Private investor diary: Hitting the wall

The Nikkei 225 was one of the better major markets, gaining 1.9 per cent. The S&P 500 was up just 0.5 per cent, but at month end was only 1.2 per cent off its intra-month all-time high. The uptrend continues to look intact. The technology-heavy Nasdaq 100 fared a little worse, off 4.0 per cent from its peak as the so-called Fangs (Facebook, Amazon, Netflix and Google [now called Alphabet]) succumbed to profit-taking.  In Germany, the Dax was off 2.3 per cent and Russia, reacting to a weak oil price, fell 5.2 per cent.

Gold did not prove a haven in June, dropping 2.3 per cent to $1241.4 an ounce, and Brent crude oil dropped 3.9 per cent, to $47.7 a barrel, on concerns that supply was continuing to outstrip demand.

The JIC Portfolio, down 2.1 per cent, performed marginally better than the FTSE All-Share. Since 1 January it is up 13.9 per cent, nicely ahead of the All-Share’s 5.5 per cent and since inception in January 2012 it has gained 141.9 per cent, an annualised return of +17.4 per cent versus 70.7 per cent, (+10.2 per cent annualised) for the index.

The JIC Portfolio

No huge winners in June. The best was Biotech Growth Trust (BIOG), up 8.5 per cent in response to the strong performance of US biotech growth stocks, in which it is predominantly invested. Diversified Gas and Oil (DGOC) came back from suspension following a placing of new stock at 70p a share, a near-10 per cent premium to the price at which it was suspended. True to its stated strategy, it has acquired gas and oil assets in Pennsylvania in what looks like a transformational deal. The share price gained 8.0 per cent over the month. Geiger Counter (GCL), the investment company that invests in companies associated with the nuclear industry and uranium, continued its roller-coaster ride, gaining 7.7 per cent. June’s duds were led by Card Factory (CARD),  down 10.9 per cent, giving up some of the gains of the previous few months. I think the fall was little more than profit-taking following a decent trading update in May. Likewise, Conviviality (CVR) was off 9.9 per cent after a strong run and AdEPT Telecom (ADT)  was down 9.3 per cent. Statpro (SOG), my smallest holding, was off 9.2 per cent and Faroe Petroleum (FPM), down 7.8 per cent, was not helped by the weaker oil price. Faroe’s weakness was despite success with the drill bit on its 50 per cent owned Brasse Field in the North Sea.

Biotech blues

Most investors give biotech a wide berth, arguing that it is too difficult to make money with the layman struggling to understand the science. The history of quoted biotech in the UK is not great. Clearly there are exceptions, but a huge number have turned out to be ‘blue-sky’ stocks, struggling to achieve commercial success. I tend to agree that picking biotech stocks is a mug’s game, which is why for some years I have invested in the Biotech Growth Trust. I agreed with the proposition that the relatively recent sequencing of the human genome, coupled with the exponential increase in computer processing power, was likely to lead to huge gains in new drug discovery. The next step was to find some experts. Biotech Growth Trust is managed out of New York by Orbimed. It has a team of more than 80 distinguished scientific, medical, investment and other professionals managing approximately $13bn worldwide. Orbimed has a superb record, as demonstrated by the performance of Biotech Growth and the Worldwide Healthcare (WWH) trusts over the past 20 years.  It was one of my first investments in the JIC Portfolio back in April 2012, since when the share price has gained over 200 per cent. After trading sideways for the past two years, I’m hopeful that recent strength is the start of another leg upwards. The valuations of many of the large biotech companies in which it is invested are looking cheap compared with history and, in both absolute and relative terms, to large pharmaceutical companies and the wider market.

Activity: a tilt to Europe

On returning from holiday in the US, I contemplated what to do following the result of the UK general election. In the event, I sold two stocks completely and added a new position. I increased my exposure to continental Europe due to improving economic growth and reasonable valuations. I did this through the JPMorgan European Trust Income (JETI) shares (22 June at 166p). Along with TR European Growth (TRG), this takes my direct exposure to continental Europe to 10.0 per cent of the portfolio. Whereas TR European focuses on small- and mid-cap stocks, JPMorgan European Income shares gives me exposure to larger companies. The manager focuses on dividend-paying companies and the prospective dividend yield stands at an attractive 3.0 per cent. It has an enviable record against its benchmark over the short, medium and long term.

I sold Inland Homes (INL) (16 June at 55.75p) realising a loss of just under 20 per cent. This has been a disappointing investment since I first bought it in November 2015. I think there are too many headwinds, with the UK consumer strapped for cash, and at the same time the Bank of England seems to be edging towards increasing interest rates. The other stock to go was long-term holding Crawshaw (CRAW) (28 June at 28.5p). I felt that the only reason to stay in the stock was if there was a sustained improvement in trading. When the last update showed that like-for-like sales were down 4.5 per cent for the first 20 weeks of 2017, no better than the first 10 weeks, it was like a wake-up call. ‘Stop being stubborn, admit you have got this wrong and move on to something better!’ I shouldn’t be too hard on myself as overall my profits from Crawshaw amount to £8,737 despite booking a loss of £1,595 on this last tranche.

I added to Diversified Gas and Oil following the placing of new shares at 70p (16 June at 71.8p). I like its stated policy of paying out 40 per cent of cash flow as dividends. I have seen forecasts that suggest it is trading at a prospective 2018 dividend yield of 8.0 per cent, which should hopefully give the share price plenty of upside. It also has the financial fire power to increase its portfolio of gas and oil producing wells. Sticking with oil, I also increased my holding in Faroe Petroleum (23 June at 82.6p). I like the visibility it has, to increase production from its current 1,500 barrels per day to 4,000-5,000 barrels through development of existing fields and planned exploration wells.

Half-term report

Half-way through 2017, the FTSE All-Share is up 5.5  per cent and the JIC Portfolio up 13.9 per cent. I shouldn’t complain, but can’t help feeling I could have done a little better. Analysis by Statpro shows that the biggest contributors to the 13.9 per cent gain in the first half were TR European Growth, up 2.1 per cent, Conviviality,  up 2.1 per cent, Bioventix (BVXP), up 1.8 per cent, AdEPT Telecom, up 1.3 per cent, and XLMedia (XLM), up 1.2 per cent. These were not only some of my largest positions at 31 December, (3rd, 6th, 12th, 2nd and 16th respectively) but also my best performers. Except for AdEPT, which gained 15 per cent, all the others were up around 40 per cent. In other words, my largest positions on 1 January turned out to be the best performers. The only top 10 stock to fall was Renew Holdings (RNWH), down 5.0 per cent. When I sold half my position in early March, perhaps I should have sold the lot. At the other end of the ledger, the biggest negative contributors were Faroe Petroleum, down 0.5 per cent, Serco (SRP), down 0.5 per cent and Royal Dutch Shell (RDSB), down 0.4 per cent. Shell was my 16th largest holding at 31 December and Serco my 22nd with just a 2.0 per cent position.

What are the lessons, if any? Should I run a more concentrated portfolio of, say, 20 stocks rather than 30? It is tempting, but often the smaller positions are the ones that through performance and averaging up grow into the largest 10, AdEPT being a good example. There is probably a case for being a little more aggressive with the smaller positions; if they do not do as expected chop them out and try another. After all, if one cuts five positions at a 20 per cent loss you only need one other position to double to cover your overall losses.

I am confident I can pick good stocks, which brings me to Royal Dutch Shell and Imperial Brands (IMB), down 12.7 per cent and 2.4 per cent, respectively, in the first half. I bought them because I thought they were cheap, not because I was particularly enamoured with their business or growth prospects. They have disappointed as they have remained cheap. Perhaps I could  do better investing the money elsewhere, in smaller stocks with better growth prospects. There is the argument that in a market setback they might prove strong and stable, but that is hardly flavour of the month.

Looking ahead

We are now entering the quieter summer period where trading volumes usually fall away. It can lead to increased volatility both in markets and individual shares but is not necessarily a time when it is difficult to make money. The main thrust of my work will be to increase the underlying quality of stocks in the Portfolio.