Watch out for stocks that flatter to deceive

The market interpreted this as a sign that it was not perhaps as relaxed about the outlook for inflation as previously indicated. Its minor change caused a stir in the market, with equities retreating. The bond market seemed more comfortable with the US Treasury 10 Year yield briefly spiking up before falling again. Emollient words from Federal Reserve Chairman Jerome Powell the following week reassured markets that the Federal Reserve continued to believe that the current jump in inflation would be transitory.

Falling bond yields gave growth and technology stocks a boost. The Nasdaq 100 was up 6.3 per cent, ending the month at an all-time high with the S&P 500 not far behind, gaining 2.2 per cent. UK and Euro-based investors would have seen these gains enhanced due to US dollar strength. The dollar appreciated 2.8 per cent against sterling and 3.1 per cent against the euro. European markets lacked lustre, with the Italian MIB down 0.4 per cent, the FTSE All-Share up 0.2 per cent, the DAX 0.7 per cent and the CAC 0.9 per cent.

There was continuing support for oil in commodity markets, with Brent crude ending June up 7.5 per cent and at its highest level in over two years. Some are talking $100 oil. Apart from nickel, up 0.9 per cent, industrial metals were weak. After a strong run, they were perhaps ripe for a bit of profit-taking, and the Federal Reserve provided the excuse. Fears that rising interest rates would lead to less robust growth saw platinum off 9.5 per cent, copper down 8.3 per cent and zinc falling 3.3 per cent. It was not much fun when one has high exposure to this area. However, the fallback should prove temporary if we are in a long upward commodity cycle caused by robust global growth and the move towards electrification of our energy needs.

Gold and bitcoin, so-called stores of value, failed to do their job in June, with the former down 6.9 per cent and the latter 5.9 per cent. The belief that the Federal Reserve was on top of inflation, together with US dollar strength, would have weakened the case for holding gold.

Performance

Both portfolios increased in value during June. The JIC Portfolio returned 0.2 per cent, in line with the return for the FTSE All-Share (Total Return) Index but behind the FTSE All-World (GBP, Total Return) Index. The All-World gained 4.2 per cent, helped by the dollar's gain vs. sterling. Halfway through the year, the JIC Portfolio is up 12.6 per cent vs 11.1 per cent for the All-Share and 11.4 per cent for the All-World.  Since its inception in January 2012, the JIC Portfolio has gained 361.0 per cent (17.5 per cent annualised), comparing favourably with the All-Share return of 97.8 per cent (7.4 per cent annualised). Over the same period, the FTSE All-World is up 244.0 per cent (13.9 per cent annualised).

Three holdings were up more than 10 per cent. At long last, Serica Energy (SQZ) seems to be gaining attention. Up 19.5 per cent, it appears to be breaking through the 140p level, which has proved a ceiling over the last two years. Early in the month, there was good news from its Rhum 3 intervention well. Flow tests were strong, and production should commence before the end of September. On its own, this should not have been enough to push the share price on. I think there is growing recognition of the prodigious cash it will generate in the coming years and its cheap valuation. Wisdom Tree Cloud Computing ETF (WCLD) was up 13.5 per cent. Having languished for much of this year while investors chased "value", it benefited from a recovery in growth stocks sparked by the falling US 10-year bond yield. SigmaRoc (SRC) gained 11.8 per cent as it announced a joint venture with Carriers du Boulonnais to increase SigmaRoc's footprint in Benelux and Northern France. Momentum seems to be with this business, and it should be a beneficiary of economies reopening. It should also be able to pass on price increases. In the JIC Portfolio, I have it as Medium Risk/Medium Reward, which points to a 2.5 per cent position. The share price has more than doubled over the last 12 months taking it to 3.9 per cent of the portfolio. I'm not, however, tempted to trim the position as I think this management team is one to back. Central Asia Metals (CAML) was down 12.5 per cent, the only holding down more than 10 per cent, giving up most of its gains for the year. Copper price weakness was responsible for the fall but leaves it on a prospective 2021 PE ratio of 7.5x and yield of 6.5 per cent.

The JIC Funds' Portfolio, which invests only in investment trusts, open-ended investment company (Oeics) and ETFs, was up 2 per cent vs 4.2 per cent for the FTSE All-World. This year it is up 9.4 per cent, a little behind the All-World's 11.4 per cent.  Having started the portfolio on 30 June last year, it has completed its first year. It gained 34.5 per cent, nicely ahead of the 25.0 per cent for the All-World and 21.5 per cent for the All-Share. The Funds' Portfolio aims to be a low maintenance portfolio. Still, after carrying out an annual review, I have done some rebalancing. Over the month, 14 of the 17 holdings were up, with Wisdom Tree Cloud Computing ETF leading the way. Other good performers were Baillie Gifford Positive Change (GB00BYVGKV59) up 9.9 per cent, Vaneck Vectors Semiconductors ETF (SMH) 7.8 per cent, Fundsmith Equity (GB00B4Q5X527) 6.6 per cent and Vaneck Vectors Video Gaming and esports ETF (ESPO), 5.3 per cent. The fall in metal prices hit Blackrock World Mining Trust (BRWM) down 6.2 per cent.

Activity

No trades whatsoever, but I did hike the Pennine Way. That gave me plenty of time for thought. On my 60th birthday somewhere in Northumberland, I mused on the fact that legendary US investor Warren Buffett had made over 90 per cent of his money after the age of 60. It would be nice to be active in one's 90s, so that's the first aim. As for making 90 per cent of one's wealth by then, how achievable is it? If one starts with £100,000, a compound return of 7.7 per cent per annum will get one up to £1,000,035. In other words, a 7.7 per cent annual return compounded over 30 years will mean that you will have made 90 per cent of your wealth over that period. That, of course, does not include any contributions one might have made along the way.

My view is that 7.7 per cent per year is eminently achievable. Such is the power of compounding and time; if one were to achieve 10 per cent per year, the £100,000 pot would grow to £1,983,739. If, however, one only gained 5 per cent per year, it would still increase to £446,774. The simple message is, start early, save what you can and try to keep costs as low as possible (an annualised 0.5 per cent can make a huge difference). Of course, the other factor is to invest well, but that is not quite as simple.

Other news

Annual results from both Biotech Growth Trust (BIOG) and Worldwide Healthcare Trust (WWH) showed excellent performance against their respective benchmarks. Supreme (SUP) acquired Vendek, a leading distributor of batteries and lighting products in Ireland. It seems a logical acquisition, giving it a foothold in the EU and distributing other products through the network. Lundin Energy (LUNE) increased its production forecasts for 2021 by around 5.0 per cent. Given the higher oil price, I look forward to seeing half-year results at the end of the month, particularly its cash generation. Lastly, K3Capital (K3C) issued its third significant trading update this year, saying that for the year ended 31 May, it had exceeded Ebitda expectations by around 7.0 per cent. Revenue of £46m was also some £1.0m ahead of previous expectations. I expect upgrades to forecasts for the current year ending May 2022 and the following year.

Outlook

The Federal Reserve has a difficult path to tread. It needs to ensure inflation does not run away but also that it doesn't stop the post covid recovery in its tracks. It also needs to keep the confidence of the market that it is on top of the situation. In that sense, it seems to have done an excellent job last month. It raised the spectre of increasing interest rates but without scaring the markets too much. The 10-year Treasury yield fell back to levels last seen in March. Growth has started to outperform value again. There is more to go in value, but investors will need to be more circumspect in what they buy.

I think we have gone through the "buy any bombed-out stock for the recovery" stage. One will need to pick between those stocks that really are good value and have some growth ahead and those that flatter to deceive. One needs to tread carefully. I'm happy to stick with my high exposure to commodity stocks for all the reasons I have rehearsed in previous columns. The most important, is that we are going through a period of secular demand for many metals driven by the drive to replace fossil fuels with renewable energy.  In recent years, a lack of investment in new mining projects for metals such as copper means that there is likely to be a supply deficit for many years. I stick with last month's conclusion - "for the time being, I remain happy to be fully invested but, on an extended run, might be tempted to raise a little cash. It is most frustrating when there is a correction, and one has no firepower!" The second half of July looks like it will be a busy time for my portfolio. Results or updates are due from SDI Group (SDI), Supreme (SUP), Sylvania Platinum (SLP), Anglo Pacific (APF), Lundin Energy and others.