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Enjoying oil’s bounce

The rising oil price has helped John Rosier's portfolio recover after a difficult start to the year
October 12, 2018

The most striking move in September was the 6.7 per cent surge in oil, with Brent crude, at $82.90 a barrel, ending the month at its highest level in nearly four years. Other commodities also staged a rally, with zinc up 7.1 per cent and copper 2.8 per cent. It will be interesting to see if this is a sustained change in trend after six months or so of drifting prices. I do hope so given my exposure to Central Asia Metals (CAML), to which I added a few weeks ago.

Background

Oil’s strength was most probably behind the 8.5 per cent gain in Russian equities. More important, for me at least, Japan had a strong month, with the Nikkei 225 up 5.5 per cent. Continued strength into October saw it close at its highest level in 27 years, although it still has another 65 per cent to go to exceed its all-time high achieved in 1989. The US continued to make steady progress, with the Dow and S&P 500 hitting new highs. However, the Nasdaq was off 0.4 per cent, with Tesla (US:TSLA) down 15 per cent and Facebook (US:FB) down 7.0 per cent.

With Brexit negotiations entering a crucial stage after the Salzburg impasse one might think that the UK equity market would have suffered. Yet the FTSE All-Share was up 0.7 per cent, which compares well with the Dax’s 0.9 per cent drop. From their 2018 highs the Dax and the Italian MIB are down 12 per cent and 16 per cent, respectively, and I suspect Italy’s latest move to increase borrowing is stoking up trouble ahead. Early days, but my decision to take my profits in TR European Growth Trust (TRG) back in May looks a good one.

Gold may have its day at some stage, but this year it has continued to disappoint, with September’s 0.9 per cent fall taking it below $1,200 an oz, and down 8.6 per cent in 2018. 

 

 

Performance

Another solid month for the JIC Portfolio. It was up 2.4 per cent compared with +0.7 per cent for the FTSE All-Share (Total Return) Index. Too early to break out the champagne maybe, but after the setbacks from Conviviality and XLMedia earlier in the year the JIC Portfolio is back in positive territory – only +0.1 per cent, but up nevertheless. In fact, since 31 March it is up 13.0 per cent against +8.3 per cent for the FTSE All-Share. Fingers crossed for a good Q4 2018. Longer term, the JIC Portfolio is up 173.0 per cent since January 2012 (+16.3 per cent annualised), compared with +83.3 per cent (+9.5 per cent annualised) for the All-Share.

There were some nice moves in September, with my oil holdings leading the way. North Sea oil producer Serica (SQZ) was up 14.6 per cent, Diversified Gas & Oil (DGOC) up 13.8 per cent and Faroe Petroleum (FPM) up 10.8 per cent. I sense growing optimism that Serica’s Rhum field (50 per cent owned by the Iranian Oil Corporation) will receive a licence from the US Office of Foreign Assets Control (OFAC). This is required for it to complete the ‘BKR’ deal with BP. Last week OFAC extended the existing licence until 4 November while talks continue. Mitch Flegg, chief executive of Serica, said: “Discussions with OFAC and other parties regarding longer-term arrangements to protect this valuable UK asset are continuing and all parties are working towards a successful conclusion.” The Rhum field provides around 5.0 per cent of the UK’s gas supply.

I hope my optimism isn’t misplaced as a failure to complete this deal would be a huge disappointment. If the deal completes I think the shares are materially undervalued, but if it fails I suspect the share price will overreact to the downside. In the event of failure, one would be left with a company with net cash on its balance sheet, generating cash from the Erskine field, the prospect of production starting at its 50 per cent owned Columbus field in 2021 and a 15 per cent share in the fully funded Rowallan exploration well, which spuds this quarter. On top of that it has further exploration opportunities and management that will actively explore other deals to grow the business. I think the risk/reward justifies my 2.0 per cent position (I added on 1 October) and I can see myself buying more whatever the outcome. 

Meanwhile, Faroe Petroleum’s largest shareholder, Norwegian operator DNO, is free to mount a full bid for the company after its six-month exclusion period ended last week. Time will tell whether it will, but in the meantime the pressure is on Faroe’s management to ensure that it maximises shareholder value. And Diversified Gas & Oil released half-year results in which it increased the quarterly dividend by 60 per cent. On current forecasts the prospective 2019 dividend yield is 7.1 per cent, although UK holders will lose 15.0 per cent of the dividend through withholding tax, unless they hold it in a self-invested personal pension (Sipp).

Investment manager Miton Group (MGR) continues to move up, gaining 13.9 per cent in September, helped on its way by strong half-year results and the news that growth in assets under management had continued at a robust pace into July and August. Taptica (TAP), which has had a torrid time this year, bounced back 13.6 per cent and I’m now breaking even. AdEPT Telecom (ADT) announced a 15.0 per cent increase in the dividend with its half-year update and a name change to AdEPT Technology. Avation (AVAP) closed the month at a new high after a 11.9 per cent move in September following strong interim results, which included a 21 per cent increase in the dividend.

It wasn’t all plain sailing. India Capital Growth Fund (IGC) was off 12.3 per cent, with the stronger US dollar and higher oil prices being unhelpful. Superdry (SDRY) dropped 10.9 per cent; UK consumer stocks are not flavour of the month, but I still think Superdry is worth sticking with given strong cash flow and a cheap valuation. Its shares trade on a prospective dividend yield of 3.6 per cent and, in addition, next Thursday when it goes ex-dividend a 25p special dividend worth a further 2.5 per cent will be paid.

My quartet of holdings playing robotics, automation, artificial intelligence, technology and biotech themes had a mixed month. Syncona (SYNC) was up 6.6 per cent but Biotech Growth Trust (BIOG), a core holding, was off 1.7 per cent, Robo-Stox Global Robotics ETF (ROBG) fell 1.9 per cent and Scottish Mortgage Investment Trust (SMT) dropped 3.3 per cent as Tesla’s troubles percolated through the market.

There were no changes to my 20-stock experimental momentum portfolio introduced in last month’s column. In September it was up 0.7 per cent, bang in line with the FTSE All-Share.

 

Activity

A quiet month on the dealing front. I started off with a spectacularly badly timed sale of Alpha FX (AFX). I thought half-year results on 5 September were slightly underwhelming and did not justify its valuation which, in my opinion, was a little on the high side. I was surprised to see, less than three weeks later, it announce that September had been “particularly strong” and that it anticipates that full-year results will be ahead of expectations. I added to Scottish Mortgage Trust and having taken profits earlier in the year, I doubled the position size in Central Asia Metals to 3.0 per cent following its interim results.  

 

Brexit

I was recently asked if my portfolio was Brexit-proof. Well, if I a) knew what the outcome will be – a deal or crashing out – and b) what the reaction would be to either scenario, I might have a better chance of answering correctly. I suspect that much of the bad news is discounted in equity markets and sterling. Sure, there might be a short-term knee-jerk reaction, but the UK market looks cheap. According to Stockopedia, the median forecast price/earnings (PE) ratio is 13.0x, the median forecast dividend yield is 3.6 per cent and the median forecast earnings growth is 12.6 per cent.

Having said that, it’s worth breaking down the JIC Portfolio. As of 5 October, 13.7 per cent of the portfolio is in overseas invested investment trusts such as Baillie Gifford Shin Nippon (BGS) and India Capital Growth Fund. A further 18.0 per cent is in funds whose assets are predominantly overseas, such as Biotech Growth Trust, Scottish Mortgage and Robo-Stox Global Robotics ETF; 21.9 per cent is invested in US dollar-based commodity stocks including Faroe Petroleum, Serica, Anglo Pacific (APF) and Central Asia Metals. Lastly, 18.2 per cent is invested in companies that either report in US dollars such as Avation and Taptica or where their sales are predominantly overseas, eg Bioventix (BVXP) and Strix (KETL).

Stripping out cash, that leaves just 27 per cent in stocks more aligned to the health of the UK economy. I’m happy with the current mix. There is a good long-term case for having a decent percentage of one’s portfolio invested in faster-growth overseas markets, and in any case Brexit might not be the only risk to the prosperity of the UK in the coming few years.

 

Outlook

We are heading to crunch time in Brexit negotiations, which will probably lead to increased volatility in sterling and the UK market. Of more importance, however, is the continued strength of the US economy and equity market. Indices have hit new highs very recently and the trend looks healthy.

There is currently a slight bout of nervousness, with US short-term interest rates moving up; US two-year Treasury yields are at their highest since June 2008 and the 10-year yield is at its highest since mid 2011. If this is just a move to ‘normalisation’ after years of post-crisis firefighting it should be welcomed, although the end of the era of ultra-cheap money might at times feel uncomfortable. In short, I’m happy to stay fully invested for the time being.

John Rosier’s portfolio (at 30 Sep 2018)
NameEPICMarket cap (£m)% of portfolio 
Bioventix BVXP1647.5
Baillie Gifford Shin NipponBGS5446.6
Biotech Growth Trust (The) BIOG4545.7
Royal Dutch ShellRDSB1007165.7
Scottish Mortgage Investment TrustSMT78465.3
AvationAVAP1574.6
Faroe PetroleumFPM6214.5
Bloomsbury PublishingBMY1674.2
Robo-Stox Global Robotics and Automation GO UCITS ETFROBG 3.9
U and I Group UAI2853.9
Iomart Group IOM4693.8
Lloyds Banking GroupLLOY421603.8
Diversified Gas & OilDGOC6263.5
MitonMGR1233.3
SynconaSYNC18783.3
India Capital Growth FundIGC983.3
Central Asia MetalsCAML4203.1
AdEPT TelecomADT973.1
TapticaTAP2553
Strix GroupKETL3183
Dunedin Smaller Companies Investment TrustDNDL1423
Anglo Pacific GroupAPF2663
SuperdrySDRY8902.1
MedicaMGP1771.7
Vietnam Enterprise InvestmentsVEIL10321.7
Cash depositCD 1.6
Serica EnergySQZ2291.6
Fidelity Asian Values (subscription shares)FASS30.1
Geiger Counter Ltd (subscription shares)GCS 0.1