Aligning ratings and weightings

At the same time, gold moved back above $1,500 (£1,172.54) an oz, gaining +2.8 per cent, and Bitcoin, seen by some as an alternative to gold as a store of value, was up +10.2 per cent. On the one hand, ‘risky’ assets did well, while on the other, ‘defensive’ assets such as gold and bitcoin also performed well. That’s what negative interest rates and the prospect of further quantitative easing does for you.

Relief that the UK did not leave the European Union on 31st October without a deal helped sterling. It rallied +5.3 per cent against the US dollar to $1.29 and 2.9 per cent against the euro to E1.16. In both cases, the highest since May this year. The FTSE 100, in contrast to overseas equity markets, had a disappointing month, falling -2.2 per cent. Given the preponderance of foreign earnings among its component companies, sterling’s rise probably accounted for much of FTSE’s weakness. Given that the FTSE 250 and FTSE Aim All-Share gained +0.4 per cent and +1.9 per cent, respectively, it would suggest that the imminent general election was not causing too much fear. A stray opinion poll or two might change that. I would expect volatility to increase as we get into the campaign proper.  

Performance

Since the excitement of the Rockrose Energy (RRE)-fuelled +8.6 per cent gain in July, the JIC Portfolio has had three pretty dull and listless months. Following falls of -2.2 per cent in August and -0.4 per cent in September, it was down a further -1.6 per cent in October. That compared with -1.4 per cent for the FTSE All-Share (Total Return) Index. The JIC Portfolio is up a creditable +20.5 per cent since 1 January versus 12.8 per cent for the All-Share. Since inception nearly eight years ago, the JIC Portfolio is up +196.6 per cent (+14.9 per cent annualised) comparing favourably with the +86.9 per cent (+8.3 per cent annualised) for the All-Share, including dividends.

Regular readers of this column will remember that back in January, I questioned whether there might not be a better benchmark with which to compare my performance. I introduced a benchmark comprising equal weights in ten funds/investment trusts. I judged them as having excellent fund managers and investment approaches, with good global and thematic diversification. The 10 components were Baillie Gifford Shin Nippon (BGS), Castlefield UK Buffettology Fund (GB00BF0LDZ31), Fidelity Asian Values (FAS), Finsbury Growth & Income (FGT), Fundsmith Equity (GB00B41YBW71), Impax Environmental Markets (IPX), Robo-Stox Global Robotics and Automation ETF (ROBG), Scottish Mortgage Trust (SMT), Templeton Emerging Markets Trust (TEM) and Worldwide Healthcare Trust (WWH). Since 1st January, that basket is up +13.7 per cent, so just ahead of the FTSE All-Share. 

The case for introducing the benchmark was that if I could not beat it, then I might as well invest in those funds and take up golf. The thought of that fills me with dread, so it’s a relief to see the JIC Portfolio, at +20.5 per cent, is well ahead at this stage. The JIC Top 10 Portfolio, comprising just 10 stocks, is up +25.8 per cent this year. This year at least, it is doing what I hoped it would; provide a better return due to its increased concentration on fewer ‘best ideas’. 

The movers and shakers last month were led by Scientific Digital Imaging, which has changed its name to SDI Group (SDI). It was up +12.7 per cent to a new high. There was no news, but maybe just an appreciation of its attractive valuation. It was on an April 2020 prospective PE ratio of 16.0x for 50 per cent earnings growth. Indeed, compared with Judges Scientific (JDG), a company whose buy-and-build business model SDI is broadly emulating, it looks super value. Judges Scientific, which has a strong fan base, is around five times the size but stands on a prospective 2019 PE ratio of 22 times. 

Tremor International (TRMR) gained +10.4 per cent, but is still down -6.0 per cent this year. I hold on to my 2.3 per cent position in the hope/expectation of better news to come from what looks like one of the best value companies in the JIC Portfolio. According to Stockopedia, it is valued at just 4.5 times 2019 earnings forecasts, falling to 3.9 times 2020 forecasts. Also, it had £50m net cash on 30 June, generates loads of cash, and the market is valuing its free cash flow at less than 7 times. I’m looking for an excuse to buy more; I need the company to surprise to the upside for once. 

Avast (AVST), a provider of computer security products, gained +6.9 per cent, again hitting new highs. It issued a positive third-quarter trading update. It’s up a pleasing +37 per cent since my first purchase in May, and I’m glad to see Investors Chronicle tipped it as a buy in the 1 November issue. The L&G Gold Mining ETF (AUCO) was up 5.5 per cent, helped by the rising gold price. 

Rockrose Energy, my largest position, led October’s fallers. It was down -13.8 per cent, although that included it going ex-dividend at 60p a share or 3.3 per cent of the share price. I think there is quite a lot of churn going on with some big holders who, given its +225 per cent gain this year, are taking profits. With it continuing to throw off cash, patience should be rewarded. On readmittance to the market in July, it had unrestricted cash of £222m comprising 94 per cent of the then share price. At 4 November unrestricted cash is estimated to have grown to £256m, 109 per cent of the current share price. The company is likely to do further enhancing deals and if not, increase returns to shareholders; either way, its value should be realised. 

Bioventix (BVXP) was off -10.8 per cent following results for the year ended 30 June. In my opinion, its valuation had got ahead of itself. Duke Royalty (DUKE) fell -8.8 per cent as it tried to raise £20m through an institutional placing and offer to private investors. It was attempting to raise £3.9m of the £20m through Primary Bid. I applaud it for including private investors but think it made two mistakes. The first was to run it over a weekend and the second, to attempt to raise so much. Back in March, SDI successfully used Primary Bid to raise just £100,000 of a total £2.5m placing. It went in minutes. Duke eventually raised £17.5m, which it has used to pay down its revolving debt facility and make a follow-on investment in an existing royalty partner. It will make further investments in the coming months and, on a prospective dividend yield of 6.8 per cent to March 2020, rising to 8.3 per cent to March 2021, looks good value to me. 

Anglo Asian Mining (AAZ), the Azerbaijani gold miner, was off -8.2 per cent and Sylvania Platinum (SLP) -7.2 per cent. Sylvania has since bounced back following Simon Thompson’s glowing report in this magazine. 

Recent activity

Just five trades in October. On the 3rd, I changed my rating of Bioventix (BVXP) from medium risk/high reward to medium risk/medium reward. For me, that targets a weighting of 2.5 per cent rather than 5.0 per cent, and so I halved the position at 3,625p. It is a high-quality company, defined by high gross and net margins, high return on capital, strong free cash generation and a strong ‘moat’. The valuation had got ahead of itself while we wait to see how quickly the newly launched High Sensitivity Troponin test for heart attacks takes off.  I hope at some stage to be able to add back to the position. 

I increased my holding in the Wisdomtree Physical Gold ETF (PHAU) to 4.0 per cent on 4 October at 11,655.75p. I completely sold out of Adept Technology (ADT) (9 October at 342p), having introduced it to the JIC Portfolio in September 2013. My total profit, including dividends, was £20,490 or 13.5 per cent of the portfolio’s starting value in January 2012. My reason for selling was mainly concern at the change in debt profile. When I first invested, it was broadly debt neutral, but over the years it has grown its debt to pursue its acquisition strategy. Cash flow is robust, and there is no reason to suggest it cannot comfortably service its debt. I just think it has become a riskier proposition. On 17 October, I added a new position, SigmaRoc (SRC) at 46.6p. It is an Aim-traded construction materials company pursuing a buy-and-build strategy under founder and executive chairman David Barrett. In early October it raised £32.8m through a placing at 41p to acquire CDH Développement, a Belgian blue limestone and aggregate business. The acquisition is expected to be immediately earnings accretive and should leave the shares on under 10.0 times earnings in 2020. Mr Barrett participated in the placing, and fellow founder and chief executive officer Max Vermorken acquired stock in the open market. I think the shares will benefit from a rerating as the story becomes better known and as it completes further deals. I have given it a rating of medium risk/medium return suggesting a 2.5 per cent weighting. I started with 2.5 per cent, but as I get to know the company better, I hope to be able to change the risk rating to low. On 24 October, I added to Duke Royalty at 43p, taking the position to 5.0 per cent, in line with my target weighting for a stock I deem medium risk/high return.

Looking forward

We are now in the traditionally stronger part of the year. Chris Dillow, of this publication, recently pointed out that since 1966, the All-Share Index has posted an average real return of 8.1 per cent from Halloween to May Day. 

However, it has lost an average of 0.6 per cent from May Day to Halloween. The UK equity market looks good value and is discounting quite a lot of bad news. With only 3.5 per cent cash I’m hoping that this seasonal effect holds true and that the ‘wrong’ election result does not throw it off-course.

John Rosier’s portfolio (at 31 Oct 2019)