Funny things are going on in financial markets. Equities, bonds, commodities and gold all made decent gains in June. Markets are anticipating interest rate cuts and further monetary stimulus. For now, central banks and governments fear slowing growth and deflation. President Trump’s tweet of 18 June neatly summed up what’s going on: “Mario Draghi just announced more stimulus could come, which immediately dropped the Euro against the Dollar, making it unfairly easier for them to compete against the USA. They have been getting away with it for years, along with China and others.”
The European Central Bank is concerned with a lack of growth and is paving the way to print more money. President Trump, meanwhile, is determined to ensure that the US does not suffer a strengthening dollar and is upping the pressure on the Federal Reserve. The market now expects two rate cuts in the US before the year-end. Government bonds have continued to rally; the yield on US 10 Year Treasuries fell to 2.0 per cent, the lowest since November 2016. Continental European government bonds also rallied with some extraordinary moves. In Switzerland, the 30-year bond yield turned negative; one has to pay the Swiss government for the privilege of lending it money for 30 years! In the meantime, the tension between the US and Iran increased, and the spectre of a full-scale trade war between the US, China and Europe still lingers.
US markets led the way, with the S&P 500 up 6.9 per cent. The technology-heavy Nasdaq did better, up 7.4 per cent as cheap money saw investors chasing growth. European markets did not miss out, with the Dax up 5.7 per cent, the Italian MIB up 8.7 per cent, the CAC 40 up 6.4 per cent and the FTSE All-Share (Total Return) Index up 3.7 per cent. The Nikkei 225 returned 3.3 per cent, and Russia was up 7.3 per cent, helped by the resurgent oil price. Brent crude gained 4.6 per cent to $64.54 a barrel. Other commodities did well, with copper and nickel up 2.8 per cent and 5.1 per cent, respectively. Concerns about where all this might end saw gold at its highest price in six years, up 7.8 per cent to $1,413 an oz. Bitcoin, seen by some as an alternative haven to gold, also participated, up 44.5 per cent (up 224% this year).
All in all, a great first half, with double-digit returns from nearly all major equity markets, with the Nasdaq up 20.7 per cent, the S&P 500 up 17.4 per cent and the FTSE All-Share (TR) Index up 13 per cent.
Performance
The JIC Portfolio, up 1.8 per cent in June, lagged the 3.7 per cent return from the All-Share. In the first half, the JIC Portfolio gained 15.7 per cent compared with 13.0 per cent for the All-Share and since inception in January 2012 is up 185.0 per cent (14.8 per cent annualised) comparing favourably with the 87.2 per cent (8.6 per cent annualised) from the FTSE All-Share (TR) Index.
The more concentrated JIC Top 10 Portfolio had a better first half, gaining 19.3 per cent. June’s big success was Anglo Asian Mining (AAZ), which I added to the portfolio in May. It was up 19.8 per cent, helped by the gold price and some good newsflow. It published updated exploration and resource reports and a positive AGM statement. Hardman & Co issued a research note, available on its website, with a discounted cash flow valuation of 156p a share (current share price 115p). In my opinion, the assumptions it has made in its analysis seem pretty conservative.
Games Workshop (GAW), another stock added to the portfolio this year, rose 11.3 per cent, helped on its way by a positive year-end trading update on 7 June. ROBO Global Robotics and Automation ETF (ROBG) bounced back after a weak May, gaining 9.2 per cent. It benefited from the market's renewed enthusiasm for growth and is nearly back to my average purchase price last year. I continue to believe that artificial intelligence, automation and robotics is going to be a huge theme over the next decade. Picking the winners will be difficult, so I am happy to gain exposure through an ETF invested globally in the leading companies exposed to the theme. The next four best performers, up more than 5.0 per cent each, were investment trusts. Biotech Growth Trust (BIOG) was up 8.5 per cent, TR European Growth (TRG), bought in May, up 6.1 per cent, Scottish Mortgage Investment Trust (SMT), up 5.4 per cent, and Worldwide Healthcare Trust (WWH), also added in May, up 5.2 per cent.
Now the negative contributors. My old friend Taptica again had a volatile month. Having at one stage been down 40 per cent, it finished the month down 16.2 per cent. An announcement on 12 June that Uber had filed a complaint against numerous adtech companies, including Taptica, was the last straw for many shareholders. On 13 June, I attended the AGM, which I found reassuring. It generated free cash in the first half and as at 13 June had $70m of net cash. Management seemed excited about the Rhythm One acquisition, where there was scope to reduce costs and overlap, and exit unprofitable long-term contracts. With $70m net cash and valued at only 4.0 times free cash flow, there is either something very wrong or the shares are screamingly cheap; I think the latter. I should have been an assassin and sold this stock a long time ago, but having failed to wield my shotgun I was determined not to be a rabbit, so again added to my position (99.7p on 13 June). At the current valuation, a new buyback programme seemed a no-brainer to me and on 14 June it announced a $10m programme to run until 31 August. That equates to around 6.0 per cent of the market capitalisation. The shares ended the month at 116.5p, and to break from the past it changed its name to Tremor International (TRMR). I hope that works.
The other disappointing stock was Diversified Gas & Oil (DGOC). There was speculation that it was inflating profits by writing up the value of previously acquired wells and taking an overly optimistic view on the life of its wells and the cost of decommissioning. This led to a near-20 per cent drop in the share price. The company responded by posting an updated presentation on its website, stepped up its share buyback programme and announced a Q1 dividend of 3.42¢, up from 1.725¢ last year. it is currently on a forecast prospective 2019 dividend yield of 10.5 per cent (if not held in a SIPP the dividend is reduced by 15.0 per cent due to US withholding tax). I am sticking with it for the time being.
Recent activity
Foreseeing the potential for a sell-off in Diversified Gas & Oil, I sold one-third of my holding on 4 June at 124.5p only to buy most of it back two days later at 103p. On 12 June, I sold 20 per cent of my holding in Games Workshop at 5,100.51p, taking it down to 4.0 per cent of the portfolio. As well as adding to Taptica, on 13 June, I bought more Syncona (SYNC). It was standing at just a single-digit premium to net asset value (NAV). I think the weakness could be down to Neil Woodford’s funds owning 16 per cent of Autolus, the Nasdaq-listed stock in which Syncona has a 31 per cent stake. Investors are worried that Woodford is a forced seller of Autolus. I added to Duke Royalty (DUKE) on 18 June at 47p, attracted by the prospective dividend yield of over 7.0 per cent.
I’m not a huge fan of physical gold as it does not pay a dividend, but when the gold price broke above $1,392 an oz on 20 June, I increased my exposure to gold miners. I added a 3.0 per cent position in the L&G Gold Mining ETF (AUCO). This ETF gives exposure to the world’s largest gold miners, such as Barrick Gold, Newmont Mining, Newcrest Mining and Goldcorp. Over the past five years, $1,390 has, on several occasions, proved a ceiling. With ongoing trade skirmishes, increasing tension between the US and Iran and concerns about where all this money printing will end, it feels as though gold will have a sustained period of performance. With Anglo Asian Mining, my exposure to gold mining now stands at 8.0 per cent.
Thoughts on position sizing
The day Taptica fell 39 per cent, I saw a Tweet from an unfortunate holder of Taptica. He said that Taptica was his largest holding and that the price drop had wiped out his profits for the year. He went on to say that he will probably take a couple of days off from investing to reflect. I have no idea how much his portfolio was up this year, so cannot calculate how large the Taptica position was, but my guess is it was more than my 2.2 per cent in Taptica on the day of the fall. In fact, I would bet it was a lot larger than my biggest position, Baillie Gifford Shin Nippon, at 6.1 per cent.
What is the correct position size to hold in a stock? There is no correct answer. It is down to one’s appetite for risk and one’s capacity to take a knock like Taptica’s drop on the chin and carry on. There is a successful investor I know who goes for the Warren Buffett approach of putting all his eggs into one basket and watching the basket very closely. He currently holds just nine stocks, so an average of 11.0 per cent in each. I believe he has a rule not to let any holding go over 20 per cent. I admire this approach, but one has to be very confident of one’s holdings, and he is.
At the other end of the spectrum there is the chap who regularly posts his holdings on Twitter and it is like a telephone directory. The latest tweet lists 60 stocks. Having met him over the years, I believe he is a successful investor. There is presumably quite a range between his largest and smallest positions. Maybe he holds lots of small, 'taster' positions, ready to add to them when the news merits it. For me, that is too many holdings to keep on top of, but each to his own.
I currently hold 25 positions (never more than 30 or less than 20). My largest four are 5.0 per-cent-plus each, but are all investment trusts. It is highly unlikely I am going to come in one morning to an announcement that sends one of them down by 30 per cent. My positions in individual stocks vary from 4.8 per cent in Bioventix at the top end to 1.6 per cent in Vietnam Enterprise Trust. Typically, I aim to invest 3.0 per cent in an individual stock and then look for an opportunity to increase it to 4.0 per cent when I think it is due a run. A run, either due to good news or because the valuation is compelling. Once an individual stock rises to over 5.0 per cent of the portfolio, I start to feel a little uncomfortable. That does not mean I will automatically sell; if the valuation and momentum is still in its favour, I will let it run. Bioventix is a prime example. I let it grow towards 10.0 per cent of the portfolio before booking some profits.
What this means is, if the worst happens and I wake up to a nasty RNS at 7:00am, which leads to a stock halving, the most I should lose, if it is a 5.0 per cent position, is 2.5 per cent. Not nice, but in the overall scheme of things, not a disaster.
The 12 June fall in Taptica knocked 0.8 per cent off the performance off my portfolio, leaving it up 13.5 per cent in the year to date. Taptica is one of my lowest conviction ideas, which is why it is one of my smaller holdings. I think it is extremely cheap and could be an amazing opportunity. Although I added a little post the AGM, until management starts to prove that it is not cheap for a reason, I will resist the temptation to add again.
In conclusion, I think it is important to look at one’s portfolio as a whole, not get too emotional about individual holdings and avoid being in a position where one stock can do irreparable damage.
Looking forward
The main event in July for the JIC Portfolio should be RockRose Energy (RRE) shares returning from suspension. The deal has completed, and we await the prospectus. I expect the shares to return at a significant premium to the 815p suspension price. In May, nervous about the possibility of a snap UK election and there being no resolution to the current Brexit impasse, I reduced my exposure to companies directly exposed to the UK economy. I increased my exposure to overseas assets through purchases of Worldwide Healthcare Trust, TR European Growth and Anglo Asian Mining. Nothing has changed, and so far that switch seems to be paying off. In June, I went further down that road with the purchase of the gold mining ETF. I’m now fully invested with just 0.3 per cent in cash. Given the huge liquidity driving financial markets, I feel reasonably relaxed not least because of my new found enthusiasm for gold. It should hopefully offer some protection.
