Repositioning for reopening

Background 

The trend of the first two months of the year continued into March. Markets quite rightly remained focused on recovery. Data published during the month showed January global merchandise trade volumes surpassed the previous monthly peak achieved in 2018. The regular round of business surveys indicated increasing confidence in the outlook, with many posting record readings. Equities did well, with value continuing to drive returns, and volatility – as measured by the VIX Index – falling to pre-Covid readings of below 20. Bonds suffered one of the worst quarters in 40 years. The US Treasury 10-year yield rose further to over 1.7 per cent, back to levels last seen in January last year. It's been some round trip. The best-performing major index in March was the Dax. It gained 8.9 per cent as markets looked past Continental Europe's slow vaccine rollout to recovery later in the year. In the US, the S&P 500 gained 4.2 per cent and the Nasdaq Composite nudged up 0.4 per cent. In the UK, the FTSE All-Share was up 4.0 per cent, but in the Far East, the FTSE China A was off 3.0 per cent and the Hang Seng down 2.1 per cent. The Nikkei 225 gained 0.7 per cent. Commodity markets paused for breath after a strong start to the year. Brent crude was down 2.3 per cent to $63 per barrel. Copper fell 2.4 per cent, nickel dropped 14 per cent and platinum 1.8 per cent. Zinc was up a meagre 0.7 per cent. Gold continued to drift. One of the arguments I presented for holding gold during 2019 and 2020 was that, with low interest rates, the opportunity cost of owning gold was negligible. Rising bond yields undermine that case. Since the gold price peaked in August last year, it is off 17 per cent. Due to the recovery in sterling against the dollar, the return in sterling terms is now negative 22 per cent. Conversely, bitcoin continued its inexorable rise, gaining 26 per cent.  

Performance

It was a frustrating month for the two JIC Portfolios. The main JIC Portfolio was up 1.0 per cent, short of the respective 4.0 per cent and 4.2 per cent gains for the FTSE All-Share and FTSE All-World (GBP) Index. That leaves it up 6.6 per cent in the first quarter against a 5.2 per cent gain for the All-Share and 3.8 per cent for the All-World. Since its inception in January 2012, the JIC Portfolio is up 336.4 per cent (17.3 per cent annualised) comparing favourably with the FTSE All-Share's 87.3 per cent return (7.0 per cent annualised). I can't complain about March's performance. It completed a remarkable year in which the portfolio more than doubled from its March 2020 low.

Four stocks were up more than 10 per cent, led by De La Rue (DLAR). It gained 18.8 per cent on growing confidence in its recovery prospects and recognition of its cheap valuation. Even after the recent run, the shares are valued at 13.5 times March 2022 earnings, falling to 10.0 times March 2023. Not bad for the anticipated earnings growth of 20 and 35 per cent for the next two years. Renew (RNWH) was up 12.4 per cent, boosted by an in-line trading update and a sensible-looking acquisition of water-focused engineering business, J Browne Group. Surface Transforms (SCE) climbed 12.2 per cent and SigmaRoc (SRC) 10.6 per cent. SigmaRoc has increased its operations in Belgium through a deal to take control of LafargeHolcim's quarry operations co-located with SigmaRoc's Belgian business. Noteworthy fallers were WisdomTree Cloud Computing ETF (WCLD), down 9.4 per cent, which suffered as investors sold highly, or, some might say, over-valued, growth. Sylvania Platinum (SLP) gave up some of its recent gains, dropping 6.6 per cent. I'm told the market is always right. Still, I struggle to understand why anyone would sell Sylvania at 110p unless, of course, they were a forced seller – after all, Sylvania was one of the stocks on IG Index's list of stocks that no longer allowed spread-bet positions after 29 March. Serica Energy (SQZ) was down 6.2 per cent, but results later this month, including a dividend declaration, will hopefully breathe some life into the share price. The JIC Funds Portfolio was down 0.3 per cent, leaving it up 1.8 per cent in the first three months of 2021. Since 30th June last year, it is up 25.2 per cent versus respective 16.6 and 15 per cent gains for the All-World and All-Share. I have shifted the style balance from growth to value in recent months, but perhaps not quite enough for March. WisdomTree Cloud Computing ETF was the worst performer, losing 9.4 per cent, followed by Biotech Growth Trust (BIOG) which dropped 5.9 per cent and Baillie Gifford Positive Change (GB00BYVGKV59), which fell 5.2 per cent. The winners were Chelverton UK Equity Growth (GB00BP855B75), up 6.1 per cent, Smithson (SSON) up 5.1 per cent and BlackRock Throgmorton (THRG) up 4.6 per cent. Cheverton's performance has been superb, up over 50 per cent since 30th June last year. Looking back, I'm glad I reduced my exposure to gold in both portfolios last year and in early January. I think there will be a time to go back in but possibly not until the long hot summer months.  

Activity 

It was another comparatively quiet month on the dealing front. I reinforced two existing positions, which I funded by trimming two holdings and running cash down to zero. On 4th March, I increased Central Asian Metals (CAML) to 5.0 per cent of the portfolio at 254.4p. I financed the purchase by reducing L&G ROBO Global Robotics & Automation ETF (ROBG) to 2.5 per cent and Syncona (SYNC) to 2.5 per cent. Given the current environment of favouring value/recovery above growth, it seemed sensible to fund any purchases by reducing my exposure to the latter. A fellow shareholder of Central Asia Metals persuaded me that I should not rate it 'high risk' due to its operations in Macedonia and Kazakhstan. I reduced the risk rating to medium, which with a high reward rating, points to a 5.0 per cent position. The only other trade was to add to Baillie Gifford Shin Nippon (BGS) on 25th March at 238.8p. I had trimmed the position in October. Since then, its weight in the JIC Portfolio had fallen back due to a period of underperformance. I continue to see it as a long-term position and an excellent way to gain exposure to the Japanese market. In the JIC Funds' Portfolio, there were also four trades. For much the same reasons as I reduced Syncona and the Robotics ETF in the JIC Portfolio, I sold the iShares NASDAQ 100 ETF (CNDX) on 2nd March at 53,633p. I used the proceeds to take the VanEck Vectors Semiconductors ETF (SMH) to target 2.5 per cent and increased Premier Miton UK Smaller Companies Fund (GB00B818N094) to 10.0 per cent. (I understand that Premier Miton has since soft closed the fund.) I also added to the position in Baillie Gifford Shin Nippon for the same reasons described earlier.  

Other news

On 4th March, there was a lovely update from K3Capital (K3C) containing my favourite line, "trading is significantly ahead of consensus market expectations". Anglo Pacific (APF) completed the acquisition of the Voisey's Bay cobalt royalty stream, and Serica Energy spudded the Columbus development well. Production is expected in early Q4 and should add a net 3,500 barrels of oil equivalent per day (boe/d), of which 70 per cent is gas. Venture Life (VLG) published impressive results for 2020, but there are a lot of sceptics. I share the concern that it raised money before announcing an acquisition and am frustrated that it still hasn't. However, an acquisition can't be anything, but value-enhancing given the near-zero return it is earning on its cash balance when it comes. I think its record of making sensibly priced value-enhancing acquisitions is pretty good. I'm happy to hold a stock that is not currently a private investors' darling and believe my patience will be rewarded.   

Measuring performance

Subscribers to my website receive a Weekend Roundup in which I include the weekly performance of both portfolios. I have long wondered why I show the performance over such a short period. What use does it serve? I have looked back at the first nine years of the JIC Portfolio and see that it was down two of the nine years or 22 per cent of the time. If we stretch that to rolling three-year periods (there are seven), it is up 100 per cent time, as it is for the eight two-year rolling periods. If we go down to monthly returns, it is down 32 of the 108 periods or 30 per cent of the time. Of the 468 weeks, it is down 178 times or 38 per cent of the time. The point is, the shorter the period, the more it is just noise. Looking too often does little good. There have been many studies demonstrating that looking at performance too often can have a depressing effect. Because one is anticipating the portfolio to have gained in value, the dopamine rush from seeing what you expected is nothing compared to the downer from the disappointment of seeing a fall in value. Just imagine if one had looked at one's portfolio at the end of 2019 and not again until 31st December 2020. It would have saved a lot of pain and anguish, and probably mistakes, too.

So, what is the optimal period to measure the progress of one’s portfolio? Monthly probably makes sense, but not because one should panic after a poor month, but because it might help one identify some underlying trends. Even after a poor year, if one is confident in one's process and the holdings in the portfolio, there should be no need to panic. Two consecutive poor years might merit a little more introspection, and maybe after three one should start to question one's approach. In short, one should focus on one's holdings and be confident in the reasons why you hold them. Continually reassess those reasons and if something changes, then consider whether it still merits a place in the portfolio.  I will therefore cease recording the weekly performance in the Weekend Roundup and devote the time saved to adding higher value-added comment on observations from the past week.  

Outlook

No change. I remain optimistic about economic recovery, initially led by the consumer. Once we are let off the leash, I think there will be a consumer boom to match no others. I think liquidity will drive markets higher. Central banks and governments do not want to take any risks with the recovery, and conditions will remain helpful for some time. Given the balance of risks, it makes sense. The authorities should run too warm than choke off recovery too early and risk deflation, or the fear of it. The risk to this approach is inflation, but given high debt levels, the authorities are relying on growth and inflation to get out of the current predicament. Given that background, I remain fully invested and with a decent exposure to commodities.

JIC Portfolio - March 2021