Private Investor's Diary: Preparing for tougher times

Performance

An excellent end to the year, with the JIC Portfolio up 3.9 per cent in December compared with 4.7 per cent for the FTSE All-Share (TR) index and 1.7 per cent for the FTSE All-World (GBP, TR) Index. It wasn't a vintage year. The JIC Portfolio returned 10.4 per cent. There were two worse years in its 10-year life. The years 2016 and 2018 were both down years (-4.1 per cent and -11.9 per cent, respectively). At least last year was positive and in double figures. Individual years are important but only part of the bigger picture. It's the long term that is critical to building wealth. Since its inception in January 2012, the JIC Portfolio is up 352.0 per cent, giving an annualised return of 16.3 per cent, comparing favourably with the 110.7 per cent from the FTSE All-Share (7.7 per cent annualised). It was also ahead of the more difficult-to-beat FTSE All-World Index, which gained 270.6 per cent (14.0 per cent annualised).

The main contributor in December was Supreme (SUP), which at last seems to be getting the recognition that I think it deserves. It was up 31.9 per cent, vindicating my increase to 5.0 per cent of the Portfolio in November. Serica (SQZ) was up 13.9 per cent on renewed gas price strength. I find it frustrating that the share price seems to move on the spot price of gas and pretty much ignore the forward price, which is elevated right through 2022. I guess in the end, its financial results will do the talking. K3Capital (K3C) gained 13.5 per cent, but is still some way off last June's high. Blackrock World Mining (BRWM) gained 10.3 per cent, helped by slightly higher commodity prices. Only four stocks were down and apart from SDI Group (SDI), -8.0 per cent, by only a couple each.

It was a year of two halves. Things were going well until July. The JIC Portfolio peaked in June and, at the halfway stage, was ahead of both the FTSE All-Share and FTSE All-World year-to-date. In the second half, I suffered from the self-inflicted wound of hanging on to Venture Life (VLG) for too long and from my sector exposure. I did not have enough exposure to higher-valued growth stocks. My exposure to commodities did not help as they drifted following a solid first half. Blackrock World Mining was up 16 per cent at the half-year stage but down 3.1 per cent in H2.

Similarly, Sylvania Platinum (SLP) was up 28 per cent before giving back 26 per cent during the second half. My exposure to Biotech Growth Trust (BIOG) was also costly, down 24.6 per cent for the year, with most of that in H2. It wasn't all bad. Serica Energy was up 110 per cent, and luckily, I took it up to 5.0 per cent in early July before it gained 74 per cent in H2. I am taking action to try and be a little quicker at recognising when a stock's momentum has changed so that, if necessary, I can act. Sometimes that might mean cutting altogether and other times just trimming, booking some profits and reducing my risk to that particular name.

The JIC Funds' Portfolio ended the year up 9.7 per cent, so some way behind the FTSE All-World GBP Index, which is my performance benchmark of choice. My under-representation in the US, particularly technology stocks, hurt the relative performance. Since its inception in July 2020, the Funds' Portfolio is up 34.9 per cent v 34.7 per cent for the FTSE All-World and +29.4 per cent for the FTSE All-World. I have used up the leeway gained in H2 2020 and need to improve this year.

Over the year, BlackRock Greater Europe (BRGE) was the star – up 30.9 per cent, closely followed by the excellent Chelverton UK Equity Growth (GB00BP855B75), up 28.7 per cent. BlackRock appeared again with its Energy & Resources Income Trust (BERI) up 28.4 per cent and BlackRock Throgmorton (THRG) up 27.5 per cent. Premier Miton UK Smaller Companies (GB00B8JWZP29) was up 22.7 per cent, although I only held it part of the time. Fundsmith Equity (GB00B41YBW7) has yet another good year, gaining 22.2 per cent, and its smaller sibling Smithson (SSON) was up 18.1 per cent. Given those returns, one might have thought the Funds’ Portfolio would have done better. Unfortunately, two long-standing favourites of mine, Baillie Gifford Shin Nippon (BGS) and Biotech Growth Trust, recorded double-figure falls. They were down 17.2 per cent and 24.6 per cent, respectively. Members of www.jicuk.com know that I have introduced measures to help me identify holdings where the share price is breaking down. More on that next month.

Background

At its December meeting, the Federal Reserve announced a tightening of monetary policy in response to higher and more persistent inflation. It said it would taper its bond-buying programme more quickly, bringing its planned end date from June to March. It also indicated that there would be three interest hikes in 2022. This abrupt change of heart seemed to be taken in its stride by equity markets which rallied into the year-end. Markets were also not overly perturbed by rapidly rising cases of the Omicron variant.

European markets faired best with the CAC 40 up 6.4 per cent, the DAX up 5.2 per cent, the FTSE All-Share up 4.7 per cent and the MIB up 4.3 per cent. The Dow Jones gained 5.2 per cent and the S&P 500 4.4 per cent in the US, but the more tech-heavy Nasdaq was up only 0.7 per cent. The Nikkei 225 put on 3.5per cent but at 3.8 per cent for the year was near the bottom of the list. The Hang Seng fell 15.3 per cent in 2021, back towards the lows of March last year.

Commodities capped off a strong year. Brent oil was up 10.9 per cent in December (55.1 per cent per cent for the year) to $77.94 per barrel. Zinc was also up 10.9 per cent, rhodium 5.1 per cent, copper 4.3 per cent, nickel 3.5 per cent and platinum 1.6 per cent. All posted returns for the year in the +20's except for platinum and rhodium down around 8.0 per cent each. 

The price of gold spent the year trading sideways in an ever-decreasing range and, despite the pick-up in inflation, ended down 4.1 per cent. Bitcoin proved a better hedge, rising 49.7 per cent over the year.

Activity

It was a busy month with eight sell trades and two buys. The result was cash increasing to 11.7 per cent of the JIC Portfolio on 31st December. As I said last month, "when the fog comes down, reduce speed, and drive more cautiously!" On 3rd December, I reduced Worldwide Healthcare Trust (WWH) to my target 5.0 per cent as the share price hit a 12-month low. I halved my holding in SDI Group on the 6th, taking it to my new target of 2.5 per cent. I love the story long term, but think that the valuation is too rich and that in a more nervous market environment it will be prone to profit-taking. In November, I decided not to buy any more stocks that I judged to be high risk, even if the potential reward was high. On 9 November, I decided to sell Surface Transforms (SCE) for a slight loss and on the 14th Calnex Solutions (CLX) for a small profit. They were the two stocks in the portfolio that I judged as high risk principally because of their valuations. I cut two losing positions. Venture Life eventually went after another profit warning on 1 December. An embarrassing stain on my record and a situation where I did not execute like an assassin! I was more assassin-like with Capita (CPI). I'd only held it a month, but its fourth-quarter update was disappointing, so out it went. I added to Renew Holdings (RNWH) on 9 December, following the publication of its results.

On 14 December, I reduced Lundin Energy (LUNES) to my target of 5.0 per cent. Still, on 22 November, I bought back those shares on weakness following its deal to sell its exploration and production assets to Aker BP (OM5J). It looks like a good deal to me. Once completed, it will leave me with shares in the more significant Aker BP business and a shareholding in Lundin Energy. Stripped of its E&P business, Lundin Energy will comprise its renewables business and $130m (£96.5m) cash to help develop it further. 

The JIC Funds’ Portfolio was also active, leaving it with 10.3 per cent cash at the end of the year. With both Worldwide Healthcare Trust and Biotech Growth Trust forming new 12-month lows, I reduced my exposure. I also reduced my exposure to ‘Growth’ by selling Baillie Gifford Positive Change (GB00BYVGKV59) and reducing L&G ROBO Global Robotics & Automation ETF (R0BG). With some of the proceeds from the sale of Baillie Gifford Positive Change, I added a new position in Keystone Positive Change Investment Trust (KPC). In general, where there are an investment trust and fund with the same mandate, I prefer to hold the trust. I also trimmed my position in Premier Miton UK Smaller Companies Fund.

Other news

It was a busy month for results and updates. In general, they went well, except for Capita. Supreme published robust results for its first-half ending on 30th September. It showed good top-line growth and increased margins due to an improved sales mix. Vaping continues to drive sales with 13 per cent growth. SDI Group's H1 results met raised expectations following its November trading update. Renew Holdings full-year results also met raised expectations, and the outlook statement suggested another excellent year ahead. Serica Energy issued a robust trading update but annoyingly did not give a figure for its current cash balance. Given high gas prices, it should be minting money. Under the purchase agreement signed when it bought the BKR fields, starting from 1st January, it will receive 100 per cent of the cash flow from these fields, up from 60 per cent. K3Capital published a positive update ahead of its half-year and hinted at further acquisitions to come. Finally, on 16 December, SigmaRoc issued a statement that said it was trading ahead of current market expectations. That seemed to arrest the drift in the share price since mid-September.

Outlook

The outlook is, in a word, murky. Some market areas look very expensive, while others are reasonably priced. The more hawkish rhetoric from the Federal Reserve has already hit the performance of smaller technology stocks. The Wisdom Tree Cloud Computing ETF (WCLD) is down 30 per cent from when I sold it in September and 34 per cent from its November peak. Many of its components still look expensive, and further weakness is, in my view, likely. This malaise seems to be spreading to larger-cap technology stocks. Of the largest twenty Nasdaq stocks, all bar three are down between 4 per cent and 15 per cent year-to-date as of 20 January.

The risk is that inflation continues to surprise, the Federal Reserve tightens more quickly, and US Treasury yields increase. In that case, value stocks should outperform. Predicting the outcome with any certainty seems fraught with danger. What if inflation starts to wane, or the Fed overdoes it and triggers a recession? My approach, therefore, is to play it more cautiously. I'm running more cash than I usually do and steering clear of highly valued stocks, however good the story. In January, I have increased exposure to "Value" and have bought a bank for the first time in a long while.

The following two tables, which I published on my website, provide a simple demonstration of what is occurring in the UK market this year.  

The first shows the worst 20 performers in the FTSE 100 to 20 January and the second the best 20.

Two things stand out. The first is the forecast Price Earnings ratios of the best performers are generally in single figures or low teens, whereas for the worst performing, the PEs are generally in the 20s and 30s. A switch from growth to value. 

Second, the market capitalisations of the best performers are on average much higher than the worst – the sleeping giants awake!

Source: ShareScope