Private investor's diary: a meaty performance

Heightened geopolitical tension saw volatility, as measured by the VIX Index, tick up mid-month before collapsing, in the final week, to the lowest levels in a decade. While we have become used to more volatile markets it is worth noting that 2005 through to early 2007 saw similar levels of low volatility before the calm was shattered by the sub-prime financial crisis. The S&P 500 gained 0.9 per cent during April, the German DAX rose 1.0 per cent and the Nikkei 225 moved up 1.5 per cent. Gold benefited from the increase in tension, nudging $1,300 an oz. before ending the month up just 1.7 per cent at $1,269 an oz. On the currency markets, sterling had a good month, up 3.2 per cent against the US dollar to £1.295, the highest since last October. Against the Euro it gained 1.1 per cent to 1.19.

April turned out to be another good month for my portfolio. It increased in value by 1.8 per cent, comparing favourably with the 0.4 per cent drop in the FTSE All Share Total Return Index. Since 1 January it has gained 13.1 per cent versus 3.6 per cent for the All Share, which means that since inception in January 2012 it has increased in value by 140.2 per cent (an annualised return of +17.9 per cent), nicely ahead of the +67.7 per cent (+10.2 per cent annualised) return for the FTSE All Share.

Small-cap tailwind

Since 1 January, I have clearly benefited from the outperformance of mid and smaller cap stocks. While the FTSE 100 was up only 1.0 per cent in capital terms, the FTSE 250 gained 8.5 per cent, the FTSE Small Cap 7.5 per cent, the FTSE Fledgling Index 10.0 per cent and the Aim 100, a massive 16.6 per cent. As at 30 April, the exposure of the portfolio was heavily skewed towards mid and small-cap with only 7.5 per cent exposure to the FTSE 100. The portfolio had a 4.2 per cent exposure to FTSE 250 stocks, 30.4 per cent FTSE Small Cap, 16.1 per cent to Aim 100, 28.6 per cent to other Aim stocks and 2.3 per cent to FTSE Fledgling. 27.3 per cent of the 30.4 per cent exposure to FTSE Small Cap, comprised five investment trusts: Baillie Gifford Shin Nippon (BGS), Biotech Growth Trust (BIOG), BlackRock World Mining (BRWM), Fidelity Asian Values (FAS) and TR European Growth (TRG). Last year of course, among other things, the portfolio suffered due to its underexposure to large-cap stocks which outperformed due to the profits boost from the devaluation of sterling. Over time, I believe that high exposure to smaller companies will continue to give me superior returns.

The JIC Portfolio: April joy

Another good month from Crawshaw (CRAW), with the share price rebounding a further 44 per cent ahead of its half-year results. Simultaneously it announced that 2 Sisters, a privately owned food processing and manufacturing company, had acquired 29.9 per cent of the Company through the purchase of new shares at 15p. 2 Sisters has also entered into an agreement where, if the share price is over 40p in a year’s time, it can exercise warrants to purchase new shares, taking its stake in Crawshaw up to 50.0 per cent. 2 Sisters will also pay just 15p for this second tranche of shares. This is being described as a 50:50 joint venture with the principal benefits to Crawshaw being the injection of £12m into the business and the sourcing of chicken and other meats at a decent discount to market prices for the next three years. Crawshaw should see improved sales and margins from the deal, as well as having the financial flexibility to continue with its store opening program. Future openings will be focused on its Fresh Meat Factory store format where it has seen significantly higher returns on investment. Initially the share price was hit hard, down some 20 per cent, as shareholders quite rightly were concerned that 2 Sisters holds all the cards and was getting the company on the cheap. Crawshaw management did a pretty good job of allaying these fears and the appointment of Jim McCarthy as non-executive chairman has gone down well. It was nice to see him and retiring non-executive director, Ken McMeikan using the weakness in the share price to pick up shares. I did precisely nothing as the share price jumped all over the place except attend a meeting with management. For the time being at least, I decided to give them the benefit of the doubt. I am hopeful that with better trading and evidence of the benefits of the joint venture becoming apparent, the share price will head up towards 40p over the next year.

StatPro (SOG) gained 39.6 per cent, as its purchase of UBS Delta, the risk and performance analytical service from UBS, was welcomed by the market. Card Factory's (CARD) results also boosted its share price by 13.7 per cent over the month. It increased the ordinary dividend by 7.1 per cent and, after paying a special dividend of 15p last November, said it expects to make further returns of surplus cash towards the end of this year. Consensus forecasts suggest it is trading on a prospective dividend yield of 7.6 per cent for the year ending January 2018. U+I Group (UAI), a recent addition to the portfolio - of which more later - was up 13.6 per cent. RedstoneConnect (REDS) gained 12.1 per cent, helped by good results and the news of a growing pipeline of new business prospects. Firmer news on new business wins should I think, help the share price make further gains. Finally, Conviviality (CVR) - the largest holding in the portfolio - outside two investment trust positions, was up 11.6 per cent. There was no specific news issued by the company but perhaps the market was responding to strong growth in eating out during the first quarter. My observation is that consumers seem to be spending on experiences rather than clothes.

Activity: property potential

It was a quiet month on the dealing front with just three trades. I added to Gattaca (GATC), the employment services group formerly called Matchtech, on 13th April at 242.25p. Earlier that morning it issued a trading update, warning that profits for the year ending 31 July would be about 10-15 per cent below expectations. The share price took a hammering first thing, dropping 20 per cent. In the statement however, there was a strong hint that the dividend would be maintained which meant that the dividend yield was 9.5 per cent at 242p. I left a limit order with my broker, which luckily was filled. The share price has since recovered some 30 per cent. I do not think the management is foolhardy in maintaining the dividend as the balance sheet is not constrained and the dividend is well covered by cash and earnings. It was nice to see chief executive Brian Wilkinson follow up the results by buying £75,000 worth of shares.

I introduced a new holding to the portfolio. On 20 April I bought U&I Group at 277p before adding further to the position on 27 April at 287p. U&I Group, formerly Development Securities before its merger with Cathedral Group in 2014, describes itself as an owner and developer of property, with an emphasis on “specialist regeneration”. It operates in the middle ground with developments of between £50m and £100m; too small for many of its larger competitors but too large for individual investors. It targets returns on equity of two to five times over two to five years, with a maximum equity participation in any single development of £15m. The acquisition of Cathedral strengthened its skills in regeneration projects, where it often works hand in hand with local government or other public bodies. With the public partner often supplying the land, these projects are typically less capital intensive and generate higher returns on capital. I was attracted by its potential to unlock value over the next few years and by the valuation, which looks too cheap to me. It values projects at cost until completion and is expecting development gains of £65m-£70m in the current year ending February 2017, with visibility on a further £150m over the next three years from existing projects alone. The shares currently stand at a significant discount to NAV, about 35 per cent, and with special dividends, which it is paying as it realises development gains, the prospective dividend yield is forecast at somewhere over 8.0 per cent. I am up about 4.0 per cent so far which hopefully is just the start of some decent performance.

Looking forward: cashed up and ready to pounce

A good start to 2017 for equity markets in general but what next? In the UK, the initial indication of Q1 economic growth was a little slower than expected at +0.3 per cent. It could be a blip but while exporters are benefiting from the devaluation of sterling it looks like the predicted slowdown in consumer spending is occurring. With inflation on the rise, real wage growth is falling, squeezing household budgets. May kicked off with disappointing figures from Sainsbury (SBRY) and Next (NXT) last week. The big question is whether bad publicity around Brexit negotiations, which will start in earnest after the General Election, will impact further on consumer confidence. In Continental Europe, economic growth is accelerating suggesting that the ECB may ease off its quantitative easing and in the US, it looks all but certain that the Federal Reserve will increase rates at its next meeting in June. I’m still preparing/hoping for a correction at some stage in the summer months and as I write my cash level is back up close to 11.0 per cent. It will be nice to deploy that cash into some bargains, which I expect to emerge.

Private investor’s portfolio (at end-April)