldingsRNWH212.33.7
11Worldwide Healthcare TrustWWH973.53.6
12Dixons CarphoneDC.4,024.403.3
13XLMediaXLM160.33.2
14BioventixBVXP49.53.1
15CharacterCCT101.13.1
16AvationAVAP76.43.1
17Inland HomesINL128.83.1
18Lloyds BankingLLOY37,935.102.9
19FairpointFRP52.32.8
20Gem DiamondsGEMD181.52.6
21MatchtechMTEC98.82.4
22Sprue AegisSPRP81.42.3
23Tullett PrebonTLPR8092.1
24On The BeachOTB302.92.1
25PersimmonPSN5,200.901.7
26InterQuest ITQ17.91.2
27SercoSRP1,313.901.1
28PatisserieCAKE284.51
29Cash depositCD1
30RedstoneConnectREDS22.90.8