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My formula for success in 2018

John Rosier reviews the recent strong performance of his portfolio and explains how he plans to drive performance in 2018
January 19, 2018

After a poor 2016, it was nice to record a much better performance from both the JIC portfolios in 2017. The JIC Portfolio was up 31.5 per cent compared with +13.1 per cent for the FTSE All-Share (Total Return) Index. Thus, since inception six years ago it is up 179.3 per cent, giving an annualised return of +18.7 per cent, comparing favourably with the +83.0 per cent – +10.6 per cent annualised – from the All-Share.

The JIC Top 10 did what it is supposed to do; an enhanced performance from a more concentrated portfolio. It was up 39.6 per cent. I’m hoping for more of the same in 2018.

Last year was a good time to be invested. The long equity bull market continued unabated. The Hang Seng Index led the way, up 36.0 per cent, followed by India, up 27.9 per cent. In the US, the Dow Jones was up 25.1 per cent, but the more representative index, the S&P 500, gained 19.4 per cent. Japan was strong, with the Nikkei 225 up 19.1 per cent to its highest level since the early 1990s. It still has a long way to go to reach its 1989 high, some 60 per cent higher. The German Dax gained 12.5 per cent, just behind the All-Share’s +13.1 per cent.

Gold, the traditional store of value, gained 12.6 per cent to $1,297 an ounce. That paled into insignificance compared with Bitcoin, which many see as the new store of value for the digital age. It gained 1,424 per cent to $14,656. In mid-December, it peaked just short of $20,000 before one of its periodic sell-offs. During its relatively short life it has had regular severe pullbacks which would test the nerves of even the most ardent fan. The cacophony screaming ‘bubble’ rose to a crescendo during December. It will be fascinating to see whether December was indeed the peak or whether the factors driving the price thus far will continue. True believers think it has much further to go, with some forecasting $50,000 this year and even $500,000 within three years! FOMO (fear of missing out) can be a very powerful force.

The JIC Portfolio was up 3.4 per cent in December, lagging the All-Share (up 4.8 per cent) for only the second time in the year. Top performers during the month were Central Asia Metals (CAML), +19.6 per cent, India Capital Growth (IGC), +10.8 per cent  and Elegant Hotels (Aim:EHG), +8.4 per cent after it revealed it had been approached by a larger hotel operator, Melia (see page 17).

Activity

During December, I sold Accrol (ACRL), realising a loss which cost me 0.9 per cent off my 2017 performance. While this could be a tremendous recovery story, I decided to sell due to uncertainty around future forecasts. I felt there were too many factors that were not within its control, which would determine whether it succeeds or not. With hindsight, it was a stock I should never have been involved with. Having bought the stock, my next mistake was not to sell in July, having recorded my concern that it would find it difficult negotiating price rises with its supermarket customers.

I added two new stocks to the portfolio, which I hope will help drive performance in 2018. I bought Taptica (TAP) (14 December at 387p). It operates in the mobile phone advertising space, helping its clients decide when and where they place their adverts. It uses its proprietary technology to optimise the return on advertising spend for clients such as Starbucks, Amazon and Expedia. It is benefiting from the rapid growth of ecommerce via smartphones rather than from people sat at their desk in front of a computer. Despite a strong performance during 2017, due to earnings upgrades, the valuation still looks attractive to me. On consensus forecasts the shares were valued at just 11.8 times December 2018 earnings for 22 per cent growth.

I also bought a small holding in Creightons (CRL) (18 December at 29.4p), funded by my sale of Accrol. Creightons is a small, Peterborough-based company specialising in the creation of high-quality personal care and beauty products for the consumer and trade market. I had been watching it for some time, but had to be patient as the share price ran away following its results in June. I hoped it would come back to the low 30s and was surprised when it did in December. I think some were a little disappointed with its first-half results. The cash position was slightly worse than expected, but the management had a good explanation: increased working capital with higher stocks ahead of the important third-quarter Christmas season, the payment of its first dividend and timing on tax payments. I think the management team is most impressive and have every chance of achieving its target of doubling sales to £60m in three years and increasing operating margins from the first-half’s 5.8 per cent towards 10 per cent. If it does, I think there could be significant upside. 

The value attributed by the market is currently £18m (market capitalisation + debt); if it achieves its target £60m sales and higher margins, I would hope that it could attain a valuation closer to £60m. I only allocated 1.0 per cent of my portfolio to start with as it is a very small company with poor liquidity, but I would hope that as the company grows I might grow my holding with it. Next news is not until final results in June, so one needs to be patient.

 

Analysis of 2017 performance and lessons learnt from 2016

Analysis by Statpro Group measures the contribution of individual stocks to the 31.5 per cent gain in the JIC Portfolio. The contribution from a stock considers not only its performance but also its weighting in the portfolio. The positives first. Top of the pile was Conviviality (CVR), which contributed 4.9 per cent, or over 15 per cent of the 31.5 per cent overall performance of the portfolio. Bioventix (BVXP) was closely behind at 4.3 per cent and XLMedia (Aim:XLM) contributed 4.0 per cent. Three of my investment trust holdings were strong contributors, with +3.6 per cent from TR European Growth (TRG), Baillie Gifford Shin Nippon (BGS), +2.6 per cent, and India Capital Growth Fund 1.4 per cent. Central Asia Metals, bought in July, contributed 1.8 per cent and long-term holdings Adept Telecom (ADT) and Avation (AVAP) +1.5 per cent and +0.9 per cent, respectively. Now to the negatives. The worst contributor was Accrol, which cost just -0.9 per cent, followed by Redstone Connect (REDS), -0.8 per cent and Serco (SRP), -0.6 per cent.

In 2017, my stockpicking was undoubtedly better, with fewer difficult decisions to make. I also heeded some of the lessons from the previous year. It all comes back to The Art of Execution; How the world’s best investors get it wrong and still make millions by Lee Freeman-Shor, which I reviewed in this column in July 2016. The basic lessons were, cut your losers quickly (be an assassin rather than a rabbit) and run your winners and even, add to them (be a connoisseur). In January last year, I listed my losing contributors in 2016, with the top detractors being Crawshaw (CRAW), -4.4 per cent, Fairpoint, -2.8 per cent, Gattaca (GATC), -1.6 per cent, easyJet (EZJ), -1.5 per cent, and Next (NXT), -1.3 per cent. Those five stocks knocked 11.6 per cent off the value of the JIC Portfolio. Remember, my worst contributor in 2017 was Accrol at just -0.9 per cent and the bottom five hit performance by just 2.7 per cent in total. Notable positions that I cut during 2017 were Character Group (CCT) in January, Crawshaw in June, after it rallied back up to 30p, Imperial Brands (IMB) and Serco in July and, of course, Accrol in December.

On to the positive contributors. Except for Baillie Gifford Shin Nippon, I added to (averaged up) all the companies listed above (to some on several occasions). I increased my positions, usually when a company published news, often leading to upgrades and confirming that I was indeed, on to a winner. Trade execution is of paramount importance.

 

Looking ahead

Six years ago, when I started the JIC Portfolio the S&P 500 stood at 1260. Since then it has more than doubled, but throughout that time the predominant call from commentators has been that the US market is overvalued. Not having any direct exposure to the US has probably been my biggest error. Two years ago, when the oil price was around $30 per barrel, a well-known investment bank forecast it would halve again to $15. On 22 January 2016, it bottomed at $28 per barrel and the new bull market, which has seen the price rise 140 per cent over the past two years, began. I make these points to prove how difficult it is to forecast these things. For what it’s worth, I wouldn’t be surprised if the markets continue to perform well for some time. With interest rates so low, where else does one put one’s money? The UK market does not look overly expensive and there are plenty of stocks with decent and growing dividends, yielding above 3.0 per cent. The UK economy looks likely to continue growing albeit at a modest pace and global economic growth looks robust. The most obvious shock to equities might come from bond markets should yields move up too far, too quickly. In the meantime, I intend to leave others to worry about market direction and will continue to focus on building a diversified equity portfolio, concentrated on stocks with forward PEs lower than 20 and with decent dividend yields. I’m wary of some of the highly valued growth stocks that did extremely well last year. Companies on forward PE ratios of 40, 50 or even 60 times leave little room for disappointment.

John Rosier’s portfolio (at end-Dec)

NameEPICMkt cap (£m)% of portfolio
    
TR European Growth TrustTRG602.48.1
Conviviality RetailCVR739.97.7
BioventixBVXP127.27.3
XLMediaXLM403.66.6
Baillie Gifford Shin NipponBGS408.85.8
Central Asia MetalsCAML538.55.4
Royal Dutch ShellRDSB93,955.55.3
Biotech Growth Trust (The)BIOG441.15.1
India Capital Growth Fund LtdIGC131.14.4
AvationAVAP1444.4
Lloyds BankingLLOY48,9814.3
Card FactoryCARD1,007.63.8
Bloomsbury PublishingBMY142.43.5
IomartIOM419.83.4
Anglo Pacific GroupAPF275.93.1
Templeton Emerging Markets Investment TrustTEM2,148.73.0
Faroe PetroleumFPM3852.8
U+IUAI241.82.8
AdEPT TelecomADT74.12.3
TapticaTAP290.12.3
Elegant HotelsEHG80.41.8
Diversified Gas & OilDGOC1151.5
CreightonsCRL201.1
Cash depositCD 1.0
Satellite Solutions WorldwideSAT520.9
Geiger CounterGCL300.8
StatProSOG93.50.7
7Digital7DIG20.90.6
Geiger Counter (Subscription shares)GCS 0.1
Fidelity Asian Values (Subscription shares) FASS 0.1