Thinking big on technology

Germany, which possibly has the most to lose from slowing growth given its exposure to manufacturing/export industries, was off 5.7 per cent, making the FTSE All-Share (total return) fall of 3.3 per cent look relatively respectable. The Nikkei 225 finished the month down 4.5 per cent, the Hang Seng 6.2 per cent, and China 5.4 per cent. The only major equity market in positive territory was Russia, up 1.0 per cent.

Commodities also struggled, possibly on fears of higher interest rates or maybe just simple profit-taking, with copper dropping off 0.8 per cent, zinc 2.2 per cent and Brent crude down 5.1 per cent to $65.33 a barrel.

Bitcoin finished the month up 1.6 per cent and at $10,309 was up 75 per cent on the 6 February 2018 low. Gold, on the other hand, continues to trade in a sideways channel, down 1.7 per cent on the month to $1,320 an ounce (oz).

In summary, a difficult month for equity investors. As always, there is plenty to worry about but hopefully February’s correction is as far as it goes.

Performance analysis

The JIC Portfolio had another poor month, falling 3.0 per cent. The only minor consolation was that it did relatively well against the 3.3 per cent fall in the FTSE All-Share (TR) Index. Since 1 January the Portfolio is down 5.9 per cent versus 5.1 per cent for the All-Share so there is a bit to do to get back into positive territory and ahead of the index. Longer term, since January 2012, I am up 162.7 per cent, (17.0 per cent annualised) compared with +73.6 per cent, (9.4 per cent annualised) for the All-Share.

Recently, I was asked why I compared my returns to the FTSE All-Share given that only about half the portfolio is currently invested in companies represented in that index; the other half being in Aim stocks and London-listed companies such as India Capital Growth Fund (IGC). The simple answer is, I don’t construct my portfolio with particular reference to the weightings of companies in the All-Share or any other index. At the end of the day, I am just trying to make money. However, as a UK investor with sterling-based liabilities, I consider the All-Share a useful comparator. It is the index most widely used to measure the performance of the UK equity market. After all, if I can’t beat it, I should put my money in a FTSE All-Share Index tracker and spend my time doing something else! That would be sad, as I enjoy the challenge. You never stop learning.

No huge disasters in February, although January’s bête noir, Conviviality (CVR), remained friendless. It fell a further 12.1 per cent, costing the Portfolio 0.7 per cent of performance. (nb: Following last week’s profit warning I have cut my position in Conviviality but more on that next month.) Other than that, Bioventix (BVXP), Biotech Growth Trust (BIOG), Royal Dutch Shell (RDSB) and Bloomsbury (BMY) each cost 0.4 per cent off the Portfolio’s return. Bioventix reports half-year figures later this month; it will be interesting to get an update on the sales of its new high sensitivity Troponin test for heart attacks and to see what dividend it pays. Creightons (CRL), which I only added to the portfolio in December, disappointed with a trading update in which it said due to increased demand it had outsourced some production with a consequent hit to margins. It is investing in new production facilities but profits for the current year ending March 2018 will be “marginally below last year”. The stock dropped 23.1 per cent over the month, but as it was just 1.0 per cent of the Portfolio, was not too damaging. Is this just growing pains or a sign of poor management? At the current price, I should either add or cut. Doing nothing doesn’t really make sense.

No huge positive contributors during the month. The best percentage gainer was Diversified Gas & Oil (DGOC), up 16.8 per cent. It announced a transformational acquisition on the first of the month. For roughly a doubling of its market capitalisation it is increasing production by 173 per cent and reserves by 217 per cent. It completely funded the deal through the placing of 166.4m new shares at 80p. This leaves it with scope to raise debt for future acquisitions. The deal went down well and it’s just a pity I only had a 1.6 per cent holding – it added a mere 0.3 per cent to the portfolio’s performance. The biggest contributor to performance was Central Asia Metals (CAML), +0.4 per cent. The only news was the placing of 6.0 per cent of the company (the complete holding of Kenges Rakishev, a non-executive director) at 275p. Other noteworthy positive contributors were AdEPT Telecom (ADT) and Baillie Gifford Shin Nippon (BGS), which each contributed 0.3 per cent. No news from AdEPT Telecom except for some persistent buying by non-executive director Christopher Kingsman. In the last month, he has spent well over £3.1m increasing his stake to 21.3 per cent. That shows some confidence! Next news should be a year-end trading update in early April. Baillie Gifford Shin Nippon, which invests in Japanese small-cap companies, has been one of my best investments. The share price is up nearly six times since I first bought in March 2012. I traded some of my holding in and out over the last six years which, unfortunately, has not really added value. All things being equal, if I had just stuck with my initial holding, the Portfolio would be worth around 5.0 per cent more than it currently is. It is difficult to just sit on your hands but is often the best course of action.

Activity

Talking of sitting on my hands, February was another quiet month on the dealing front, with only two trades. I added a small initial position in Scottish Mortgage Trust (SMT). I have been watching this for nearly a year waiting for an opportunity to add it to the Portfolio. I should have just got on with it last year. It came off a little in the market correction, allowing me to buy (13 February at 442p) some 7.0 per cent below its January high. What’s the attraction? I like the investment approach of James Anderson and Tom Slater, the managers at Baillie Gifford in Edinburgh. They take a long-term view and are focused on looking for tomorrow’s winners; the companies that are benefiting from technological advances and from the growth in wealth across the world. With around 47.0 per cent of the portfolio invested in North America, it is well known for its exposure to Amazon (US:AMZN), Facebook (US:FB) and Tesla (US:TSLA), but with 23 per cent in China it gives me exposure to companies such as Tencent (the Chinese Facebook), Alibaba (Chinese Amazon) and Baidu (Chinese Google). One of its holdings which looks particularly exciting given the massive growth in Chinese overseas travel is Ctrip, the Chinese travel company that recently bought Skyscanner.

It holds just 3 per cent in UK equities with pretty much the remaining 27 per cent in continental European stocks such as Kerring (FR:KER) (luxury goods) and ASML (NL:ASML) (the Dutch manufacturer of machines used in the production of the most advanced computer chips).

In addition to its quoted portfolio, around 15 per cent is held in 40 or so unlisted companies. Hopefully, if messrs Anderson and Slater have done their work properly, some of these should add significant value in the coming years.

Last October, I attended a talk by the outstanding Jim Al-Khalili, presenter of The Life Scientific on BBC R4 and Professor of Theoretical Physics at Surrey University. My key take-away was his assertion that the pace of technological change was accelerating. He made a convincing case that in all areas of technology, (artificial intelligence, energy, medical, quantum computing, blockchain) change would be far more dramatic over the next 10 years than the last. As James Anderson says, “optimistic big thinking isn’t what fund managers do: their default position is profound risk aversion”. I think in a long-term portfolio, I should have some exposure to that optimistic 'big thinking'. I bought just 1.0 per cent to start with but intend to add monthly over the next year until I get up to 6 or 7 per cent of the portfolio.

The Baillie Gifford website has some excellent information on the trust, the managers’ approach and many of its holdings, including Ctrip.

Due to a lack of cash in the Portfolio, I funded the purchase by top-slicing TR European Growth (TRG) (13 February at 1,173p). At 7.4 per cent, however, it remains my largest position.