Why cash isn't king

Crude oil made further progress, with Brent crude up 2.5 per cent to $62.66 (£46.96) per barrel. Indications that Russia and Organization of the Petroleum Exporting Countries (Opec) would agree to extend production curbs until the end of 2018 helped sentiment. Other commodities paused for breath, with zinc off 3.4 per cent and copper 1.8 per cent.

Sterling had a good month against the US dollar, up 1.8 per cent to 1.35, but this was probably more a case of dollar weakness, given the euro also gained 2.1 per cent against the greenback. Gold continued to trade in a narrow range, finishing the month up 0.6 per cent at $1,277 an ounce. There must be a lot of holders of gold who wished they had put some of it into Bitcoin. It had another phenomenal month, up 58 per cent and above $10,000 for the first time. It started 2017 at just $960. As I write, it is up a further 50 per cent in December at over $15,000.

A glowing performance

A poor month for the FTSE All-Share (TR) Index, but a good one for the JIC Portfolios. There is something especially satisfying about being up in a down month. The JIC Portfolio was up 1.3 per cent against the 1.7 per cent drop in the All-Share. In the year to date the JIC Portfolio is up 27.1 per cent, and since inception in January 2012 is up 170 per cent, or +18.3 per cent annualised. Over the respective time periods the FTSE All-Share (Total Return) Index is up 7.9 per cent and 74.7 per cent (9.9 per cent annualised).

The JIC Top 10 is doing what it’s supposed to do – achieve better returns from a more concentrated portfolio, up 2.7 per cent on the month, leaving it up 34.5 per cent in 2017.

The star performers of the month were Geiger Counter (GCL), up 41.4 per cent, Bloomsbury (BMY), up 15.7 per cent, Baillie Gifford Shin Nippon (BGS), 8.3 per cent to the good and Bioventix (BVXP), 8.2 per cent ahead. Geiger Counter invests in companies involved in the exploration, development and production of energy, predominantly within the uranium industry. It rose on a bounce in the spot price of uranium. There is also optimism that some six years after the Fukishima nuclear disaster, the outlook for uranium prices looks rosier. Industry leader Cameco recently announced the shutdown of its McArthur River mine in a move that will make a significant dent in oversupply. It will probably require other industry participants to play ball and trim production for a sustainable price increase. 

Following October’s results, Bloomsbury, which readers will remember I added to the portfolio in July, rose to the top of the trading range it has occupied for the past four years. Given its reasonable valuation, including a prospective dividend yield of 3.7 per cent, and upward revisions to earnings forecasts, I am hopeful that it will break out; much depends on Christmas sales. 

Baillie Gifford Shin Nippon was helped by a buoyant Japanese market. It has been by far my most profitable holding, having first added it to the portfolio in March 2012 at 168p – it’s now 856p. 

There was no news concerning Bioventix, so I think its rise was just a case of bargain hunters taking advantage of the sell-off post October’s results. 

The one disaster in the portfolio was Accrol (ACRL), which returned from suspension after being thrown a lifeline by major shareholders and its banks. The share price was off 71 per cent in November. Readers of last month’s diary will remember that I had written the price down by 70 per cent to 40p when it was suspended, so I took the performance hit in October. The write-down to 40p was remarkably prescient, with the share price currently trading at 42p. I haven’t at this stage added to my position and am in two minds about what to do. It is tempting to sell and move on but if the new management team can reduce costs and drive through price increases the potential recovery could be sizeable. Card Factory (CARD) was off 13.2 per cent, but over half that fall was accounted for by it going ex-dividend at 17.9p per share on 9 November. Again, the festive season will be important.

A busy month

I was a little busier in November. I added to several existing positions, completely sold three and added one new stock. I sold Patisserie (CAKE) on 7 November at 343p, booking a nice profit. I was concerned that it might succumb to the pressure on cost and sales hurting many of its competitors. I booked my profits in Fidelity Asian Values (FAS) – 8 November at 382p – and sold JPMorgan European Investment Trust (JETI) on 15 November at 165.8p, preferring to concentrate my exposure to continental European equities through TR European Growth Trust (TRG). I added to TR European Growth at the same time (15 November at 1,111.7p). I added to Biotech Growth Trust (3 November at 820.5p) following a presentation by the managers which reminded me of the sector’s potential and its current low valuation. I increased Royal Dutch Shell (RDSB) on 7 November at 2,510.9p and 28 November at 2,404.4p, attracted by its prospective dividend yield of 5.9 per cent and excited by management upgrading its financial targets. Lloyds Banking (LLOY) is another high-yielder (prospective yield of 6.6 per cent) that I think the market is being slow to appreciate and so added to my position (8 November 67.2p). As mentioned earlier, I think Bloomsbury has further upside and increased my position (8 November at 180.5p).

My new stock, Anglo Pacific (APF), is an old acquaintance of the portfolio. I held it during 2012 and 2013 before cutting my position in December 2013 at 182.5p. That proved a good decision as it eventually bottomed at 53p early last year. I have been a little slow getting back in, but I think at the 139p I paid on 16 November it should prove a good investment. It describes itself as “the only company listed on the London Stock Exchange focused on royalties connected with the mining of natural resources. It is an objective of the company to pay a substantial proportion of its royalties to shareholders as dividends”. It currently has 11 principal royalty streams, across five continents and across a diversified commodity exposure, including coking coal, thermal coal, nickel, cobalt, iron ore, gold, uranium and vanadium.

The attractions are: it should generate long-term cash returns by growing its royalty stream through investing in producing or near-term producing assets. With low overheads, the cash-flow returns to shareholders are high. It is lower risk, as royalties are revenue based, which means it is not exposed to cost inflation that might affect the profitability of the companies in which it is invested. Its commodity and geographic diversification should reduce volatility. It is exposed to commodity price upside (and downside) as price increases should feed through to increased royalty receipts. Since 2013, under Julian Treger, who owns 3.1 per cent of the company, there has been a step change in free cash flow. Essentially, the investment stage, when the company was building up its future royalty stream, has come to fruition.

So far this year, it has paid 4.5p in dividends. Current forecasts are for a final dividend of 1.5p, making 6.0p in total for the year. That equates to a dividend yield of 5.2 per cent at the current share price of 142p. That is attractive enough for me, but after reading its latest updates I will not be surprised if current forecasts prove too conservative.

It was another good month for dividends, with a further 0.4 per cent of the value of the JIC Portfolio going ex-dividend.

Dividend appeal

The bull market rumbles and, increasingly, people I talk to are eager to tell me how much cash they have built up in their portfolios. It worries me because they are experienced investors whom I respect and I of course do not want to look stupid, being fully invested when the crash comes. Perhaps I am being greedy but I just don’t feel as nervous as everyone else seems to be. If I reduced my exposure to equities where would I put my money? I think bonds look expensive and, should inflation tick up, look exposed. Although I can see the case for gold as a store of value, I struggle with its lack of dividend-paying potential and cash, at current interest rates, loses you money in real terms every day you hold it.

Instead of trying to time the market, I am focusing my efforts on companies with attractive yields, which I think are backed by sustainable cash flow. This month, in the portfolio table, I have added an extra column showing the consensus forecast prospective dividend yield of each of my holdings. The prospective dividend yield of the whole portfolio is forecast at 2.8 per cent, even though some of the investment trust holdings such as Biotech Growth, Baillie Gifford Shin Nippon and India Capital Growth (IGC) do not pay dividends. Dividends have played an important part in the total return of the JIC Portfolio. Since January 2012, it has received dividends, all of which have been ploughed back into the portfolio, that add up to 29 per cent of the original starting value.  

The S&P 500 ended November up 14 months in succession for the first time. I’m hoping for 15 on the bounce and a good end to the year.