Two good lessons learnt

Not only did global equities have a fantastic month, but there was a switch from growth to value as the dial of confidence in global economic recovery switched from low to high. Investors who had been comfortable paying up for the safety of growth switched allegiance. With the outlook looking bleak, the market had sold down economically sensitive companies since the outbreak of the pandemic. Suddenly value stocks were all the rage, especially as the gap in valuations between value and growth was as stretched as it had ever been.

What did this mean in terms of actual market moves? The 18.4 per cent return of the Russell 2000 best demonstrated the switch from growth to value. That compared with 11.8 per cent from the Nasdaq. Where the US goes the rest of the world follows, so in the UK the best stocks over the month were the most beaten up. International Consolidated Airlines (IAG), owner of British Airways, was up 60 per cent, Rolls-Royce (RR) 48 per cent and Royal Dutch Shell (RDSB) 33 per cent.

Some of the market moves were extraordinary. The CAC 40 was up 20 per cent, the Nikkei 225 15 per cent, the DAX 15 per cent, the FTSE All-Share (Total Return) 12.7 per cent, the S&P 500 11.0 per cent and the FTSE China A-Shares 5.5 per cent.

Commodity markets were also buoyant, with oil staging a huge recovery. Brent crude was up 26 per cent to $47.7 per barrel. Metals were also strong, with platinum up 15 per cent, copper up 13 per cent, zinc 10 per cent and nickel 6 per cent.

It was difficult to lose money in equities and commodities, but bond markets suffered. With the prospect of greater economic growth and with less fear of deflation bonds were no longer in demand. The yield on government bonds both sides of the Atlantic rose to their highest levels since March. Gold, seen as a safe haven, also succumbed to selling pressure, falling 5.5 per cent.

Performance:

The JIC Portfolio’s return of 8.5 per cent was its fourth-best month in its 107-month history. April’s 17.2 per cent and May’s 8.7 per cent bounce-back from the March bottom, along with July last year (Rockrose Energy!) were the only better months. On 30 November the portfolio was up 12.9 per cent this year compared with a drop of 13.2 per cent for the FTSE All-Share and a gain of 10.5 per cent rise for the FTSE All-World (GBP) Index. That means since inception in January 2012 it has returned 275.2 per cent, (16.0 per cent annualised) comparing favourably with the All-Share’s 71.4 per cent, (6.2 per cent annualised) and the All-World’s 202.1 per cent (13.2 per cent annualised).

In the JIC Portfolio the standout stocks were Central Asia Metals (CAML), up 29 per cent (helped by the rising copper price), Lundin Energy (SW:LUNES), also up 29 per cent (oil price), SDI (SDI) 22 per cent, SigmaRoc (SRC) 22 per cent, De La Rue (DLAR) 19 per cent and Sylvania Platinum (SLP) 18 per cent (platinum price).

The worst stocks were L&G Gold Mining ETF (AUCO) down 7.8 per cent (gold price), Anglo Pacific (APF) minus 5 per cent and Bioventix (BVXP) down 3.0 per cent.

The JIC Funds Portfolio was up 7.2 per cent in November versus 8.9 per cent for the FTSE All-World (TR) (GBP) Index. The three top performers were BlackRock Greater Europe Trust (BRGE) up 15 per cent, Wisdom Tree Cloud Computing ETF (WCLD) 14 per cent and BlackRock World Mining Trust (BRWM) 13 per cent. The only fund to fall was the L&G Gold Mining ETF (AVCO). 

Activity

During November, there were 13 trades in total. I sold all my Anglo Asian Mining (AAZ) and VanEck Vectors Junior Gold Miners (GDXJ) ETF. Anglo Asian went  on 3 November at 115p as its resource update underwhelmed me, and in any case I was looking to reduce my exposure to gold. The sale of VanEck Vectors Junior Gold Miners on 23 November at 3,131p was prompted by the gold price falling through $1,850 per ounce on 23 November. I continue to believe gold has a place in the portfolio in the longer term, but I think it will struggle over the next six months or so, while the reflation trade continues. The new position was K3 Capital (K3C) (added on 24 November at 203.5p). This business sales and brokerage company has many attributes that I find attractive. It generates a high return on capital, it looks good value, the balance sheet is clean, and the management has meaningful stakes in the company. Hopefully, this will be a long-term compounder for me.

In other trades, I added to positions in Serica Energy (SQZ) (at 104p), Renew (RNWH) (448p), WisdomTree Cloud Computing ETF (WCLD) (3,297p), Venture Life (VLG) (83.9p) and BlackRock World Mining Trust (twice at 436p and 440p). I took Renew to my target 5.0 per cent ahead of results in December, which I anticipate will lead to upgrades to forecasts for 2021. With BlackRock World Mining, I increased my target weight to 7.5 per cent. With optimism increasing for a global recovery in 2021, coupled with the 'greening' of the globe, demand for metals is outstripping supply. The likes of copper, zinc, platinum, and nickel are moving to multi-year highs.

I reduced the position in L&G Gold Mining ETF to 2.5 per cent (on 17 November at 2,833p) as part of my reduction in exposure to gold. I halved the iShares NASDAQ 100 ETF (CNX1) to 2.5 per cent, (at 50,843p) to fund the increase in BlackRock World Mining, and I gave SDI a haircut. After a strong run, I sold 20 per cent of my position at 85.1p, reducing it to 4.0 per cent.

Review of 2020 and lessons learnt

2020 started well, with the JIC Portfolio hitting new highs in mid-January before Covid upset everything. If someone had told me what was ahead in terms of lockdowns and the hit to the economy, but said don’t worry, your portfolio will be up 16 per cent by mid-December, I would have thought them mad. That, however, has happened, with the JIC Portfolio up 74 per cent from the 23 March low point. So, the first lesson is to take heed of the adage, 'time in the market, not timing the market' is important to achieving long-term returns. It would have been so easy to panic out during March, but then one would have been faced with the horrible task of buying back higher, which is easier said than done. One will always be waiting for a pull back. The second lesson is not to be overactive, feeling one must do something to add value. My 31 December 2019 portfolio is about 3 per cent higher in value than the JIC Portfolio at this stage. In other words, if I had done nothing this year, I would be slightly better off. Two trades cost me dear. The first was to sell Rockrose Energy (RRE) a few days before it was taken over at a 50 per cent premium. I don’t feel so bad about that one as I think my reason for selling was logical and my timing was just bad luck. The second, less forgivable mistake was selling Games Workshop (GAW) at £60. A few months later it had doubled to £120. I sold because I was worried about the valuation and despite a chart that clearly has decent upward momentum. It was arrogant and silly of me to think I knew better than the market. There is nothing wrong with booking some profits, but my new rule is not to sell so much that you are angry if it keeps going up. That is, of course, unless something has changed to the investment case.

Those two sales cost me around 6.0 per cent of missed performance. The fact that I am 3.0 per cent behind the 'no-trade' portfolio, suggests that at least I clawed half the shortfall back with some of my purchases. Venture Life has proved a good investment, up more than 50 per cent on my first purchase in May. SigmaRoc has also done well, more than doubling since I added to my position in mid-April. My largest position, BlackRock World Mining Trust is up 44 per cent since I added it back to the portfolio in June, and with the oil price recovering, Lundin Energy is up 14 per cent on my average price.

At the start of the year the annualised return of the JIC Portfolio over the eight years since 1 January 2012 was 16.2 per cent. As of the 14 December, the JIC Portfolio is up 16.5 per cent this year and, with 12 trading days remaining, the annualised return remains at 16.2 per cent. Can’t complain.

Still early days for this 'do-little' portfolio.

Outlook

In last month’s column, it might have sounded like I had got slightly carried away with my bullish outlook; 'Bring on the roaring twenties'. I said I thought 'Pfizer Monday' would be as important a turning point for the UK equity market as the day in September 1992, when the UK left the Exchange Rate Mechanism. I stand by that, only this time, Pfizer Monday has far broader implications for the entire globe. Global economic growth next year should be robust as recovery from the pandemic takes hold. I think the reflation trade or switch to value or recovery will continue well into 2021. As far as the UK is concerned, the icing on the cake would be a trade agreement with the EU – fingers crossed. The FTSE 100 Index is full of value/recovery stocks, and valuations look attractive. Overseas investors will look at the UK with fresh eyes, and I think it is probable the trickle of foreign acquisitions of UK companies seen in recent months, will turn into a torrent.