Private investor's diary: turning to the US

Meanwhile, in the UK, Prime Minister May's speech to the Conservative party conference shook the market out of its torpor concerning the UK's exit from the European Union. It looked as though the government was prepared for 'hard Brexit', including leaving the single market. The main reaction was seen in the currency markets, with sterling suffering a "flash crash" on the morning of 6 October. In a matter of seconds, it dropped more than 6.0 per cent against the US dollar. It recovered a little, but nevertheless suffered a 5.7 per cent drop against the dollar over the month, taking it down to the lowest levels since early 1985. UK gilts were also under pressure, with the 10-year yield rising back above 1.0 per cent. The government's plan to loosen the purse strings at a time when its finances have deteriorated, coupled with the spectre of higher inflation and a lower pound, has not been missed by the market.

Over the month, UK equities made further gains with the FTSE All-Share (TR) Index up 0.6 per cent. The trend of recent months continued, with larger FTSE 100 companies leading the way. The more domestically oriented FTSE 250 Mid Cap Index fell 1.8 per cent. In overseas markets, Japan was boosted by a weakening yen, with the Nikkei 225 up 5.9 per cent. In continental Europe, the Dax was up 1.5 per cent but in the US, pre-election jitters saw the S&P 500 off 1.9 per cent. Gold fell 3.2 per cent to $1,277 an ounce (oz). At one stage, it was off 6.0 per cent, but support came in at the 200-day moving average. Oil was also weak, with Brent crude ending October down 3.0 per cent at $48.53 per barrel.

Performance

Although it hardly merits hanging out the bunting, October was a better month for the portfolio. It gained 0.6 per cent, in line with the All-Share Index. Ten months into the year, performance remains in negative territory, down 5.3 per cent, compared with +13.0 per cent from the All-Share. Longer-term performance still looks respectable. Since inception in January 2012, the portfolio has gained 109.9 per cent (16.6 per cent annualised), compared with the total return from the All-Share of 56.7 per cent (9.7 per cent annualised).

In general, UK consumer-facing stocks in the portfolio were a drag while my overseas stocks, especially dollar earners, made good progress. Analysis from StatPro shows that Bioventix (BVXP) was the largest overall contributor to the portfolio's increase in value, adding 1.0 per cent. Regular readers will remember me singing its praises in my July review. In October it came good, gaining 22 per cent after announcing a 27 per cent increase in revenues and a 35 per cent jump in profits. With its cash pile growing to £5.4m, it announced a special dividend of 20p, in addition to a 30 per cent hike in the annual dividend to 42p.

Other strong contributions came from Fidelity Asian Values (FAS), which gained 8.7 per cent, and XLMedia (XLM), up 13.6 per cent. The main detractors were DixonsCarphone (DC.), Redstone (REDS) and Fairpoint Group (FRP), which lost 0.6 per cent, 0.4 per cent and 0.4 per cent, respectively. Despite recent positive trading news from DixonsCarphone, I think the market is concerned, perhaps overly so, that the UK consumer will struggle next year and that margins will be squeezed by rising import costs.

Activity

An active month for the portfolio with my primary aim to increase the exposure to overseas earners at the expense of companies' dependent on the health of the UK domestic economy. I disposed of five holdings completely, while introducing six new ones. The five to go were Persimmon (PSN), Lloyds Banking Group (LLOY), OnTheBeach (OTB), Gem Diamonds (GEMD) and European Assets Trust (EAT). I booked a nice profit in Persimmon, having bought in the immediate aftermath of the Brexit vote, but felt that going forward Inland Homes gave me sufficient exposure to the housebuilding sector. With OnTheBeach and Gem Diamonds I realised a loss. I like OnTheBeach for its disruptive approach to the holiday market, but worry about the strong headwinds it is facing given sterling's weakness. With Gem Diamonds, I conceded that diamond prices may stay weaker for longer and that I had better use for the money.

Having sold my exposure to gold following the referendum result in June, I used the recent weakness as an opportunity to buy back. Rather than buy the physical metal, I again bought the ETFS Daxglobal Gold Mining Index ETF, which gives me exposure to some of the largest gold mining companies in the world. Barrick Gold (CA:ABX), Newcrest (AU:NCM), Newmont (US:NEM), Randgold (RRS) and Goldcorp (CA:G) comprise more than 40 per cent of the fund. With increasing concerns about the prospects of higher inflation it felt a good level to gain exposure to gold, if only for 'portfolio insurance'. In addition, it had the attraction of further increasing my exposure to the dollar. I think that the chances of a weaker dollar combined with a weaker gold price most unlikely. Following my badly timed sale of BP earlier in the year, a glaring omission from the portfolio was exposure to oil. I bought Ithaca Energy, an exploration and production company. It is clearly a play on the oil price, but an added attraction is the imminent more than doubling in production from its Stella field in the North Sea.

A few months back, when I added Patisserie Holdings (CAKE) to the portfolio, I mentioned my attraction to self-financing, rollout stories. In Revolution Bars (RBG) I think I have found another. Revolution, which floated on the market in March 2015, currently operates 62 bar restaurants comprising 53 Revolution and nine Revolution de Cuba bars. It plans to open around five new outlets per year and thinks that ultimately there is potential for 100 Revolution bars and 40 Revolution de Cubas. It offers a premium drinks and food experience with an average take of more than £30 per head. Around 60 per cent of its customers are women. With an ungeared balance sheet and decent cash generation, it should be able to finance its growth out of existing resources. At the time of buying, I thought that the market was undervaluing its growth prospects; it was valued at just 9.7 times June 2017 forecasts for 21 per cent earnings growth and a prospective dividend yield of 3.4 per cent.

I also bought Accrol Group Holdings (ACRL), the producer and supplier of own and private label paper products to some of the UK’s largest retailers. Its products include kitchen roll, toilet tissue and facial tissue. It has been growing market share particularly at the discount end and has recently invested in new production facilities at its site in Blackburn, Lancashire to meet increasing demand. I can understand why the chief executive bought £132,000-worth of shares at the end of September, as on current forecasts it was valued at a prospective April 2017 PE ratio of just 10.3 times and dividend yield of 4.3 per cent.

I added two new investment companies, India Capital Growth (IGC) and Geiger Counter (GCL). India Capital Growth gives me exposure to Indian mid-cap stocks. On a longer-term view I think the portfolio will hugely benefit from its exposure to this rapidly developing economy. In the shorter term, the timing might be quite fortuitous given that India is in the enviable position of being able to reduce interest rates as inflationary pressures ease. The potential for the current discount to NAV of 17 per cent to narrow over time is an added attraction.

I dipped my toe into Geiger Counter, an investment company managed by New City Investment Managers, which invests in companies involved in the exploration, development and production of energy, predominantly in the uranium industry. The rationale is that uranium will recover from the current 12-year low spot price of $18.75 per lb. In June 2007, the price was as high as $136 per lb and as recently as 2011, prior to the Fukushima disaster, $70 per lb. Demand for uranium is forecast to increase with new reactors coming on line in India and China, and Japanese reactors, which have laid dormant since the Fukushima accident, slowly being recommissioned. This comes at a time when, due to the depressed uranium price, there has been little new production. In fact, earlier this year, industry leader Cameco mothballed its Rabbit Lake operation in Saskatchewan. Timing these things is never easy, but it feels as though we are close to the bottom. I bought just a 0.5 per cent holding to start with, being wary of the liquidity and bid-offer spread in what is quite a small investment company.

I consolidated my exposure to continental Europe by selling the remainder of my holding in European Assets Trust, realising a nice profit, and reinvesting most of the proceeds in TR European Growth (TRG), taking it up to 6.5 per cent of the portfolio. I am attracted to the mid-teens discount to NAV of the trust and note that the manager seems to be in the 'groove' as far as performance is concerned.

Looking forward

Much to the surprise of nearly everyone, last week saw the election of Donald Trump as the next president of the Unites States. This led to some dramatic moves over the remainder of the week: the Dow Jones was up 5.4 per cent on the week to close at an all-time high; S&P industrials had their best week since March 2009, gaining more than 8 per cent; US bank stocks were up 14 per cent, the largest weekly gain since May 2009; the Russell 2000 Small Cap Index was up 10 per cent, the second-largest weekly gain since March 2009; the Nasdaq Biotech Index gained 14 pre cent, the largest weekly gain since Feb 2001; five-year forward inflation expectations jumped to the highest level of the year at 1.89 per cent; US 10 year Treasury Par Yield moved from 1.8 per cent to 2.15 per cent; copper up 14 days in a row for first time ever (13 days in a row in 1970); Gold dropped 6.0 pre cent to $1,226.85 an oz. In summary, equities and industrial commodities gained at the expense of government bonds and gold. Markets clearly see a Trump presidency as good for growth and likely to lead to higher inflation.

I continue to believe that equities look attractively valued compared with other asset classes, especially bonds. The one area that I am exposed to that is clearly benefiting from last week's result is biotech and healthcare. Valuations have been suppressed over the past year due to fears that Hillary Clinton would introduce drug pricing regulation. With that threat removed, I am hopeful that after a difficult 12 months my two holdings in this area, the Biotech Growth Trust (BIOG) and Worldwide Healthcare Trust (WWH), will have a better year ahead and resume their upward path.

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