Private Investor’s Diary: Value has a good few years to go

Then higher energy prices exacerbated inflation. Russia’s use of gas as a weapon against the West caused a spike in gas and electricity prices over the summer. Central banks raised interest rates to bear down on inflation but often appeared to be behind the curve. Equities suffered as central bank liquidity dried up. Highly valued growth stocks, the darlings of the previous 10 years, suffered the most as investors baulked at the high valuations. Value investing staged a comeback, with lowly valued energy and mining stocks benefiting the most.

The US 10-Year Treasury Bond yield rose from 1.5 per cent in January 2022 to 3.8 per cent at the end, having touched 4.3 per cent in October. In the UK, the 10-Year Gilt had a more dramatic fall from grace, jumping from 1.0 per cent to 3.7 per cent, via 4.5 per cent at the peak of the Tory party leadership crisis.

This renewed enthusiasm for value helped the FTSE 100 become the only major equity index to end the year in positive territory. It gained 0.9 per cent, supported by the oil majors, mining companies and defensive stocks such as AstraZeneca (AZN) and Imperial Brands (IMB). Unfortunately, concerns about the outlook for the UK economy caused mid and smaller-sized companies to suffer. The FTSE Mid-250 fell 19.7 per cent, and the FTSE Aim All-Share was down 31.7 per cent. The FTSE All-Share Total Return Index was up 0.3 per cent over the year.

Technology/growth stocks, as represented by the Nasdaq, bore the brunt of the equity sell-off. The Nasdaq composite was down 33.1 per cent. The broader S&P 500 index was off 19.4 per cent, and the Dow Jones just 8.8 per cent. In continental European markets, the DAX was down 12.3 per cent, the CAC down 8.8 per cent, while the MIB fell 8.4 per cent. In Far East markets, the Nikkei 225 was down 9.4 per cent and the Hang Seng down 15.5 per cent.

The US dollar was strong, helped by higher interest rates and its status as a haven in uncertain times. Sterling lost value, with its nadir for the year coming in September, triggered by the embarrassing events at the top of the Conservative party. It meant that to a sterling-based investor, gold was up 11.9 per cent over the year. A much better performance than bitcoin, whose supporters claimed it would protect holders against inflation and the debasement of ‘fiat’ currencies. It was down 64.0 per cent, behaving like a highly valued growth stock with no earnings.

In commodities, Brent crude ended the year up 10.4 per cent. Industrial metals were a mixed bag, with nickel up 46 per cent and platinum 11 per cent, but zinc and copper were down 11 per cent and 13 per cent, respectively.

Portfolio performance

It was a decent end to the year but not enough to push the JIC Portfolio and Funds Portfolio into positive territory. The JIC Portfolio was up 1.7 per cent in December. The loss for the year was -4.9 per cent, a little behind the FTSE All-Share (TR) Index but nicely ahead of the small and mid-cap indices. Not my worst year, which remains 2018’s -11.9 per cent. It leaves the JIC Portfolio up 329.6 per cent since inception in January 2012 (14.2 per cent annualised), which compares with 111.4 per cent (7.0 per cent annualised) for the FTSE All-Share (Total Return) Index. The FTSE All-World GBP (Total Return) Index returned -47.3 per cent in 2022. Sterling’s weakness helped. The All-World US$ Index was off 17.7 per cent. Since January 2012, the All-World has gained 243.5 per cent, 11.9 per cent annualised.

The JIC Funds Portfolio was down 0.6 per cent in December compared with a drop of 4.7 per cent for the All-World. Since this portfolio’s inception in June 2020, it is up 28.2 per cent versus 24.8 per cent for the All-World and 29.8 per cent for the All-Share.

The standout performer in December was CentralNic (CNIC), up 21 per cent. In early December, the board replaced the chief executive and announced a shift in strategy. Whereas the outgoing chief executive had pursued an acquisition-led approach, the board signalled a new approach to cash flow deployment. No doubt frustrated by the low valuation, it said there would be a greater focus on returns to shareholders versus mergers and acquisitions. It also signalled a share buyback, which it initiated on 30 December. Other notable positive contributors were Sylvania Platinum (SLP), up 7.3 per cent, and Renew Holdings (RNWH), up 7.2 per cent. At the bottom end of the table were SDI Group (SDI), down 11.7 per cent, and my oil and gas positions: Serica Energy (SQZ) was down 10.1 per cent with poor reception to its proposed acquisition of Tailwind Energy, IOG (IOG) -7.8 per cent and Kistos (KIST) -7.5 per cent. 

The significant positive contributors to 2022 were generally my resources stocks. BlackRock World Mining Trust (BRWM) and Serica Energy were up 18.3 per cent, followed by Sylvania Platinum, which gained 15.8 per cent and Ecora Resources (ECOR) (formerly Anglo Pacific), up 11.7 per cent. Bioventix (BVXP) staged a strong recovery, ending the year up 17.4 per cent, having been down 15 per cent by mid-March. All these stocks were amongst my most prominent positions, and the returns listed above did not include the hefty dividends paid.

The new additions to the JIC Portfolio at the start of the year performed poorly. I'd have been far better off if I'’d left the money in cash. Somero Enterprises (SOM) was down 32 per cent, NIOX (NIOX) 10 per cent and Lloyds Bank (LLOY) 15 per cent when I cut my losses in October. SDI Group gave up 20.7 per cent in what was a derating of the shares. At the start of the year, the market valued SDI at around 30 times forecast April 2023 earnings. Such was the enhancement to earnings from acquisitions; the valuation dropped to a more modest 16 times. I halved my position in December 2021 on valuation concerns, but gradually added back at lower prices during the summer. I cut De La Rue (DLAR) in February and, although I took a hefty loss, it’s pleasing to see that it dropped another 30 per cent since I bit the bullet. Supreme (SUP) was another major detractor, down 55 per cent by the time I cut my position in August for my most significant monetary loss since the inception of the JIC Portfolio in January 2012. I must get better at cutting!

New portfolio activity

I reduced my position in Biotech Growth Trust (BIOG) to a target of 2.5 per cent at 591p on 12 December. The sale was to raise cash to increase my holding in K3 Capital (K3C). On 8 December, K3 Capital announced that it was in advanced discussions with Sun Capital partners concerning a possible cash offer of 350p a share. The board said “it was minded to accept the offer”. The market did not believe a firm offer would be forthcoming as a few days later I was able to pick up stock at 313.5p, an 11 per cent discount to the possible offer price. Anyway, on 16 December, the company confirmed the firm offer, and I decided to sell at 343.5p, leaving just under 2 per cent upside. A bird in the hand. The 350p offer could have been a lot better, given K3 Capital had traded at 390p in May 2021. Still, with the board and management behind the deal and uncertainty about the UK economic outlook, it felt like a victory. Over the two years I held K3 Capital, I made a profit of £17,600, including dividends, a return of 50 per cent. I used some of the proceeds to increase Polar Capital Holdings (POLR) to target 5.0 per cent on 16 December at 485p and Harbour Energy (HBR) to 4.5 per cent at 312.5p. On 20 December, I took advantage of the aversion to Serica's takeover of Tailwind Energy to increase my target of 7.5 per cent at 252.3p.

The JIC Funds Portfolio

December's return was notable for all its positions performing better than my benchmark, the FTSE All-World (GBP) Total Return Index, which was down 4.7 per cent. L&G Gold Mining ETF (AUCO) performed best, up 3.6 per cent, and Temple Bar Investment Trust (TMPL) worst, down 4.3 per cent.

Although the portfolio return was negative in 2022, it benefited hugely from my shift of emphasis from growth to value in late 2021/early 2022. Out went the likes of the iShares NASDAQ ETF, VanEck Vectors Semiconductors ETF, WisdomTree Cloud Computing ETF and VanEck Vectors Video Gaming ETF to be replaced by the likes of Temple Bar Investment Trust, BH Macro, iShares US Value Factor ETF, BlackRock Energy & Resources Income, Next Energy Solar Funds and Argonaut Absolute Return Fund.

For the year, the best-performing holdings were BlackRock Energy & Resources Income Trust (BERI), BlackRock World Mining Trust, and Next Energy Solar Fund (NESF). The worst were Smithson (SSON), -35.2 per cent; Chelverton UK Equity Growth Fund (GB00BP855B7), -22.2 per cent and Biotech Growth Trust, -22.1 per cent. Cheverton’s return was pretty good compared with the FTSE 250 and Aim. I like the management and approach, so while I abandoned other UK funds, I decided to stick with Chelverton as my fund for UK mid and smaller company exposure.

I aim for the Funds Portfolio to be a ‘do-little’ portfolio. I traded more last year than I’d like, but I needed to make that growth-to-value switch. I think value has a good few years ahead of it as interest rates stay relatively high, especially compared with the last decade or so, and economic growth is more subdued than we have become accustomed to. More details at www.jicuk.com

Dividend income update

With BlackRock World Mining’s dividend of 5.5p paid on 22 December and NextEnergy Solar Fund’s 1.88p on 30 December, the total income received in 2022 amounted to £31,105. That was more than twice 2021’s £14,336. All revenue has been kept in the portfolio and reinvested, adding to the long-term compounding of the portfolio. I hope to exceed 2022’s income this year with some hefty dividend increases from the resource stocks to come. 

Outlook

Given that few predicted with any accuracy the events of 2022, whether geopolitical, economic or market-related, writing an outlook statement might seem futile. It does teach one to stay humble and be prepared to accept when one has got it wrong. One should be willing to adapt to changing circumstances.

I have little to add to last month’s outlook. I continue to err on the cautious side, believing that although inflation will come down due to the base effect, it will remain sticky due to tight employment markets and wage pressure. While likely to be volatile, energy prices (mainly electricity) will stay at levels far higher than we were used to before Covid-19. Investment in renewable energy sources and the requirement to increase the size of the grid as the economy shifts from its reliance on fossil fuels to electrification will have its costs. Western economies will have to find a way to cope with these increased costs, but it is likely to mean lower economic growth. Stagflation remains a genuine danger. My high exposure to miners of industrial metals required in the transition to an electrified economy will pay off as supply struggles to keep up with demand. If I’m correct, the miners should continue to make robust returns for shareholders.

Where could I be wrong? Energy prices could come down faster and further than anticipated, boosting household income. Inflation could surprise to the downside, leading to positive real wage growth. Allied with lower energy bills, favourable real wages would be a massive boost to household budgets, the government’s finances, and overall economic growth. Interest and mortgage rates could peak earlier than expected, fall quicker and lift the clouds over the housing market. If this alternative scenario plays out, it could be a good year for equity markets. My positions in commodities and stocks such as Polar Capital Holdings should help the JIC Portfolio keep up.