Join our community of smart investors

On the defensive

Worries about a general election prompt John Rosier to make a series of changes to his portfolio
June 13, 2019

The four-month winning streak came to an abrupt end in May. Markets were increasingly concerned about the outlook for global economic growth. President Trump’s increasingly belligerent rhetoric was the main factor. Optimism that trade talks with China would come to a speedy and successful conclusion were dashed. President Trump slapped further tariffs on Chinese goods, but instead of rolling over China retaliated with tariffs of its own. The fall in confidence is no better illustrated than by the dramatic collapse in US Treasury yields. The 10-year Treasury yield dropped from 2.5 per cent to 2.15 per cent during the month. Only last November the yield was 3.3 per cent. There has been a shift in market expectations, with an 81 per cent probability of two cuts or more now being priced in. Europe has not escaped, with German 10-year yields at -0.21 per cent; in Greece the yield has moved from a record high of 42 per cent in 2012 to an all-time low of 2.9 per cent.

Equities suffered, giving up some of 2019’s gains. Of the major equity markets, the US S&P 500 and Nasdaq were the only indices to reach new highs this year before falling 6.6 per cent and 7.9 per cent, respectively, in May. European indices also suffered with the Dax off 5.0 per cent and the CAC 40 down 6.8 per cent. The UK held up comparatively well despite ongoing political paralysis and the resignation of Prime Minister Theresa May. The FTSE All-Share (Total Return) index was down 3.0 per cent. Uncertainty was reflected more in the currency market, with sterling down 3.0 per cent against both the euro and US dollar. Commodities were hit by growth fears, with Brent crude oil down 13.9 per cent to $62 a barrel and copper and zinc off 9.0 per cent.

The only ‘blue’ to be found was the Indian Sensex, Russia, gold and Bitcoin. In India, following the general election, there is political stability for the next five years. Gold was up 2.0 per cent to $1,311 an ounce, fulfilling its safe-haven status, and Bitcoin continues its rocket-like recovery, up 62 per cent in May and 132 per cent this year.

 

Performance

The JIC Portfolio gave up some of its 2019 gains during May, finishing the month down 1.9 per cent. That leaves it up 13.7 per cent in 2019 compared with +9.0 per cent for the FTSE All-Share (Total Return) Index. The bespoke JIC Benchmark, introduced last month, was down2.3 per cent in May and is up 12.1 per cent since 1 January. Since inception in January 2012, the JIC Portfolio has gained 179.9 per cent, giving an annualised return of 14.9 per cent, compared with 80.5 per cent and 8.3 per cent for the FTSE All-Share (TR) Index.

Last month’s standout holding was Altitude (ALT), up 20.4 per cent ahead of 2018 results on 28 May. Other notable risers were Games Workshop (GAW), up 7.4 per cent, Anglo Asian Mining (AAZ), up 6.7 per cent and AdEPT Technology (ADT), up 5.8 per cent. Games Workshop continued its good run following strong results in April. Anglo Asian Mining posted results ahead of forecasts and increased the final dividend more than expected. AdEPT Technology benefited from a presentation by Ian Fishwick, the founder and chairman, at the three-day Mello London Investment Event. More than 5.0 per cent fallers comprised ROBO Global Automation and Robotics ETF (ROBG), -9.5 per cent, Bioventix (BVXP) -7.5 per cent, Syncona (SYNC) -7.4 per cent, Anglo Pacific (APF) -6.1 per cent and Strix (KETL), -5.5 per cent. Anglo Pacific and Strix both went ex-dividend during May, so their returns were not quite as bad as posted. The weakness in the Nasdaq will not have helped ROBO Global and Syncona given their exposure to technology-based stocks, and Anglo Pacific’s weakness might be down to fears of weaker commodity prices ahead.

 

Recent activity

After two relatively quiet months on the dealing front I was busy during May. I sold my position in Iomart (IOM) at 354p, booking a 10 per cent profit. Iomart is a quality company, with good cash flow and I am sure it will do well in the long term. I felt, however, that the valuation was looking stretched given current growth forecasts. In any case, I needed the cash to introduce a new stock to the portfolio. I bought Anglo Asian Mining ahead of 2018 results on 16 May. Earlier this year, I met Bill Morgan, CFO, which gave me a better understanding of the company and its prospects. Anglo Asian Mining has low cost gold mining operations in Azerbaijan and last year, through strong cash generation, reduced net debt from $18.1m in January to net cash of $6.1m by the year-end. Importantly, it also started paying dividends; 3.0¢ at the half-year stage with an aim of distributing equal payments at the half and full-year stage. It was thus a nice surprise to see the final dividend of 4.0¢. It bodes well for the future. The other positives for Anglo Asian are that it has an active development and exploration program, which will, hopefully, deliver greater visibility of future production. In the meantime, the gold price is a little perkier, back over $1,300 an ounce. The prospective dividend yield for 2019 is forecast at 5.6 per cent and it is valued at only 5.0 times 2018 free cash flow.    

Apart from Iomart, there were four further outright sales. The aim was to shift the emphasis of the portfolio away from stocks sensitive to the UK economy and market, to more defensive areas. I’m hoping a general election can be avoided, but given the Brexit impasse and parliament’s opposition to leaving without a deal, I fear my hopes may be dashed. Out went Lloyds Banking (LLOY) (23 May at 57.8p) for, including dividends, a small loss. U+I (UAI) followed on 24 May at 162p, at break-even, including dividends. Melrose Industries (MRO) at 169.2p and Miton (MGR) at 54.1p were also sold, both for a reasonable profit. Apart from Anglo Asian Mining I added three new positions: Worldwide Healthcare Trust (WWH) on 23 May at 2,600p, TR European Growth (TRG) on 24 May at 854p and Avast (AVST) on 29 May at 308p. Worldwide Healthcare Trust gives me exposure to overseas markets and to a theme that should continue to do well as global spending on healthcare continues to rise. At the very least it should prove defensive. Continental European markets look cheap and, having sold out of TR European Growth last year, I was happy to buy back in at the lower levels. I bought Avast, a provider of cybersecurity products on 29 May at 308p. This FTSE 250 company principally sells direct to consumers around the world. It has 435m customers but only 4.0 per cent are on a paid-for version. There is thus great potential to up-sell and cross-sell. Last year it achieved a 7.2 per cent increase in paying users and increased the number of products per user from 1.32 to 1.4. The average revenue per paying customer increased by 8.6 per cent to $49.24. Cash flow is strong, allowing it to reduce net debt by $200m to $900m last year. It is valued at 13.4 times 2019 earnings forecasts for 15 per cent growth, 11.0 times free cash flow and is on a prospective dividend yield of 3.0 per cent.

Other trades included adding to Scientific Digital Imaging (SDI) on 15 May at 55.0p and Altitude at 106.7p on 26 May, and trimming Bloomsbury (BMY) on 21 May at 241p and Anglo Pacific at 214p on 29 May.

 

When to sell?

I attended the excellent Mello Investment Event at Chiswick during the month and, as well as meeting lots of potential investments, I went to the talk by Lord John Lee, author of How To Make A Million Slowly. He said that he rarely sold a position, taking the attitude that it was better to hold for the long term and add on weakness. He rightly pointed out that, with modern communications, not only can one see whenever a stock has moved, but also it is so easy to sell. One is continually tempted to take profits at the push of a button. He echoed Keith Ashworth-Lord, the manager of the successful Sanford DeLand UK Buffettology Fund. Last November, at the same event, he said that he didn’t sell quality companies just because the valuation increased. My view is, that is all very well if you have big inflows into a fund; one can top up the lagging positions and essentially rebalance that way. The JIC Portfolio does not have the luxury of cash injections. Since I set it up in January 2012 the only cash credited to the Portfolio has been from dividends received. I strive to find long-term positions and stick with them, notable examples being Baillie Gifford Shin Nippon (BGS), Bioventix and AdEPT Technology, but if I find a new idea, the money has to come from somewhere. I will sell if I think I have an alternative with better prospects. I might also sell if things have changed so that the original investment case no longer applies, such as with Iomart. I am also happy to trim positions after a good run to provide cash to top up smaller positions which I think are due a catch up. In general, I try to avoid making 'top-down' decisions on individual stocks but the prospect of a general election in the UK fills me with horror. I felt it prudent to take some action to position the portfolio ahead of the event. Time will tell how sensible a move that was.

I am wary that I have been quite active this year, introducing eight new stocks to the Portfolio. However, Games Workshop, RockRose (RRE) and Altitude, all bought in January, are up 47 per cent, 28 per cent and 38 per cent, respectively, on my average purchase price. I am also hoping for great things from RockRose when it comes back from suspension next month. Scientific Digital Imaging, bought in February, is up 18 per cent on my in-price and Anglo Asian Mining, bought last month, is up 10 per cent. The last three, Worldwide Healthcare Trust, TR European Growth and Avast, bought in the last 10 days of May, are all at around break-even. Of the stocks I sold, all are at or below the share price I sold, except for Royal Dutch Shell (RDSB), which is up just 4.0 per cent.

 

Outlook

May’s pullback in markets has resulted in a marked change in interest rate expectations. It will be interesting to see when the Federal Reserve cuts, what guidance it gives and whether it once again supports equity markets. In such a low interest rate environment I continue to find it difficult to come up with an alternative to equities. I remain pretty fully invested, although the purchase of Worldwide Healthcare Trust and some exposure to the gold price through Anglo Asian Mining might suggest the market jitters are getting to me.

NameEPICMarket cap (£m)% of PortfolioTotal return %Yield (Forecast)
    Since purchase 
Baillie Gifford Shin NipponBGS488.55.792.1 
Worldwide Healthcare TrustWWH1,360.65.0-1.5 
Scottish Mortgage Investment TrustSMT7,460.84.93.80.6
Biotech Growth Trust (The)BIOG344.34.929.9 
Serica EnergySQZ347.24.853.5 
BioventixBVXP190.34.6198.72.0
Strix KETL305.14.48.54.9
AltitudeALT79.14.440.8 
Cash depositCD 4.30.0 
Games WorkshopGAW1,450.24.340.23.4
Scientific Digital ImagingSDI52.14.217.0 
Duke RoyaltyDUKE90.94.29.17.5
Rockrose EnergyRRE102.64.227.7 
Diversified Gas & OilDGOC902.44.063.19.2
Bloomsbury PublishingBMY173.34.037.43.7
TR European Growth TrustTRG421.44.0-2.02.2
Central Asia MetalsCAML384.53.317.66.5
Anglo Asian MiningAAZ109.83.26.65.6
India Capital Growth FundIGC103.13.13.8 
AvastAVST2,950.23.0-0.13.1
AdEPT TechnologyADT86.53.0148.92.7
SynconaSYNC1,563.82.9-2.6 
Anglo PacificAPF362.92.850.44.2
Robo-Stox Global Robotics and Automation GO UCITS ETFROBG 2.8-10.6 
TapticaTAP178.22.4-47.13.6
Vietnam Enterprise InvestmentsVEIL968.11.6-11.0