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An experimental portfolio

John Rosier turns to a few simple rules to create a new 20-stock portfolio he hopes will successfully capture their upwards rerating
September 13, 2018

A good month for both US equities and the dollar, helped by a robust economy and strong second-quarter results season. The S&P 500 was up +3.0 per cent, hitting new highs for the first time since the end of January sell-off, and, even better, the Nasdaq gained +5.7 per cent, for a 17.5 per cent return this year. Apart from the Nikkei 225’s +1.4 per cent rise, things weren’t so good elsewhere. Turkey’s largely self-inflicted woes hit both the lira and the stock market. Along with events in Venezuela and to a lesser extent Argentina, it was a reminder of the risks of emerging markets when central authorities lose control of the economy.

European markets were weak, with the Italian MIB off -8.8 per cent, the DAX -3.4 per cent and the CAC -40 1.9 per cent. As the deadline draws near for a Brexit agreement with the European Union, sterling bore the brunt, falling to the lowest level against the euro and US dollar in a year. The FTSE All-Share (Total Return) Index was off -2.8 per cent, all but wiping out this year’s gains.

While oil was strong, with Brent Crude up +5.1 per cent to $78 per barrel, other commodities saw no respite from recent weakness. Copper was off -4.6 per cent, zinc -5.6 per cent and nickel -8.5 per cent as markets fretted about the outlook for global growth given President Trump’s increasingly belligerent approach to trade. Gold continues to be dull, off -2.1 per cent to $1,206 an oz, and Bitcoin off -9.2 per cent to $7,014, which while above 2018’s low of $5,800, leaves it still struggling to regain the support that drove it up towards $20,000 in 2017.

 

Performance

The JIC Portfolio had a much better month gaining +1.5 per cent. Relative to the All-Share’s return of -2.8 per cent, it was the fourth best in the 80 months since inception of my portfolio. Since 1 January it is down -2.3 per cent, now just 2.5 per cent behind the 0.2 per cent gain of the FTSE All-Share. Four months left to get into positive territory and push ahead of the index. In the longer term, the JIC Portfolio is up +173.0 per cent (+16.3 per cent annualised) since January 2012, compared with +83.3 per cent (+9.5 per cent annualised) for the All-Share.

The main contribution to a good August was the avoidance of disasters. Central Asia Metals (CAML) was the only stock down more than 10.0 per cent. Its -10.6 per cent fall on the back of weak copper and zinc prices cost the portfolio just -0.18 per cent of performance. No huge winners during the month, just a preponderance of steady risers.

Anglo Pacific (APF) bounced back +12.4 per cent as investors started to appreciate the huge benefit to cash flow should the new owners of the Kestrel iron ore mine achieve their planned doubling of production. Serica Energy ((SQZ) gained +8.5 per cent on the news that it had bought Total’s 42.25 per cent interest in the Bruce field and 25 per cent interest in the Keith field, further consolidating its position in the North Sea. It has been structured much the same way as its earlier agreement to buy BP’s interests in the Bruce, Keith and Rhum fields. The one stumbling block is the Iranian National Oil Corporations 50 per cent interest in the Rhum field. Serica says that discussions are at an advanced stage, with both UK and US governments regarding it receiving a licence from the US office of Foreign Assets Control. This will absolve it from sanctions regarding its dealing with an Iranian corporation. Given that Rhum provides 4-5 per cent of the UK’s gas consumption there is a political imperative for an agreement. The uncertainty needs to be removed and hopefully in Serica’s favour. With 1.5 per cent of the portfolio in the stock I am prepared to take the risk believing the upside to be far greater than the downside.

Faroe Petroleum (FPM) gained another +6.7 per cent, helped by the stronger oil price and the hope that DNO, with its 29 per cent stake, will make a full bid after its six-month exclusion period ends in October. It tried unsuccessfully to requisition an emergency meeting to appoint two directors to Faroe’s board. I think that’s good news and the pressure remains on Faroe to maximise value for shareholders. Medica (MGP), the radiology reporting business, continued to benefit from July’s strong update, gaining +7.5 per cent, and publishing house Bloomsbury (BMY) bounced back +6.6 per cent.

My four trusts/exchange traded funds playing the robotics, automation, AI, technology and biotech themes, which I wrote about in length last month, had a good August. Syncona (SYNC) was up +6.2 per cent, Robo-Stox Global Robotics and Automation (ROBG.L) +5.1 per cent, Biotech Growth Trust (BIOG) and Scottish Mortgage (SMT) +4.7 per cent. In total, they comprise 18.4 per cent of the portfolio.

 

Activity

I sold 20 per cent of long-term favourite Bioventix (BVXP), reducing it to 8.0 per cent of the JIC Portfolio. It remains my largest position, but following a 50 per cent rise since March I thought it prudent to book some profits. As well as my monthly purchase of Scottish Mortgage Trust and Syncona, I added to ROBG.L, taking it to 4.0 per cent. Apart from that, in what was a quiet month, I realised a small loss on Elegant Hotels (EHG). Sterling’s weakness against the dollar is unhelpful given holidays in Barbados are priced in dollars and the UK is by far its biggest market. There is a 'value' based case for holding Elegant Hotels given its discount to net assets and an attractive yield, but trading can’t be easy and markets are currently more interested in stocks with good growth momentum. I felt I could make better use of the money and used some of the proceeds to add to positions in Miton Group (MGR) and Biotech Growth Trust.

 

An experiment

As usual, August was a quiet month, and so in between hiking in the Swiss Alps and walking The Ridgeway I had plenty of thinking time. I started a rules-based experiment to see how well a 20-stock portfolio, based primarily on momentum, would perform. I wanted to reduce emotional input to an absolute minimum. I established a new portfolio on ShareScope, into which I put a notional £100,000. Of the 20 holdings, I decided that 12 should be UK companies and the other eight, investment trusts to give me exposure to themes and overseas markets. I don’t want to be 100 per cent dependent on the UK. The rules I set for the individual companies are simple. For a stock to be added to the 'momentum' portfolio it must have a market capitalisation over £50m, its share price must have closed at a six-month high the previous evening, its prospective PE ratio must be below 25, its PEG ratio below 1.0 and it must be paying a dividend. The investment trusts just need to have closed at a six-month high, although I endeavoured to ensure a decent geographical spread. Lastly, the rules for selling are very simple; if a stock drops through a trailing 20 per cent stop-loss or closes at a six-month low, out it goes, making way for a new entry. Should a holding grow to 15.0 per cent of the portfolio, I will sell a third of the position.

Between 15 and 31 August I invested the money when stocks that met my rules presented themselves. The costs of investing the money, stamp duty and brokerage fees, amounted to £468. At 31 August, the 'momentum' portfolio had a value of £99,670. 

I included the rules on valuation to gain exposure to stocks where there might be the potential for an upwards re-rating. I am very nervous of buying very high fliers, as if they disappoint, the de-rating can be devastating. It contains some interesting stocks with strong earnings forecasts and reasonable dividend yields. The investment trusts give it exposure to the US, Japanese smaller companies, private equity, healthcare and biotech. This portfolio shouldn’t need much work and it will be interesting how it performs compared with the JIC Portfolio and the wider market. I’ll report back in six months or so.

 

Outlook

It’s nice to see US equities make up the falls seen in the first quarter and the fact that they are hitting new highs, in the face of much scepticism, seems bullish to me. Timing markets is very difficult and where the UK goes over the next year I have no idea. It’s difficult to see how a no-deal Brexit could be good for markets in the short to medium term. Sterling would probably take the brunt, although that of course is good for UK stocks with overseas earnings. Brexit negotiations are clearly a concern, but, and I know it seems unlikely, imagine waking up one morning to hear that a compromise had been reached which had enough support to get through parliament. Approaching 70 per cent of my exposure is either in overseas markets such as Japan (through Baillie Gifford Shin Nippon) or in dollar and other foreign currency exposed stocks, such as Royal Dutch Shell (RDSB), Anglo Pacific (APF) and Bioventix to name a few. Hopefully this will serve me well during the remainder of the year and into 2019.  

 

The portfolio (at 31 August 2018)

NameEPICTotal sharesMkt.Cap (£m)% of Portfolio
     
Bioventix PLCBVXP1000169.18.0
Baillie Gifford Shin Nippon PLCBGS13635526.76.6
Biotech Growth Trust (The) PLCBIOG2942463.66.0
Royal Dutch Shell PLCRDSB900116574.65.5
Scottish Mortgage Investment Trust PLCSMT37388076.15.1
Bloomsbury Publishing PLCBMY7925170.24.3
Avation PLCAVAP7852142.24.3
Faroe Petroleum PLCFPM11350559.34.1
U and I Group PLCUAI7287288.54.1
Robo-Stox Global Robotics and Automation GO UCITS ETFROBG1306 4.1
Lloyds Banking Group PLCLLOY2680742208.83.9
India Capital Growth Fund LtdIGC15854108.23.7
Iomart Group PLCIOM3682438.33.6
Syncona LtdSYNC49281762.23.2
Diversified Gas & Oil PLCDGOC118165553.1
Dunedin Smaller Companies Investment Trust PLCDNDL4333142.63.1
Anglo Pacific Group PLCAPF8585272.13.1
Miton Group PLCMGR19438112.73.1
Strix Group PLCKETL7439316.23.0
AdEPT Telecom PLCADT317186.72.8
Taptica LtdTAP3330223.52.7
Superdry PLCSDRY824973.12.4
Alpha FX Group PLCAFX17541802.3
Vietnam Enterprise Investments LtdVEIL1567999.11.7
Medica Group PLCMGP4503171.11.7
Central Asia Metals PLCCAML2930378.41.5
Serica Energy PLCSQZ8002202.21.5
Cash depositCD5272 1.3
Geiger Counter Ltd (Subscription Shares)GCS8045 0.1
Fidelity Asian Values PLC (Subscription Shares)FASS14493.30.1

  

The experimental portfolio

NameEPICMkt.Cap (£m)% of PortfolioTotal return %Price paidPE (F)Alt. RollingYield
       PEG(Forecast)
         
D4t4 Solutions PLCD4T469.45.36.317115.30.771.5
Games Workshop Group PLCGAW1151.75.36.6332024.8 3.4
Staffline Recruitment Group PLCSTAF353.85.36.1119211.10.502.2
Tatton Asset Management PLCTAM151.55.24.126024.00.542.9
Cohort PLCCHRT1705.12.340513.30.382.2
Next Fifteen Communications Group PLCNFC459.95.12.057018.20.381.3
JPMorgan US Smaller Companies IT PLCJUSC189.75.10.9327   
Polar Capital Global Healthcare Growth & Income PLCPCGH271.95.10.7219   
TT Electronics PLCTTG440.25.10.326718.70.532.4
Biotech Growth Trust (The) PLCBIOG463.65.0-0.4840   
Capital Gearing Trust PLCCGT263.85.0-0.64150   
Harbourvest Global Private Equity LtdHVPE1105.35.0-0.61384   
JPMorgan American Investment Trust PLCJAM10325.0-0.6466   
Warpaint London PLCW7L195.74.9-2.026018.60.532.2
Mincon Group PLCMCON322.14.9-2.515619.90.611.2
GlaxoSmithKline PLCGSK77395.94.8-3.8161214.00.605.1
Sainsbury (J) PLCSBRY7133.94.8-4.833916.90.613.0
JPMorgan Fleming Japanese Smaller Cos Inv Tr PLCJPS234.94.7-5.4453   
Syncona LtdSYNC1762.24.7-5.9283   
Vp PLCVP.451.74.6-9.1123011.80.382.7
Cash depositCD 0.00.00