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Fully invested and optimistic

John Rosier reviews the lessons learnt in 2018 and explains why he is comfortable starting the new year fully invested
January 18, 2019

After 2017’s gain of 31.5 per cent, it was back to earth with a bump for the JIC Portfolio in 2018. It was down -11.9 per cent after a particularly poor December. This was slightly worse than the -9.6 per cent fall in the FTSE All-Share (Total Return) Index and leaves the JIC Portfolio up 146.2 per cent, 13.7 per cent annualised, since inception seven years ago. Over the same period the FTSE All-Share has returned +65.5 per cent, 7.5 per cent annualised.

The least said about the more focused JIC Top 10 Portfolio the better.  It was down -18.9 per cent over the year, leaving it up 17.9 per cent since inception just over four years ago, pretty much in line with the +18.1 per cent from the FTSE All-Share.

Last year saw the low volatility of 2017 give way to more normal conditions and was accompanied by a sell-off in equities. As usual, this was driven by the US with a number of factors coming together. The starting point for equities was a valuation near the top end of its historical range. We then had steadily rising US Treasury yields, with the 10-year moving from 2.4 per cent in January to 3.2 per cent in November.

With the Federal Reserve steadily raising interest rates, shorter-term Treasury rates also moved up, leading many to fear a looming US recession. President Trump introduced trade tariffs (never good for global growth), principally against China, but also on some European goods, leading to tit-for-tat responses. Another negative was a steadily rising oil price, although the collapse since early October should prove beneficial in 2019. 

Lastly, the revelation that Facebook had been making users' private information available to third parties, did not help the cause of highly valued internet companies, the so-called FANGs (Facebook, Amazon, Netflix and Google). Greater government scrutiny and regulation is on the way on both sides of the Atlantic. And I nearly forgot: in the UK we had the ongoing uncertainty from Brexit.

China saw the worst of it, down -30 per cent over the year. Continental European markets were not much better, with the DAX off -18.3 per cent, the MIB -16.1 per cent and the CAC -11.0 per cent. In the Far East, the Nikkei 225 fell -12.1 per cent and the Hang Seng -13.6 per cent. In the US the S&P 500, helped by a sharp rally in the closing days, was off -6.2 per cent. On an intra-day basis, however, on 26 December it was just over -20 per cent down on its 21 September high. A 20 per cent fall being the recognised definition of a 'bear' market. Brexit or no Brexit, the performance of overseas markets puts the -9.6 per cent fall in the FTSE All-Share (TR) in context.

Oil (Brent crude) finished the year down -18.7 per cent and industrial metals were also weak on fears of slower world growth; zinc fell -22.4 per cent, copper -20 per cent and nickel -14.5 per cent. Gold was a relative store of value in that it fell only -1.9 per cent.

 

Performance

In January 2018, I wrote that I had added two stocks in December “which I hope will help drive performance in 2018”. One of those was Taptica (TAP) and it did drive performance – but unfortunately in the wrong direction. It was one of five stocks that, in total, cost me 12 per cent of performance. Analysis by Statpro Group shows that Taptica cost me 2.4 per cent, with the share price down -65 per cent over the year. It started January with a trading update that sent the shares higher, before, some might say cynically, it placed new shares to raise £22m. Alongside raising new money, it also placed shares on behalf of the chief executive and other interested parties.

I’m never keen on companies raising cash 'opportunistically', preferring them to make the case to shareholders when needs be. The very next day, another of my holdings, XLMedia (XLM) did the same trick, raising money opportunistically after a strong 2017. A few months later, XLMedia issued a profit warning and, not totally convinced by the reasons given, I promptly sold. I made a decent profit in XLMedia having initially bought in 2015, but it cost 2.3 per cent of performance in 2018. Mr Hindsight tells me I should have sold both positions on their 'opportunistic' fund raises.

I continue to hold Taptica despite it announcing in November, that Hagai Tal, the chief executive was stepping down. He had been found guilty in a US court for certain statements made in relation to the sale of a company of which he was a shareholder and chief executive officer at its time of sale in August 2011. That was before he was involved with Taptica. Taptica was quick to appoint Rivi Bloch as interim chief executive and to reassure that trading was in line with expectations. It also announced a share buyback. I think selling now risks throwing the baby out with the bath water. On current forecasts the shares are valued at only 4.2 times 2018 earnings and are on a free cash flow yield of 23 per cent with net cash on the balance sheet.

My worst stock was Conviviality. Having covered it in detail at the time, I won’t go over the story again, but in total it knocked 4.7 per cent off performance. This was another stock where, in the nick of time, I cut the position. Had I not, the damage would have been much worse with it going into administration. Superdry (SDRY), bought in July, cost me -1.6 per cent and Card Factory (CARD), sold in March, cost me 1.1 per cent.

The positives: Long-term favourite, and my largest position, Bioventix (BVXP) contributed 2.3 per cent. This high-quality business continues to generate loads of free cash and again paid a special dividend. Dividend payments in 2018 were up 27 per cent on 2017. Serica Energy (SQZ), bought in April, contributed 1.4 per cent as it completed its deal to buy North Sea assets from BP and Total. I think this still looks extremely cheap and will be another strong performer in 2019. Faroe Petroleum has just been acquired by DNO and contributed 1.3 per cent to performance and Diversified Gas & Oil (DGOC), which continues to grow through accretive acquisitions, added 1.0 per cent to performance. Looking at that list, perhaps I should focus more on oil and gas!

Lessons from 2018? I probably say this every year, but cut my losses sooner. It’s difficult cutting losses, but certainly last year a trailing stop-loss would have saved me a lot of money. Perhaps if I took President Trump’s approach and labelled them “losers”, it would be easier.

 

Recent activity

Last month I concluded with: “The last few months have seen many attractive companies come back to tempting valuations. I will be searching for those with juicy yields and the prospect of Lord Lee’s 10 per cent per annum dividend growth.” In December I added two new stocks to the JIC Portfolio, Standard Life Aberdeen (SLA) and Taylor Wimpey (TW.). I might not get 10 per cent per year dividend growth out of them, but the yields are very attractive, and I think safe. Standard Life Aberdeen, now an asset manager, is on a prospective 2018 dividend yield of 9.4 per cent. The balance sheet is strong, and the company is buying back stock. In addition, top management, including co-chief executives Martin Gilbert and Keith Skeoch, have been adding to their holdings.

Taylor Wimpey is on a prospective yield of 11.7 per cent as it returns excess cash to shareholders. In its 13 November update it said that it expected to end 2018 with net cash of £600m and confirmed its intention to pay the 2018 dividend. It also “reiterated its commitment to return £600m by way of total dividends to shareholders in 2019, a 20 per cent increase on 2018”.  It repeated this in last week’s year-end trading update. Again, management gives me reason to be confident with substantial share buying during December. Probably not one to buy if you believe the governor of the Bank of England’s worst-case Brexit scenario of a 30 per cent drop in house prices will come to pass.

Other trades included adding to existing positions in Taptica and Superdry, which were funded by selling Fidelity Japan (FJV), reducing Faroe Petroleum by a third, and reducing Syncona (SYNC), India Capital Growth Fund (IGC) and ROBO Global Robotics and Automation ETF (ROBG) to around 3.0 per cent of the portfolio each. More detail on trades at my website www.JohnsInvestmentChronicle.com

 

Outlook: Reasons to be cheerful

I’m a natural optimist and enter the new year in that vein and am fully invested. Last month I pointed to the attractive valuation of the UK market and quoted Chris Dillow: “If past relationships hold, the yield points to the All-Share index rising 30 per cent over the next three years, with only a 6 per cent chance of it falling.” 

Another optimistic pointer from history comes from Charlie Bilello of Pension Partners. He publishes excellent charts and tables on Twitter, @charliebilello. One of many that stood out last month was a table showing the 25 most oversold days since 2001, measured by the percentage of stocks in the S&P 500 above their 50-day moving average.

The 24 December was half way down the list in 13th position. Obviously, we do not know what will happen over the next 12 months but in all the previous 24 worst oversold days the market was up a year later and by an average of 23.0 per cent. Closer to home, @compoundincome points out that buying the UK market at the current valuation has historically led to strong returns.

In the past, when the UK median price/earnings (PE) ratio was below 14 times, the 10-year annualised return has been well into double figures. At 1 January the UK market PE ratio was just 11.3! Here’s hoping history repeats itself. 

John Rosier's portfolio (at January 2019)

NameEPICTotal sharesMarket cap (£m)% of portfolio
BioventixBVXP900157.67.4
Baillie Gifford Shin NipponBGS13,635442.96
Scottish Mortgage Investment TrustSMT4,1086,8035.2
Biotech Growth TrustBIOG2,942337.85
Bloomsbury PublishingBMY8,717152.24.7
Strix GroupKET11,665267.94.4
Serica EnergySQZ12,500332.34.2
Lloyds Banking GroupLLOY30,19736,8944.2
U and I GroupUAI7,287262.24.1
Anglo Pacific GroupAPF10,000270.44
Iomart GroupIOM4,455357.64
Royal Dutch ShellRDSB61887,644.403.9
Central Asia MetalsCAML6,463382.83.8
Diversified Gas & OilDGOC11,816634.93.7
India Capital Growth FundIGC14,10998.43.3
Melrose IndustriesMRO7,5297,960.303.3
AdEPT TechnologyADT3,486823.2
Duke RoyaltyDUKE 27,44287.33.2
SynconaSYNC4,3481,768.803.1
Faroe PetroleumFPM7,570548.13
Robo-Stox Global Robotics and Automation GO UCITS ETFROBG1,060 2.9
Standard Life AberdeenSLA3,8426,500.802.7
Miton GroupMGR19,43879.12.4
TapticaTAP5,500109.62.4
Taylor WimpeyTW.5,4444,464.502
Vietnam Enterprise InvestmentsVEIL1,5671,003.501.9
SuperdrySDRY1,300383.41.6
Cash depositCD770 0.2
Geiger Counter Ltd (Subscription Shares)GCS8,045 0.1
Fidelity Asian Values PLC (Subscription Shares)FASS1,4492.50.1