October was another testing month for investors. Things came to a head during the last week with the US election looming and European countries succumbing to a second wave of Covid-19. Governments imposed tighter restrictions in many countries, including a second national lockdown in England. Equities bore the brunt, with European markets, not surprisingly, hardest hit. The German DAX was off 9.4 per cent, the Italian MIB, down 6.5 per cent and the CAC 40 shed 4.4 per cent. In the US, the S&P 500 fell 2.8 per cent and the Nasdaq was down 2.3 per cent.
Although equity markets gave up some of the previous months’ gains, underneath the surface it looked like optimism about the outlook was improving. US Treasuries sold off (yields rose), suggesting fears of a deflationary slump were waning. To back that up, commodities, except for oil, were strong. Copper rallied to its highest price in over two years, and nickel and zinc were up 4.5 per cent and 4.8 per cent, respectively. Although the leading indices gave up ground, smaller companies and value stocks generally did better. In the US the Russell 2000 was up 2.3 per cent, and in the UK the FTSE Aim was off only 1.1 per cent, while the FTSE SmallCap index gained 1.1 per cent. One last straw in the wind was China, where the economy is thriving again, the FTSE China Index was up 1.0 per cent.
Brent crude was off 10 per cent to $37.90 per barrel on 31 October on worries that European lockdowns would impact demand. Gold gave up 1.0 per cent, but Bitcoin seems to be on another run, gaining 25 per cent.
Both the JIC Portfolio and the JIC Funds Portfolio gave up ground but fared relatively well compared with the indices. The JIC Portfolio was down 2.1 per cent versus -3.8 per cent for the FTSE All-Share Index and -2.5 per cent for the FTSE All-World GBP Index. 2019’s gain stands at 4.1 per cent, comfortably ahead of the -23.0 per cent for the All-Share and 1.5 per cent for the All-World. Since inception in January 2012, the JIC Portfolio is up 245.7 per cent, (15.1 per cent annualised) compared with 52.1 per cent for the All-Share, (4.9 per cent annualised) and 193.6 per cent for the All-World, (10.2 per cent annualised).
The relatively new JIC Funds Portfolio was down 0.6 per cent in October versus -2.5 per cent for the All-World and in its first four months increased in value by 7.6 per cent versus 0.9 per cent for the All-World. The winners in October were JPMorgan Emerging Markets (JMG) with 7.4 per cent and BlackRock Throgmorton Trust (THRG) on 6.5 per cent. Over the four months, there have been some exceptional moves, with Baillie Gifford Shin Nippon (BGS) up 27 per cent, JPMorgan Emerging Markets 16.9 per cent and Baillie Gifford Positive Change (GB00BYVGKV59) 15.7 per cent. Worldwide Healthcare Trust (WWH) down 5.2 per cent, was the only holding that was down over the four months. The other 16 positions all beat the return of the FTSE All-World.
In the JIC Portfolio, only one stock was up more than 5.0 per cent in October. Serica Energy (SQZ) gained 8.9 per cent, helped by an improving gas price. The weak gas price impacted its first half to June. Gas dropped from 28p per therm in January to as low as 10p in March/April during the first national lockdown. Despite that, Serica managed to maintain a cash position of just over £100m due to its hedging policy and its low operating costs. In a positive operations update on 12 October, it pointed out that the gas price had staged a healthy recovery. The average price in September was 29.5p per therm and had increased to 35p in October. Higher gas prices should lead to a significant increase in cash flow in the second half and bodes well for the dividend.
The main drag on the portfolio was Anglo Pacific (APF), which despite an ongoing share buyback fell 16.7 per cent. Despite its efforts to rebalance its portfolio, it is still too highly exposed to royalty payments from the Kestrel mine in Australia. Coking coal prices remain subdued but, hopefully, with China showing robust growth and the prospect of faster global growth in 2021, the price should recover. I think the third quarter could well be the low point for royalty income for Anglo Pacific. On a medium-term basis, there should be a decent recovery. In the longer term, it will continue to use cash flow to reduce its dependence on coking coal and increase exposure to commodities with attractive prospects. In the meantime, it should maintain the dividend, leading to a dividend yield of around 8.0 per cent. Other more than 5.0 per cent fallers included Anglo Asian Mining (AAZ) -8.5 per cent, Strix (KETL) -7.6, SigmaRoc (SRC) -6.3 per cent, L&G Gold Mining (AUCO) -5.7 per cent and VanEck Vectors Junior Gold Miners (GDXJ) -5.4 per cent. The ongoing fighting between Azerbaijan and Armenian separatists in Nagorno Karabakh, together with the weak gold price, impacted Anglo Asian Mining.
Readers of last month’s column will remember that in September I reverted to the target stock weighting parameters that I had in place before the first lockdown in March. I said that it would inevitably lead to fewer positions in the portfolio, and it has. I sold four stocks completely, and added two new ones, leaving me with 24 at the end of October. It has been a complicated process whittling the holdings down to the ones where I have the most conviction. Some might think that holding fewer stocks increases the overall risk. Still, studies have regularly shown that it is the fund manager’s best ideas, (ie, the largest positions), that drive performance and the rest are just padding. The process is not over, and I see the total number of holdings falling further over the next few months.
On 12 October, I sold Moneysupermarket (MONY) at 274p, booking a reasonable profit. It was a small position, and on closer inspection, I could not see myself adding to it. Cash flow is strong, but growth is elusive. In a competitive market with the likes of Go Compare and Compare The Market, I’m not sure how much brand loyalty there is. Do most people use the site which is in front of mind following a recent advertising campaign? If they stopped advertising, I suspect their income would quickly dwindle. Luckily my timing was right as the share price dropped 15 per cent the following week following a disappointing update. On 13 October out went 4basebio AG (GER:4BSB) as I received the takeover cash from Sparta Ag, and on 26 October I sold Paypoint (PAY). As with Moneysupermarket, I couldn’t see myself adding to my position.
Again, cash flow is healthy, but growth is slow. I also feared that although transactions will have improved since the spring lockdown, they might still disappoint. I took a loss on my sale amounting to about 0.5 per cent of the portfolio. The last stock to go, was the smallest position, Vietnam Enterprise Investments (VEIL) on 29 October at 458p. As well as those four complete sales, I reduced Anglo Asian Mining to 2.5 per cent (14 October at 110p). I somewhat belatedly increased the risk rating from medium to high. It probably always should have been high, given its operations are in Azerbaijan. I reduced Anglo Pacific (APF) to 2.5 per cent (22 October at 103p) and Baillie Gifford Shin Nippon to my target weight of 5.0 per cent (29 October at 246p).
I added Central Asia Metals (CAML) to the portfolio (26 October at 172.8p). With copper and zinc strong, helped by Chinese buying, this low-cost producer looks attractive. Consensus forecasts value it at just 9.5 times 2020 earnings per share, falling to 8.1 times in 2021. Cash flow is strong, and the dividend yield is forecast at 4.8 per cent for 2020, rising to 6.2 per cent next year. The share price has good momentum, which I think will continue, helped by further earnings upgrades. I have ranked it high risk (Macedonia and Kazakhstan) high reward, hence a 2.5 per cent position. I also added JPMorgan Emerging Markets Investment Trust. Having sold Vietnam Enterprise Investments, I wanted to add exposure to a more broadly based emerging markets fund. This trust has a record second to none over one, three and five years, and I like its geographic split. China accounts for 40 per cent of the portfolio, with the likes of Alibaba and Tencent among the top 10 positions. I rank it medium risk/high reward, pointing to a 5.0 per cent target position. On 31 October it was at 2.5 per cent as I have invested all the cash in the portfolio. Something else will have to give.
I used other buy trades to take positions up to target weight. I added to De La Rue (DLAR) (13 and 15 October at 154p and 139p), Bioventix (BVXP) (12 and 19 October at 4,100p and 4,300p), BlackRock World Mining Trust (BRWM) (15 October at 417p) and Lundin Energy (SW:LUNES) (14 October at 1676p). Venture Life Group (VLG) is now one of my three largest positions at 7.5 per cent. I reduced the risk rating from medium to low, which with high reward, points to a 7.5 per cent position. I justify the low risk rating due to the net cash on the balance sheet and the strong momentum in the business. There have been several upgrades to earnings this year, and I suspect there will be more. I took it up to 7.5 per cent on 13 October at 100.8p.