Turning risk back on

For equity markets, it was a case of what had gone up the most falling the most. The Nasdaq, which had been defying gravity over the summer months, fell 5.7 per cent. At one stage it was down more than 10 per cent from its early September high. In stock market parlance a 10 per cent drop is classed as a correction. On an intraday basis the S&P 500 also "corrected", but recovered to end the month off just 3.9 per cent. Far East markets were also off, with China down 6.4 per cent and Hong Kong 6.8 per cent. European markets fared relatively well, with the CAC 40 down 2.9 per cent, the MIB -2.4 per cent, the DAX -1.4 per cent and the FTSE All-Share -1.7 per cent. Japan was the one bright spot, with the Nikkei up 0.2 per cent. The FTSE All-World USD Index was down 3.4 per cent, but due to sterling weakness, the same index in sterling terms was off just 0.4 per cent.

In commodity markets, oil dropped back, with Brent crude off 7.5 per cent to $42 a barrel. Industrial metals were weak, with nickel down 5.6 per cent and zinc 4.7 per cent. Copper, or 'doctor copper' due to its supposed ability to predict turning points in global economic growth, was off just 1.0 per cent. 

Government bonds moved pretty much sideways. The yield on US 10-Year treasuries fell a little to 0.69 per cent. In the UK, the 10 Year Treasury yield fell to just 0.22 per cent. Gold gave up some of its recent gains, and in another correction fell 10 per cent from its August all-time high.

Performance

Both JIC portfolios had a good month, although it felt like hard work. The JIC Portfolio was up 0.9 per cent, taking this year's gain to 6.3 per cent. That compares favourably with the 19.9 per cent drop in the FTSE All-Share (Total Return) Index and a 4.1 per cent increase in the FTSE All-World GBP (Total Return) Index. Since inception in 2012 the JIC Portfolio is up 253.2 per cent (+15.5 per cent annualised) versus +58.1 per cent for the All-Share (+5.4 per cent annualised) and +184.6 per cent for the All-World GBP (+12.7 per cent annualised).

The JIC Funds Portfolio was up 2.0 per cent. In its first three months, the JIC Funds Portfolio gained 8.3 per cent compared with 5.6 per cent for the JIC Portfolio. Both did well against the All-World Index, which was up 3.4 per cent over the quarter. The star performers over the three months were Baillie Gifford Shin Nippon (BGS), up 23.4 per cent, Baillie Gifford Positive Change Fund (GB00BYVGKV59) up 16.6 per cent, VanEck Vectors Video Gaming & esports ETF (ESPO) and VanEck Vectors Junior Gold Miners ETF (GDXJ). All the holdings performed better than the FTSE All-World Index return of 3.4 per cent, apart from Worldwide Healthcare Trust, which was down 1.8 per cent. So, a good start for the JIC Funds Portfolio and it will be interesting to see if it continues to do better than the JIC Portfolio over the long term.

The JIC Portfolio achieved a positive return despite the best efforts of PayPoint (PAY), which dropped nearly 20 per cent on the last day of the month. Ofgem announced it had launched an inquiry into allegations that PayPoint had abused its position in over-the-counter payment services for prepayment energy customers. It also said that at this stage "no assumption should be made that there has been an infringement", but if found guilty, the financial penalty could be up to 10 per cent of its annual worldwide turnover. It goes on to say that it considers the seriousness of the infringement, turnover in the relevant market and other mitigating or aggravating factors when deciding the penalty. The share price reaction feels overdone, but this is likely to rumble on for some time. 

The weaker oil price impacted the two oil stocks with Serica Energy (SQZ) off 19.6 per cent and Lundin Energy (SW:LUNES) -15.7 per cent. Other more-than 10.0 per cent fallers were Anglo Asian Mining (AAZ) -15.4 per cent, Moneysupermarket (MONY) -12.3 per cent and De La Rue (DLAR) -10.7 per cent. The weaker gold price and the flare-up of skirmishes between Azerbaijan and Armenia over the disputed territory of Nagorno-Karabakh hit Anglo Asian. On a prospective dividend yield approaching 6.0 per cent and with the prospect of a special dividend in the first quarter next year, it feels like a buying opportunity. It might be however, that my risk rating should be increased from Medium to High. On the positive side, Baillie Gifford Shin Nippon was up 21.3 per cent. This trust, which invests in smaller Japanese companies, was a stellar performer throughout the first six years of the JIC Portfolio’s life, but for the past two years has struggled to make progress. It seems to have got its mojo back. When looking at its top 10 positions, it is interesting to see how many are 'techy based new economy' stocks. Many have benefited from Covid-19. For instance, top performers included companies such as M3 (leading online drug marketing platform), Dema-Can (leading online food delivery) and Bengo4 (an online legal portal).

Anglo Pacific (APF) was up 19.6 per cent with the board frustrated at its valuation, launching a £5m share buyback. It pointed to the discount to NAV, its financial strength and the dividend yield of nearly 8.0 per cent. On that yield, there is a case for it cutting the dividend and increasing the amount of the buyback. Other positives included Strix Group (KETL) up 9.2 per cent, Biotech Growth Trust (BIOG) 9.2 per cent and SigmaRoc (SRC) 9.1 per cent. 

Reducing the number of positions

Back in March, when the market was in freefall, I decided to reduce the individual stock risk within the portfolio. I did this by lowering my standard unit size from 7.5 per cent to 6.0 per cent. That led to three target weightings of 6.0 per cent, 4.0 per cent and 2.0 per cent. So Low Risk/High Reward pointed to a target weighting of 6.0 per cent, Medium Risk/High Reward and Low Risk/Medium Reward 4.0 per cent and Medium Risk/Medium Reward and High Risk/High Reward 2.0 per cent. It is debatable whether the portfolio benefited from the change, but in the bleak days of March, it seemed the correct thing to do. I think at that stage, reducing individual stock risk made sense. Six months on, we know more about Covid, the response of governments and central banks, and indeed which companies are coping, or even benefiting from the disruption. Trekking across the bogs of the Outer Hebrides during September gave me a lot of thinking time. I decided to switch back to my original target weightings. Therefore, unit size reverts to 7.5 per cent for Low Risk/High Reward, 5.0 per cent for Low Risk/Medium Reward and Medium Risk/High Reward and 2.5 per cent for High Risk/High Reward and Medium Risk/Medium Reward.

In practice, it will mean that the number of holdings in the JIC Portfolio will move back down towards 20 from nearer to 30. Hopefully, it will lead to greater clarity over which positions I have the highest conviction in, and of course, ultimately to better performance.

High Reward means I think it should make more than 20 per cent return over the next 12 months, Medium Reward means between 10 per cent and 20 per cent return over the next 12 months.

Activity

The result of the switch back to 7.5 per cent standard unit size was that nearly every position in the portfolio was below target, and most still are. One should see the five trades during September in the context of a move towards the new targets. On the 24th, I sold my position in WisdomTree Physical Gold ETF (PHAU), booking a nice profit. I used the proceeds to increase Anglo Asian Mining (132.5p), L&G Gold Mining ETF (AUCO) (2,933.7p) and Worldwide Healthcare Trust (WWH) (3,513.8p) to the new target weights. The next day, I changed the risk rating on Venture Life Group (VLG) from medium to low. Low Risk/High Reward points to 7.5 per cent, and so I used the remaining cash to add to the position (101p). Half-year results on 24 September led to further earnings upgrades. I felt justified in moving it to low risk, given the momentum in the business, the capacity to materially increase sales through its existing factory and the net cash on the balance sheet. The valuation of just 16.6 times current 2021 forecasts looks attractive to me. Especially as I think analysts will revise up forecasts. 

Readers should not see the sale of WisdomTree Physical gold as me turning cold on the metal. Given the scale of the pullback from the August all-time high, I think the sell-off is nearly complete. I continue to believe it is sensible to have some exposure to gold, hence my adding to the gold mining ETF and Anglo Asian Mining. Governments are continuing to spend, financed by ever more central bank money printing.

I reluctantly accepted the €2-a-share offer for 4basebio AG from Sparta AG. I felt that it was too risky to hold on. I was concerned that I might end up as a minority shareholder in 4basebio and that Sparta AG might not have my best interests at heart. The investment premise had also shifted. I had invested in 4basebio for its DNA manufacturing business and didn't want to end up being invested in 4basebio ex this business (the plan is to float the DNA business on Aim before Christmas). Sparta's plan to invest 4basebio's cash in developing biotech businesses is all very well, but I already have enough exposure to this area through Biotech Growth Trust and Syncona. 

Accepting the offer will raise 4.0 per cent cash, which I will put back to work, most probably increasing some existing positions to target. Depending on the sterling/euro exchange rate when I receive the cash, I should make a 7-10 per cent return. So not a disaster, just disappointing. 

Outlook

Lots going on over the next month or so, with the US presidential election and Brexit trade talks continuing. What impact they will have on the market is anyone's guess. September's correction in US equities might have done the trick in terms of expunging some of the excess optimism. Commentators often describe corrections as healthy. If it removes some of the bullishness and allows the market to move on to new highs, then healthy it is. There is, however, always the risk that it is the start of a more protracted fall. With the Federal Reserve and other central banks likely to expand their balance sheets and with the commitment to keep interest rates low for the foreseeable future, I remain optimistic and fully invested.