Four reasons to like commodities

Possibly the most noteworthy move over the month was the continued sell-off in US Treasuries. The 10 Year yield moved above 1.0 per cent for the first time since last March signalling a growing belief that economic recovery, or at the very least, higher inflation is on the way. Another sign of optimism came from commodities.  Brent crude was up 6.5 per cent to $55.1 per barrel, its highest since last February. Nickel and copper were up, but zinc gave up some ground. One of the most significant moves came from platinum group metal, rhodium which gained 20 per cent. Helpful for my Sylvania Platinum (SLP) holding.

Within equity markets, Nasdaq managed to finish up 1.4 per cent, and in Japan, the Nikkei 225 was up 0.8 per cent. Apart from those, all-other leading indices were down. Ominously for those who believe that how January goes, the year goes, the S&P 500 was off 1.1 per cent. For once the UK fared a little better than continental European markets with the FTSE All-Share (TR) Index down 0.8 per cent compared to drops of 2.1 per cent for the DAX, 2.7 per cent for the CAC and 5.0 per cent for the Italian MIB. The relative success of vaccination programs must be influencing markets with their being a massive prize for re-opening economies as soon as possible. In the UK, smaller companies, which are more dependent on the UK economy's health, did better. The Aim Index was up 0.3 per cent and FTSE Small Cap up 0.2 per cent. For the record, the FTSE All-World GBP (TR) Index was down 0.9 per cent, slightly more than the fall of 0.4 per cent for the $ denominated index. This disparity was due to sterling strength. The vaccination programme's success and an end to the endless wrangling about the Brexit trade deal helped sterling.

Performance

By the skin of their teeth, both JIC portfolios were up during January.  The JIC Portfolio was up 0.1 per cent compared to -0.8 per cent for the FTSE All-Share and -0.9 per cent for the FTSE All-World GBP. That leaves the JIC Portfolio up 309.8 per cent, (16.8 per cent annualised) since inception in January 2012 vs 76.6 per cent (6.5 per cent annualised) for the FTSE All-Share. The FTSE All-World is up 206.2 per cent, (13.1 per cent annualised) over the same period. There were no disasters over the month, profit warnings etc. The worst performing position was Baillie Gifford Shin Nippon (BGS), off just 8.6 per cent. The best performers were new holding Surface Transforms (SCE), which gained 29.0 per cent, although I only captured 16 per cent of that. The biggest contributor to the performance, by dint of its position size, was Sylvania Platinum, up 17.2 per cent. Apart from those two names, no other position was up more than 10.0 per cent.

The JIC Funds Portfolio was up 0.3 per cent vs minus 0.9 per cent for the FTSE All-World GBP Index. That leaves the portfolio up 23.3 per cent since June last year v 11.3 per cent for the All-World. In January, 12 of the 16 positions performed better than the All-World with Baillie Gifford Positive Change (GB00BYVGKV59) topping the charts at 7.7 per cent. Baillie Gifford Shin Nippon was the worst performer at -8.6 per cent.

Activity

I entered the new year with the lessons from last year at the front of mind. Had I done nothing all year, the portfolio I started the year with would have performed some 4.0 per cent better than the actual JIC Portfolio. I don't want to repeat that this year so added pressure in making sure every trade counts. Is the trade I'm about to do adding value or am I doing it for some other reason? A feeling that I must do something to show I'm on the ball or perhaps I have run out of patience, just at the wrong time. It is too early to conclude, but the JIC Portfolio is currently about 0.5 per cent ahead of the JIC 31 December 2020 portfolio.

I traded a few times, which I hope will set the portfolio up nicely for 2021. I sold two stocks completely. First out was Strix Group (KETL) on 6 January at 221p, realising a reasonable profit. It was my smallest position at 1.7 per cent of the portfolio, and I wasn't convinced enough to add. I also sold the L&G Dax Gold Mining ETF (AUCO), again for a profit. I felt that sterling strength might diminish any gains, and in any case, I thought my new positions would do better. I trimmed two positions, SDI Group (SDI) and Bioventix (BVXP), again realising decent profits. I stuck to my new rule of only selling so much that if it kept going up, it wouldn't annoy me!

I introduced two new holdings, Calnex Solutions (CLX) and Surface Transforms and added to Anglo Pacific (APF). I concluded last month's review by saying that I wanted to gain exposure to companies that would benefit from the rollout of 5G. Calnex Solutions is the first new position within this theme. It is a UK company which produces equipment to test the speed and data capabilities of mobile networks. The company, led by founder and 12 per cent shareholder Tommy Cook, generates attractive margins. Gross margins are in the high 70s and net margins come in at around 30 per cent. It carries out its research & development in-house but outsources manufacturing. It's not cheap on 34 x March 2021 earnings forecasts, but with 20 per cent growth, the PE ratio falls to 28 x March 2022 earnings. However, forecasts look as though they might be too low. In its H1 to 30 September, turnover grew by 37 per cent. It has been H2 weighted previously, and yet current full-year forecasts show H2 in line with H1 and down on H2 last year. Hopefully, full-year results will beat current forecasts and lead to upgrades for the coming year and beyond. I have rated it high risk /high reward pointing to a 2.5 per cent position for me. I started at 1.5 per cent at 111.3p on 11 January, and I expect to add in the coming weeks.

The other high risk/high reward position I added was Surface Transforms. It manufactures carbon fibre reinforced ceramic brake discs and after years of research and development is at last winning contracts. Its main customers are manufacturers of performance cars where the superior qualities of ceramic discs are required. They do not overheat, which severely impacts the performance of standard steel discs. The discs are also much lighter, last longer and produce about 25 per cent of the brake dust. The big news came last September when it won a contract from OEM 8 (original equipment manufacturer). This contract win led to profit upgrades and the company to feel more confident about its medium-term target of achieving annual revenue of £75m. Even better, in January it said that it anticipated average selling prices would be higher than initially anticipated. The company says that it expects the first five manufacturing cells' potential revenue to be £75m per annum and not the previously stated £50m. Again, it is not cheap; the 54p I paid on 14 January, valued it at 32 x 2022 earnings per share forecasts of 1.7p. I think there is scope for upgrades, but the real prize comes in 2023-2026 when the valuation could drop very quickly. With this position, I see the most significant risk being execution. The company needs to demonstrate it can ramp up production to service the recently announced contracts and any new ones this year and next. I started with a 1.0 per cent position and added a further 0.5 per cent on 20 January. I intend to build to a 2.5 per cent holding.

I increased Anglo Pacific to target 5.0 per cent of the portfolio on 13 January at 130p. It was forecast to announce an 8.0p dividend for 2020, down from 9.0p in 2019. I thought that might be too cautious. With commodity prices strong, I thought there must be a chance that it would maintain the dividend at 9.0p. Either way, it looked good value to me, trading around asset value and with an 8.0p dividend, a yield of 6.2 per cent. Last week my hopes were fulfilled when it announced a maintained 9.0p dividend. Also, through the sale of some of its holding in iron ore producer, LOAC, net cash on the balance sheet stood at £25m.

Other News

Other news included a positive update from Central Asia Metals (CAML), and I look forward to 30 March when it announces its final dividend. Fundsmith's founder Terry Smith published his annual letter to shareholders which is always a good read. Fundsmith's 18.3 per cent return last year was in-line with its annualised return of 18.2 per cent since inception 10 years ago. Fundsmith is as good a benchmark as any to try and beat. Serica Energy (SQZ) published a positive update and is benefiting from the recovery in gas prices. Next year, it receives 100 per cent of net cash flow from the Bruce, Rhum and Keith fields compared to 60 per cent in 2021. That should give a considerable boost to operating cash flow. Again, I look forward to hearing about its dividend in respect of 2020. Renew Holdings (RNWH) trading update was solid. Lundin Energy (SW:LUNE) hiked the dividend by an impressive 80 per cent after beating production forecasts by some margin. De La Rue (DLAR) also exceeded expectations. Sylvania Platinum had a strong Q2 and H1 and will announce a windfall dividend next week.

Commodity stocks

A dominant theme in the portfolio continues to be commodities. I have a decent exposure through BlackRock World Mining (BRWM), Sylvania Platinum, Anglo Pacific, Central Asia Metals, Lundin Energy and Serica. In a nutshell, the reasons for my substantial exposure to commodities are:

• Demand for copper, zinc, nickel, iron ore etc. is increasing due to global economic recovery and continued growth in Far East/China.
• Electrification of the world is also driving demand. Steel for wind farms, nickel, cobalt etc. for batteries, copper for electric motors in EVs and generators in wind turbines.
• Demand is increasing at a time when there has been little investment in new mines. It takes time to bring a new mine on stream. A perfect storm is gathering.
• If inflation picks up commodities are likely to keep up even if they are part of the cause.

Outlook

At what level the US 10-year Treasury yield will prompt switching out of equities back into bonds, is the critical question. My best guess is that it needs to get back to pre-pandemic levels of 1.8 per cent-2.0 per cent before one should be too concerned. It will only get there if confidence continues to build about the pace of economic recovery and its sustainability. The Federal Reserve has made it clear it will not take any risks with the recovery. That must mean that it will take risks with inflation. I don't know the long-term impact of the "Reddit generation", but in the shorter term, liquidity is abundant.  US citizens are due to receive another pandemic relief cheque, some of which will find its way into the markets. Nasdaq is hitting all-time highs, and my three ETFs with exposure to this area, (iShares Nasdaq 100, WisdomTree Cloud Computing (WCLD) and L&G ROBO Global Robotics and Automation (ROBG)) are doing likewise. I'm not smart enough to call the top and thus enter February fully invested.