Safety is golden

Meanwhile, China was grappling with the coronavirus outbreak. Markets again took fright, concerned about its economic impact both within China and globally. In the final week of the month equity markets sold off and, except for the major US indices, moved into negative territory. Commodity prices fell dramatically. Brent crude, which had spiked up to $71 a barrel on the Soleimani news, ended the month down 14.1 per cent to $56.7 a barrel. Nickel and copper were down around 10 per cent and zinc fell 3.9 per cent.

Of the major equity markets, Hong Kong’s Hang Seng was down 6.7 per cent. As usual, the Shanghai exchange was closed for Chinese New Year. European markets were down, led by the UK, with the FTSE All-Share (Total Return) Index off 3.2 per cent. The German Dax dropped 2.0 per cent, the Italian MIB 2.7 per cent and CAC 40 2.9 per cent. In the Far East, the Nikkei fell 1.9 per cent. The US bucked the trend with the Nasdaq composite up 2.0 per cent and the S&P 500 down only 0.2 per cent. The place to be invested in January was the very largest US companies: Apple (US:AAPL) was up 5.4 per cent, Microsoft (US:MSFT) 7.9 per cent, Amazon (US:AMZN) 8.7 per cent, Alphabet (US:GOOG) 7.0 per cent and, most incredible of all, Tesla (US:TSLA), up 55 per cent. As many commentators have pointed out, elephants can gallop. The question is, for how long?

Gold, the traditional refuge in times of financial and political stress gained 4.3 per cent, and Bitcoin, the new kid on the block and a less proven store of value, gained a massive 30 per cent.

Performance

Halfway through the month, the JIC Portfolio was up 5.5 per cent, and I was feeling pretty pleased with myself. After that, it was down to earth with a bump. The JIC Portfolio ended the month down 0.1 per cent. While a little disappointing, that compared favourably with the 3.2 per cent fall in the FTSE All-Share. Since inception eight years ago the JIC Portfolio is up 231.8 per cent (16.0 per cent annualised) comparing favourably with the 91.0 per cent (8.3 per cent annualised) gain of the FTSE All-Share (Total Return) Index.

The main positive contributors to performance in January were Tremor International (TRMR), the company formerly known as Taptica International. It gained 26 per cent following a trading update on 6 January, which showed strong cash flow and net cash of $75m on 31 December. On the same day, it announced the purchase of Unruly from News Corp (US:NWSA) in exchange for News Corp taking a 6.9 per cent stake in Tremor. Rebekah Brooks, chief executive of News UK, also joined the board of Tremor. Unruly is a global, brand-safe video platform and under the terms of the agreement Tremor has agreed to advertising spend of £30m over the next three years on more than 50 News Corp titles in the UK, US and Australia. It looks a good fit and should allow Tremor to benefit from Unruly’s relationships with tier 1 brands such as P&G, Unilever, Nestle and AMEX. Bioventix (BVXP) was up 19.0 per cent after being tipped in a national broadsheet.

SDI (SDI), formerly Scientific Digital Imaging, was up 14.3 per cent on no news. Games Workshop (GAW) responded positively to interim results on 14 January which reported revenue growth of 16 per cent year on year. The operational gearing in the business led to a 40 per cent increase in operating profits. Cash generated from operations nearly doubled to £60.4m. The share price was up 8.7 per cent. Earnings forecasts for the year ending 2 June 2020 increased by around 3.0 per cent, but I suspect the actual figure will be much higher. Sylvania Platinum (SLP) gained 8.1 per cent ahead of half-year results. Wisdom Tree Physical Gold ETF (PHAU) was up 4.4 per cent, in line with the price of gold.

Detractors from performance included Serica Energy (SQZ), down 10.5 per cent after announcing that unscheduled repair work on the Bruce platform would lead to no production from the Bruce, Keith and Rhum fields for two months. The shutdown is frustrating, but in the grand scheme of things does not change the investment case. I guess a negative stance might be that with ageing oil and gas fields these sorts of events are increasingly likely. Renew Holdings (RNWH) succumbed to profit-taking following its stellar post-election rise. It fell 8.4 per cent despite announcing what looks like a sensible acquisition. It bought Agger Limited, the parent company of Carnell Support Services. Carnell provides specialist engineering services to the UK highway network. As a specialist engineering business involved in long-term contracts maintaining critical infrastructure, it looks a good fit. It gives it a position in a new market and thus another leg for future growth. Duke Royalty (DUKE) was off 7.9 per cent, Strix (KETL) -7.1 per cent, Anglo Asian Mining (AAZ) -5.6 per cent and Baillie Gifford Shin Nippon (BGS) -5.2 per cent. 

Activity

A little more active in January compared with recent months. I sold my remaining position in Avast (AVST) on 6 January at 467.9p. It had seen a tremendous rerating since I bought the position last May. It had moved from a prospective PE ratio of 13.4 times December 2019 consensus forecasts to just over 20.0 times. The timing was fortuitous given allegations towards the end of the month that its Jumpshot subsidiary had been selling sensitive browser history data to third parties. Avast subsequently announced it was winding down Jumpshot. The result was a 30 per cent drop in the share price, although it has subsequently recovered half of that fall.  

I used the proceeds from the sale of Avast to increase my exposure to gold. I added to both the Wisdom Tree Physical Gold ETF, giving me exposure to bullion, and to the L&G Dax Global Gold Mining ETF (AUCO), giving me exposure to the world’s largest gold miners. I took both positions to 5.0 per cent. The fundamentals for gold look attractive given the late stage in the economic cycle and bull market, which seems to be increasingly driven by easy money/debt. Keeping it simple though, someone once said: “to make money, find a bull market and ride it”. A quick glance at a chart of the gold price, and it’s hard to dispute that gold is in a bull market. I hope that it will give the portfolio a degree of protection in a sell-off as well as some capital appreciation. 

I reduced Bloomsbury (BMY) to 2.5 per cent on 10 January at 291p, in line with my medium risk/medium reward assessment. Somewhat prematurely, I also cut my position in Games Workshop to 2.5 per cent (13 January at 6,583p). Given a PE ratio of 28 times May 2020 forecast earnings, I had reduced my reward rating on the stock to medium. Analysts upgraded profits, so the valuation may not be as stretched as it looks. Time will tell whether I will have an opportunity to increase my Reward rating to High at a lower cost. In the same vein, I reduced my reward rating on SDI Group from High to Medium and cut the position to 2.5 per cent of the portfolio (16 January at 89.25p). The share price had risen 80 per cent since October, leaving it on a prospective April 2020 PE ratio of 25 times. A bit rich for me.

Three other buys to mention. I reduced my risk rating on Tremor International from high to medium feeling that financial risk was negligible given it had $75m of net cash and was generating money. I already had a high reward rating based on its very low valuation of only around 4.5 times earnings and cash flow. Medium risk/high reward points to a 5.0 per cent weighting for me. I got there through two trades: 10 January at 155.75p and 29 January at 201.25p. Last year the company bought back shares; I would urge them to do so again as at this rating it is difficult to think of anything else that would be more value-enhancing. I increased my position in ROBO Global Robotics and Automation ETF (ROBG) to 5.0 per cent on 14 January at 1,310.86p, believing this to be an excellent theme to play in the coming years. I also added to Sylvania Platinum on 22 January at 44.73p ahead of half-year results on 31 January. I should have waited.

Income

Given the importance of income in generating long-term returns, I think it is worth looking back at the total dividend income received by the portfolio each year since inception in January 2012. In the calendar year 2012 it was £2,519, rising to £7,027 in 2014, £11,067 in 2016, £11,328 in 2018 and dropping to £10,552 last year. In total, the portfolio has received £66,656, accounting for very nearly 20 per cent of the increase in the total value of the JIC Portfolio over the eight years. 

Outlook

Long-term members of JIC cannot accuse me of being anything but an optimist, but I admit to feeling a little more cautious. I think there is a chance that the markets are underestimating the economic impact of the coronavirus outbreak. I believe the consensus view is that, similar to previous epidemics, such as Sars, in six months all will be alright. I hope that is the case, but given the late stage of the US economic cycle, the length of the current bull market and extended valuations, there is a risk the markets will take a tumble. Of course, it is possible that continued monetary stimulus can keep the plates spinning for longer, but I think a degree of caution makes sense. At the time of writing, my cash stands at 11 per cent, and I have exposure to gold, physical and gold mining stocks of over 15.0 per cent.

The portfolio (as at 31 January 2020)