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Private investor’s diary: in optimistic mood

Former City fund manager John Rosier says his portfolio has had a good month
September 16, 2016

The recovery in equity markets that started in the immediate aftermath of the European referendum result continued into August. There was a growing realisation that the harbingers of doom had grossly overexaggerated the immediate consequences of a 'Leave' result. The economy might have seen a very short-term dip, but had clearly avoided plunging into recession.

Those indicators that had shown some initial weakness following the result, bounced back strongly in August. For instance, the July Services Purchasing Managers Index dropped to 47.4 in July before recovering to 52.9 in August. The 5.5-point rebound was the largest monthly jump in the survey's 20-year history. The FTSE All-Share (Total Return) index gained 1.9 per cent on the month. Not surprisingly, given increased optimism surrounding the UK economy, small and mid-caps led the way. The FTSE Small Cap index was up 2.3 per cent, the FTSE 250 +2.5 per cent and the Aim All-Share +4.7 per cent, in contrast to the 0.9 per cent advance from the FTSE 100.

In overseas markets, the S&P 500 closed at an all-time high on 15 August in a month that was notable for very low volatility. The S&P 500 went the whole month without a 1 per cent move on the day before. The index finished the month down 0.12 per cent, but still less than 1.0 per cent off its mid-month high, with the markets fixated on the timing of the next interest rate rise. Will it be as early as next Wednesday, at the September meeting of the Federal Reserve Open Markets Committee, or will it be delayed until later in the year? The German Dax gained 2.5 per cent on the month, the Nikkei 225 recovered its poise, up 1.9 per cent and the Hong Kong market was up 5.0 per cent.

Having dipped down to $40 per barrel in July, oil bounced back, with Brent crude up 8.4 per cent to $46.9. Gold drifted back 3.3 per cent to $1,312 per ounce.

 

Performance

My portfolio had another good month, helped on its way by the improved performance of mid- and small-cap stocks. It gained 3.2 per cent on the month, compared with the +1.9 per cent return of the FTSE All-Share - but still has some way to catch up with the All-Share's performance in calendar 2016. Since 1 January it is down 2.6 per cent, compared with the +10.5 per cent return of the index. Since inception, in January 2012, performance looks much rosier, with the portfolio up 116.0 per cent, giving an annualised return of +17.9 per cent, compared with +53.2 per cent, +9.6 per cent annualised, from the All-Share.

Two of my post-referendum purchases, Lloyds Banking Group (LLOY) and housebuilder Persimmon (PSN), continued to recover ground lost in the days following the referendum result, gaining 11.7 per cent and 8.1 per cent, respectively. At its half-year results, Persimmon talked confidently, saying that customer interest had been robust, with visitor numbers up 20 per cent since the referendum. Furthermore, since 1 July, its private sale reservation rate was 17 per cent ahead of the same period in 2015. If there was any crisis of confidence in the housing market post the Brexit result, it seems to have been shortlived. My other housebuilding stock, Inland Homes (INL), gained 12.6 per cent.

My best-performing stock in August was relative newcomer to the portfolio RedstoneConnect (REDS). It gained 32 per cent, helped on its way by a number of positive announcements - it won a new contract and successfully extricated itself from an onerous lease on it old head office. My two recruitment stocks, Interquest (ITQ) and Matchtech (no renamed Gattaca:GATC), benefited from the realisation that the UK economy was not plunging into recession. They gained 18 per cent and 17 per cent, respectively, but from very depressed levels.

Readers may have seen the recent publicity surrounding the importance of the correct and speedy diagnosis of heart attacks, when it comes to improving survival rates. It was discussed on BBC Radio 4's Today programme on 30 August, as was the use of troponin blood tests. Shares in Bioventix (BVXP), the creator of antibodies for use in such blood tests, jumped 16 per cent following a positive year-end trading update. Not only did it say that results would be ahead of market expectations, but it gave some clarity on the timing of the introduction of its new antibody, which Siemens is using in its High Sensitivity troponin test for heart attacks.

A small rise in troponin in the blood indicates whether you are having a heart attack, or something much less serious such as indigestion. When presenting at A&E with symptoms, a simple blood test will tell, within about one hour, whether you are having a heart attack and need to be kept in for treatment or whether you can go home. Not only should this improve diagnosis, treatment and survival rates, but also save the NHS a substantial amount of money. Normally I leave the experts to pick my biotech/life science holdings through my longstanding position in the Biotech Growth Trust (BIOG). Bioventix, one of my favourite holdings is an exception. It is a quality company that achieves a very high return on capital, generates prodigious amounts of cash, has great visibility of revenue and profits and has huge barriers to entry. Additionally, it is extremely well managed by its chief executive and founder, Peter Harrison, who incidentally owns 12 per cent of the company.

Another longstanding investment trust holding, Baillie Gifford Shin Nippon (BGS), was my worst performer. It gave up 9.3 per cent, but is still up a healthy 15 per cent since the turn of the year. Having reduced the holding on a number of occasions earlier this year, it is getting close to a level where I may be tempted to add. Legal services company Fairpoint Group (FRP) remains friendless, falling 9.2 per cent and Sprue Aegis (SPRP) gave back some of its recent gains, dropping 8.5 per cent.

 

Activity

As well as adding a new holding to the portfolio, I increased my exposure to my two recovery/management plays, which I mentioned last month, Serco (SRP) and RedstoneConnect. Serco's interim results on 4 August confirmed the recovery in its fortunes was well under way. Earnings forecasts were upgraded again; consensus forecasts for calendar year 2016 have increased from just 1.5p in May to 4.4p currently. I also beefed up my holding in Conviviality (CVR), the UK's biggest franchised off-licence chain and the largest independent drinks distributor to the on-trade. I am convinced the market is undervaluing its growth prospects under the guidance of chief executive Diana Hunter. It has made some transformational acquisitions in the past year (Mathew Clark and Bibendum) and has assembled a top-notch team to run each of its three divisions. On current consensus forecasts, the shares are valued at just 11.0 times earnings for the current year ending May 2017. To me this seems far too cheap, for forecast earnings growth of 60 per cent and a prospective dividend yield of 5.6 per cent. I am hoping for a material re-rating over the coming year.

My new stock was investment trust TR European Growth (TRG), which I funded by reducing my exposure to European Assets Trust (EAT) but leaving exposure to continental Europe remained steady at around 7.0 per cent of the portfolio. I was attracted by its exposure to smaller companies and its excellent long-term record in this space. The fact that the discount to net asset value had drifted out to 16 per cent was a bonus. In January the discount was only 5 per cent.

My one outright sale was Tullett Prebon (TLPR). Having bought opportunistically in June when it looked oversold and just too cheap, I decided, not being wedded to the stock for the long term, to book my two-month, 18 per cent gain.

 

Director buying

I like to keep an eye on director dealing in my holdings and tend to pay more attention to purchases. In general, there is one main reason why directors buy; they think the stock is cheap. Selling on the other hand, can be for a variety of reasons: divorce settlements, tax bills, diversification etc. Since the referendum result, encouragingly, there have been fairly significant purchases across a number of my stocks; Adept Telecom (ADT), Crawshaw (CRAW), Dixons Carphone (DC.), Lloyds Banking Group and Biotech Growth Trust to name a few. In the coming months, I look forward to seeing whether these were shrewd purchases by those who are closest to the companies I hold in my portfolio.

 

Looking forward

As summer turns to autumn there is a more optimistic mood in the UK regarding the economy, and there have been suggestions that the governor of the Bank of England may have jumped the gun by halving interest rates to 0.25 per cent and introducing another round of quantitative easing in August. It is not entirely clear that it was merited.

In the US it looks as though another hike is on the way before the end of the year - and perhaps as soon as the September meeting. The markets tend to get in a bit of a tizzy about these things, but from such low levels I think a return towards some sort of normalised interest rates will not unsettle equity markets too much. These moves are generally well signposted and are not end-of-cycle, panic moves to slow down an overheating economy; more the first moves towards 'normalisation'. Given current low yields, I would be much more worried if I was a bondholder and feel that if you are looking for bubbles, this is one waiting to pop.

 

NameEPICMkt.Cap (£m)% of Portfolio
Fidelity Asian Values FAS2187.1
Baillie Gifford Shin NipponBGS208.66.3
AdEPT TelecomADT55.66.0
Crawshaw GroupCRAW65.15.2
Conviviality RetailCVR380.74.9
BlackRock World Mining TrustBRWM506.94.9
European Assets Trust NVEAT355.83.9
Renew HoldingsRNWH226.23.8
Biotech Growth Trust (The)BIOG393.33.8
SafeStyle UKSFE224.23.7
BioventixBVXP57.43.5
XLMediaXLM178.33.5
Dixons CarphoneDC.4360.63.5
AvationAVAP87.93.4
Worldwide Healthcare TrustWWH926.43.4
Inland HomesINL1433.3
Character Group (The) CCT108.53.3
Lloyds Banking Group LLOY43502.33.2
TR European Growth Trust TRG355.63.0
Fairpoint Group FRP47.52.5
Gem Diamonds GEMD174.62.4
Cash depositCD2.2
Sprue AegisSPRP74.52.0
GattacaGATC115.62.0
PersimmonPSN5734.31.8
On The Beach Group OTB271.31.8
RedstoneConnect REDS30.21.7
Serco GroupSRP1443.51.6
InterQuest Group ITQ21.61.4
Patisserie HoldingsCAKE319.81.1