Sanguine, not second guessing

Equity markets responded positively to the change in interest rate sentiment, recovering from oversold positions at the end of December. Expectations of a successful conclusion to US/China trade talks also helped. China's benchmark index was up 7.4 per cent in March and is now up 34 per cent this year. India also benefited from improved sentiment, with its index gaining 7.8 per cent. In the US, the S&P 500 was up 1.8 per cent, (13.1 per cent for the first quarter). Continental European markets also participated despite poor economic news. The Dax was up 0.1 per cent in March, taking its return to 9.2 per cent over the first quarter, and the CAC gained 2.1 per cent in March and 13.1 per cent in the first quarter. The UK had a relatively good month despite/because of Brexit, with the FTSE All-Share (Total Return) Index up 2.7 per cent in March. The indices more sensitive to the UK economy, FTSE 250, FTSE Small Cap and Aim, performed less well.

Commodities responded positively to the prospect of interest rate cuts, with Brent oil up 25 per cent in the first quarter to $67.61 a barrel, zinc and nickel up around 20 per cent, and copper 9.2 per cent. Gold continued to flatter to deceive, looking as though it might break out to a five-year price high in February before dropping back. It ended the first quarter up just 1.0 per cent at $1,297 per ounce.

Performance

A positive month for the JIC Portfolio, although its return of 1.9 per cent was slightly behind the 2.7 per cent from the FTSE All-Share (Total Return) Index. That leaves it up 11.5 per cent in 2019 compared with 9.4 per cent for the All-Share. Over the longer term – since inception in January 2012 – it is up 174.4 per cent, (14.9 per cent annualised) comparing favourably with the 81.3 per cent total return (8.6 per cent annualised) from the FTSE All-Share. The more concentrated JIC Top 10 Portfolio was up 2.7 per cent in March and 14.5 per cent in Q1.

Last month I described the Taptica (TAP) share price as being like a rollercoaster. Up 26 per cent in January, it was down 24 per cent in February before bouncing back 36 per cent in March, making it the biggest mover in the portfolio, as it completed its acquisition of Rhythm One. There is a right battle going on between those who point to the extreme cheapness of the situation and those that believe the business is going backwards. My view remains that at the current valuation the new CEO will not have to do much to beat very low expectations and see a significant move up in the share price. I admit that I am coming at this as an existing holder and question whether I would have the courage to buy it if I didn’t already hold it. I have spent a lot of time on this one, perhaps too much but I just think it is too late to be an assassin. Diversified Gas & Oil (DGOC) was up 15.0 per cent, ending the month at a new high. It responded well to yet another “transformational” acquisition. It funded the $400m acquisition of 107 unconventional gas producing wells from HG Energy roughly half each from debt and a placing of new shares at 122p. The acquired wells have low operating costs and very long operating lives and are forecast to increase DGOC’s overall production by 28 per cent, to 90,000-plus barrels of oil equivalent per day. It expects the acquisition to be immediately accretive to cash flow and earnings and that the corresponding increase in dividend per share should be greater than 19.0 per cent. Taking the current forecast for 2020’s dividend of 13.75¢ and increasing it by 19 per cent gives 16.4¢ or a yield of 10 per cent at the current price of 126p. As a UK shareholder, unless it is held in a self-invested personal pension (Sipp), there is a US 15 per cent withholding tax, reducing the yield to 8.5 per cent. I know there are many sceptics who are wary of its buy-and-build strategy and think that the story is almost too good to be true. I share some of those misgivings, but feel that a prospective 2020 yield of 10 per cent more than compensates.

Other companies that moved than 10 per cent were: Miton (MGR), up 12.9 per cent following 2018 results which included a 43 per cent increase in the dividend; February’s new purchase, Scientific Digital Imaging (SDI) up 11.2 per cent and India Capital Growth Fund (IGC) up 10.8 per cent.

Compared with last year when my Q1 performance was marred by a couple of profit warnings – or in Conviviality’s case, worse – thus far in 2019, I have luckily avoided any disasters. My worst stock in Q1 was U+I (UAI), down 10.4 per cent, which I think is mainly down to Brexit fears and in March, Iomart (IOM), down 8.9 per cent. Fingers crossed for the remainder of the year.

Recent activity

Just six trades in March. I twice reduced my position in Bioventix (BVXP), (14 March at 3,810p and 19 March at 3,903p). I remain a huge long-term fan of the company but felt that following a 28 per cent run in the share price this year, the valuation was looking a little rich. I felt it prudent to lock in some profits and reduced it to 5.0 per cent of the portfolio; still one of my largest positions. Hopefully, I will have an opportunity to add back around the £30 mark but if not and it keeps going up, that’s fine. Syncona (SYNC) announced the sale of its holding in Nightstar to Biogen, which was greeted well initially with the share price moving over 300p. This prompted profit-taking and the share price drifted back; I added to my position on 18 March at 240p. On 19 March, I raised some cash by selling all my Standard Life Aberdeen for around 10 per cent profit since purchase in December and January. While the new chairman, Sir Douglas Flint, is doing the right things, I concluded that it might take some time to see concrete evidence that the financial performance of the group is improving. In short, I felt I could redeploy the money in stocks with better prospects. Last month, I wrote about my addition of Scientific Digital Imaging to the portfolio. On 22 March, I added at 50p, taking the position to 3.0 per cent. Wearing my 'hunters' hat I added to Taptica again, at 176p on 19 March. My average price is now 268p, which must at least be my first target. According to the latest note from FinnCap, at 268p the shares would be valued at just eight times 2019 earnings and on a free cash yield of 8 per cent. It has a longer-term target price of 550p, which does not look unreasonable as long as the company meets forecasts.

Portfolio analysis

Stripping out the investment trust and fund holdings, which make up 24 per cent of the portfolio, Stockopedia shows that the JIC Portfolio has a clear bias towards small-cap growth, which I am comfortable with.

Drilling down to look at sector exposure shows a good spread although I make two observations. My lack of exposure to consumer defensives could leave me exposed in a recession-driven bear market and my exposure to energy is probably as high as I feel comfortable with. If as seems likely, RockRose Energy comes out of suspension at a significant premium, my exposure to energy could move to well over 20 per cent of the portfolio. That will be an obvious area for profit taking.

Further analysis shows that the median forecast PE ratio of the portfolio is 11.5 times, compared with 12.3 times for the UK market, and that the forecast earnings per share growth is 34 per cent versus 11 per cent for the market. The forecast dividend yield is 3.6 per cent versus 3.9 per cent for the market median. Hopefully, given the faster earnings growth forecast for my portfolio, dividend growth will also be higher than the market. Again, I feel comfortable with that analysis of the portfolio. In general, I am trying to avoid highly rated companies that are full of high expectations; these are the companies where there is a risk of significant de-rating on news of poor trading. Further diversification comes from my exposure to investment trusts and exchange traded funds (ETFs) such as Baillie Gifford Shin Nippon (BGS), India Capital Growth Fund (IGC), Vietnam Enterprise Trust (VEIL), Scottish Mortgage Trust (SMT), Biotech Growth Trust (BIOG) and Robo-Stox Global Robotics and Automation ETF (ROBG). As well as currency diversification these funds give me exposure to some fast-growing geographic regions and themes.

Outlook:

I expect no prizes for last month saying, “when I write my next monthly, we will either have left the EU on 29 March or there will be some sort of extension to Article 50”. It seems highly unlikely that we will leave without a deal on 12 April and goodness knows where we will be in a year’s time. All through the process I have been reasonably sanguine, preferring to focus on individual stocks and ensuring I have a decent amount of diversification both geographically and from a currency perspective. Trying to second guess what is going to happen and then what the market reaction will be seems a huge waste of time and effort. The UK market, however, continues to look attractively valued compared with others and any lifting of the current uncertainty should, I think, result in a decent bounce. I remain fully invested.