Sticking with equities and gold

This tremendous US performance was despite a surge in COVID cases in some states. Optimism about the economy waned a little. The 10 Year Treasury yield fell back to the March low of 0.55 per cent. Many expect it to fall further, perhaps to 0 per cent if deflation takes hold.  With a deteriorating outlook, but with very cheap money, investors were happy to pay up for stocks such as Apple and Amazon, which seem to be benefiting from COVID.

Gold also profited from increased nervousness about the outlook. It was up nearly 10 per cent and ended the month just short of all-time highs.  Many people fear that increased government debt around the world will eventually feed through to higher inflation.  Others believe that in a no-growth world, where other asset classes struggle, gold represents a store of value. Also, the opportunity cost of holding gold is virtually zero when other assets classes yield so little. Gold has worked well as a hedge during these uncertain times. It doesn't feel the right time to be realising profits just yet. 

Performance:

During July, the JIC Portfolio made further progress, and the JIC Funds Portfolio got off to a good start. The JIC Portfolio was up 0.6 per cent, nicely ahead of the 3.6 per cent drop in the FTSE All-Share (TR) Index and a 1.0 per cent fall in the FTSE All-World (TR) GBP Index. Year to date the JIC Portfolio is up 1.6 per cent v minus 20.5 per cent for the All-Share and minus 0.3 per cent for the All-World. Since inception in January 2012, the JIC Portfolio is up 237.3 per cent, (15.2 per cent annualised) comparing favourably with a gain of 57.0 per cent for the All-Share, (5.4 per cent annualised) and of 172.5 per cent for the All-World, (12.4 per cent annualised).

In its first month, the JIC Funds Portfolio was up 2.3 per cent. The top three contributors were VanEck Junior Gold Miners ETF (GDXJ) up 22 per cent, L&G Gold Mining ETF (AUCO), up 16.8 per cent, and Baillie Gifford Positive Change Fund (GB00BYVGKV59) up 9 per cent. The worst performer was Worldwide Healthcare Trust (WWH) which was down 6.4 per cent.

The JIC Portfolio also benefited from its exposure to gold. In addition to the ETFs also held in the JIC Funds Portfolio, it holds Wisdom Tree Physical Gold ETF (PHAU), Anglo Asian Mining (AAZ) and Blackrock World Mining Trust (BRWM). Anglo Asian Mining, the Azerbaijani gold miner, was up 15.0 per cent and Sylvania Platinum (SLP) gained 22 per cent, helped by a resurgent platinum price. Sylvania also announced encouraging Q4 figures. The full-year update is in a month or so, with all eyes on the dividend. SDI Group (SDI) rallied 11 per cent after reassuring full-year results. The outlook statement was positive with it expecting to make further value-enhancing acquisitions during the coming year. Wisdom Tree Physical Gold was up 10.6 per cent and Blackrock World Mining, 7.5 per cent.

Three positions performed particularly poorly. Anglo Pacific fell 11.8 per cent, impacted by weaker coking and metallurgical coal prices. Hopefully, prices will recover as demand picks up in H2. Lundin Energy's (SW:LUNE) Q2 results were a little below consensus on the revenue front leading to a 10.4 per cent drop in the share price over the month. Earnings were robust, benefiting from lower Norwegian tax and it achieved record quarterly production.  Moneysupermarket (MONY) was off 9 per cent.  The outlook statement, although confident about longer terms prospects, sounded a note of caution about the second half.

Activity:

Just six trades during July, although that included weeding out three stocks on the last day of the month. I sold Tremor International (TRMR), Duke Royalty (DUKE) and Watkin Jones (WJG). The first two recorded the second and third largest monetary losses in the eight and half year history of the JIC portfolio. It was a strangely cathartic experience to rid the JIC Portfolio of these troublesome positions. I was thinking about the overall shape of the Portfolio when I read Chris Dillow's column in the Investors Chronicle. He concluded that "Portfolios are like garages, they need a regular clear out".  

My concern is that for all the talk of a V-shaped recovery, the time taken until the economy regains February's peak is moving further out. Fears of a second wave of COVID, the imposition of quarantine on those returning from abroad and of regional lockdowns, could further impact confidence and economic recovery. When will the economy get back to pre-COVD levels? Q1 next year? I suspect later. There are many questions to which we do not know the answer. Will car sales ever recover to pre-COVID levels? Is there a risk people say, "my next car will be electric, so 'I'll run the existing one for another two years or so?" With many people discovering home shopping, will High Street sales recover to pre-COVID levels? What is the outlook for office property given there could well be a permanent reduction in the amount of time people spend in the office? Finally, with furloughing being wound down, what is the outlook for unemployment come the end of the year.

I'm not becoming bearish on the equity market. With Treasury and Gilt yields heading towards zero and interest rates set to stay low, I don't see an alternative. I'm attempting to position the portfolio in stocks that will benefit from the "new normal" and not to companies where the financial or operational risk is high. Reluctantly I concluded that Tremor, Duke Royalty and Watkin Jones fell into that category.

I like Duke Royalty's business model but am concerned that it could suffer from a more muted recovery. There must be a risk that some of its royalty partners struggle to resume royalty payments. In some cases, they might suffer a permanent diminution in value, leading to write-downs at Duke Royalty. Management is doing all the right things, but I think the risks have increased. I hope I'm wrong and will keep an eye on it but feel I can better use the money released elsewhere. Tremor International's last results were not very encouraging with the business being impacted by the lockdown more than I had anticipated. I have stuck with Tremor for too long, pointing to its cheap valuation. The reality is, few others seem to appreciate the "value" I see. It appears to have an issue of trust with the market. My patience has run out. I asked myself if I would I buy it now if I didn't already own it? The answer was a resounding no. I added Watkin Jones to the Portfolio in March. It is a quality company achieving a high return on capital. The year ahead, however, looks to be challenging with fears about the numbers of students, especially from overseas, attending university this coming academic year. Watkin Jones can and will adapt its business model, but that will take time. Again, would I buy it now if I didn't already own it? No. For the record, I sold Tremor International at 137.8p, Duke Royalty at 21p and Watkin Jones at 140p.

Inevitably, when realising a loss, there is a risk of looking stupid. Duke Royalty has done just that in pretty short time! Last week it issued a trading update which the market clearly liked with the share price, as I write, some 35 per cent higher than my selling price. That has cost the Portfolio about 0.7 per cent of total performance. One never gets every decision correct, (selling Games Workshop (GAW) back in April, or RockRose Energy (RRE) in June was not very smart). The aim must be to position the portfolio how one sees fit, and according to one's investment approach, and hope that in the round, the Portfolio does well.

I increased De La Rue (DLAR) to my target weight of 2.0 per cent by taking up my allocation in the open offer at 110p and by buying in the market at 122.5p on 17 July. Forecasts are for around 16p of earnings for the year ending March 2022. The rating of 8.1x March 2022 earnings for a recovery stock, looked far too cheap to me. I have it as High Risk/High Reward, pointing to a 2.0 per cent position for me. On 21 July I trimmed the position in VanEck Vectors Junior Gold Miners to 3.0 per cent at 3848p.  I used the cash released to increase PayPoint (PAY) to target 2.0 per cent on 22 July at 575.8p. PayPoint's Q1 results to 30 June were resilient in the face of COVID. The valuation looked attractive with a prospective dividend yield of 5.6 per cent, giving me the confidence to increase the position.

Cash as the end of the month stood at 7.0 per cent. I intend to bring other positions within the Portfolio up to target weight and perhaps add a new stock.

Outlook:

I make no change to last month's view. With interest rates looking increasingly likely to stay low for longer and the prospect of nominal yields on government bonds moving into negative territory, I see no alternative to equities. The yield on the 10 Year Gilt has fallen to 0.15 per cent or -1.4 per cent in real terms! Low rates should allow equities to command higher ratings. I continue to try and position the Portfolio towards companies which I think will come out of COVID 19 in a stronger position. In case I'm wrong, I'm sticking with my 15 per cent plus exposure to gold, and gold miners.