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Keeping up in virus-stricken markets

John Rosier explains his strategy for managing his portfolio through the current volatile conditions
March 12, 2020

The penny finally dropped. Once cases of Coronavirus infections accelerated outside China, specifically in South Korea, Iran and Italy, markets woke up to the likely impact on global economic growth. It began to fear the worst. In the last six trading days of the month, the Dow Jones dropped 13 per cent, recording its fourth-largest percentage fall over six days in 75 years. The only worse periods were the October 1987 crash, September 2011 (9/11) and October 2008, (the financial crisis). The S&P 500 fell 8.4 per cent in February but, on an intra-day basis, it plunged 15.8 per cent from its 19 February all-time high.

Apart from government bonds, there was really nowhere to hide. The 10-year US Treasury was in demand and rose so that its yield fell to 1.13 per cent, its lowest ever. With markets seeking safety, it has subsequently fallen further, to below 1.0 per cent. Major equity markets were thumped. The Nikkei 225 was down 8.9 per cent as Japan looks to be moving into recession, the DAX was down 8.4 per cent, the CAC 8.5 per cent and Russia 14.3 per cent. In the UK, the FTSE All-Share (Total Return) Index fell 8.9 per cent, with Aim a little worse at 9.3 per cent down and the FTSE Mid Cap a little better, falling 8.6 per cent.

Commodities were hit on growth fears and none more so than oil. Brent crude fell 11.6 per cent to trade at $50.12 a barrel. A far cry from January’s brief visit above $70 a barrel. Zinc and nickel were down, but copper managed to gain just 0.9 per cent. After a poor last day of the month, gold ended the month flat. Selling of gold on Friday 28 February seems to be down to “leveraged traders” receiving margin calls in falling markets. This led to forced selling of liquid gold exposure to raise the required cash. I think the underlying argument for having an exposure to gold remains intact and, if anything, is now more robust.

 

Performance

The JIC Portfolio recorded its second-worst monthly return in its 98-month history, giving up 7.3 per cent. (October 2018 was slightly worse, dropping 8.6 per cent). From the portfolio’s peak in mid-February, it fell 11.3 per cent, its most substantial pullback since inception in January 2012. While it can be disheartening to go through a drop in one’s portfolio value, I think it is essential to keep things in perspective. Pullbacks are part and parcel of investing over the long term. The important thing is not to get too disheartened when the screen is red, and the news is grim. Equally, one shouldn't get carried away when everything one touches, turns to gold.  

February’s drop leaves the JIC Portfolio up 207. 7per cent (14.8 per cent annualised) since inception just over eight years ago. That compares favourably with the 74.0 per cent (7.8 per cent annualised) gain of the FTSE All-Share (Total Return) Index.

Two of my holdings recorded positive returns in February; Sylvania Platinum (SLP) and Syncona (SYNC). Sylvania was up 20.3 per cent following excellent results for its half-year ended 31 December 2019. This led to significant upgrades, leaving the shares valued at just 3.5 times June 2020 earnings and on a prospective dividend yield of 8.6 per cent, at 56p. Moreover, current forecasts are for a dividend in the year to June 2021 of 15¢, leading to a yield of 21 per cent. Something is wrong here; either the share price is far too low, or the price of platinum group metals is about to collapse. Syncona responded well to a quarterly update early in the month.

The list of fallers is long. Much of the selling was indiscriminate, but stocks that had performed well seemed especially prone to profit-taking. Among my holdings, SDI Group (SDI) was down 31.5 per cent, RockRose Energy (RRE) 25.9 per cent, Anglo Asian Mining (AAZ) 17.1 per cent, Serica Energy (SQZ) 15.3 per cent and Bloomsbury (BMY) down 13.7per cent. Serica and RockRose will have been hurt by falling oil and gas prices. Following the fall, RockRose stands at a 20 per cent discount to its unrestricted cash on 31 December 2019, a cash figure that will only have increased since then. Needless to say, I have hung on. Serica is also in a strong position and is discounting a continued weak gas price. It is expected to announce a maiden annual dividend of 4.0p at its April results, giving a dividend yield of around 4.6 per cent at the current share price.

Relatively good performers were in areas one might have expected to hold up. Wisdom Tree Physical Gold ETF (PHAU) was down 0.2 per cent, Biotech Growth Trust (BIOG) fell just 1.2 per cent and Worldwide Healthcare Trust (WWH) dropped 4.3 per cent. Renew Holdings (RNWH), which has long-term contracts maintaining critical infrastructure, was down 1.2 per cent; the government can’t just turn the taps off.

 

Activity

In my last monthly report, I pointed to my 11.0 per cent cash at 31 January and exposure to physical gold and gold mining of 15.0 per cent. I was cautious, believing “there is a chance that markets are underestimating the economic impact of the coronavirus outbreak”. I had a busy February, increasing my cash exposure to 16 per cent by mid month and gold exposure towards 20 per cent. I sold Strix Group (KETL) in two tranches (on 6 February at 184p and 14 February at 182p), concerned that its business would be hit by its reliance on China for supplies. On 19 February it issued a reassuring statement saying there were no immediate concerns regarding its supply chain. Time will tell whether this situation will deteriorate or not. I sold Anglo Pacific (APF) (6 February at 169.5p), worried about downward pressure on commodity prices. I sold TR European Growth Trust (TRG) (7 February at 946p) on a worsening economic outlook.

For the same reason, I halved my position in long-term favourite Baillie Gifford Shin Nippon (BSG) (20 February at 161p). I sold Scottish Mortgage Trust (SMT) (7 February at 619p). On 21 February I halved L&G ROBO Global Robotics & Automation ETF (ROBG) at 1,310.72p. In both instances, I thought they would not be able to buck a sustained drop in US equities. In all of the cases above, I expect to be able to buy back at lower prices in the coming months.

On 3 February, I made an opportunistic purchase of Sylvania Platinum at 35.6p on a 20 per cent spike down is the share price. On 14 February, I sold those shares and a few more, at 49.1p, reducing my position back to 3.8 per cent. That was poorly timed as on the following Monday it published its half-year results and the shares took off to 65p. I increased my exposure to Wisdom Tree Physical Gold ETF to 7.0 per cent (18 February at £116.11). I also added a 2.5 per cent position in VanEck Vectors Junior Gold Miners ETF (GDXJ) (7 February at £26.76). This ETF gives me exposure to a basket of smaller gold miners, which should be highly geared to an increase in the gold price. Gearing, however, works both ways, hence only a 2.5 per cent position.

During the last few days of February, I bought back the SDI shares that I had sold in mid-January at 89.25p for just 62.8p a share. On the last trading day of the month I took advantage of market weakness to add to Anglo Asian Mining at 117p, to Worldwide Healthcare Trust at 2,845p and to Sylvania Platinum at 48.4p. I bought a new position in Aberdeen Standard European Logistics Income Trust (ASLI); a dividend yield of 6.3 per cent, which should grow faster than inflation, was too tempting. Cash at 29 February was back down to 10.5 per cent.

 

My plan

As I write on Tuesday morning, markets have tumbled further. On Monday 9 March, the FTSE All-Share revisited the lows of December 2018 and was down 22 per cent from its 17 January peak. Unlike the FTSE All-Share, the S&P 500 is still some 15 per cent above the December 2018 low. There will be rallies, but for what it’s worth I think the markets will go lower before staging a sustained recovery. I think the economic news will deteriorate badly in the next few months. I also believe that the US market, especially, is being too complacent about the looming hit to company earnings.

Against that, considerable monetary and fiscal measures will be announced. Last week, the Federal Reserve cut interest rates by 0.5 per cent. Further cuts are on the way and no doubt it will resort to further “unconventional” monetary easing. Other central banks will join in and governments will announce fiscal measures to dampen the impact of Coronavirus. The Fed’s 0.5 per cent cut last week was greeted with a spike up in the gold price. 10 Year Treasury Bonds look less and less attractive on a yield of 0.75 per cent. With money essentially free, gold I think goes higher. The opportunity cost of financing a gold position is insignificant. I am maintaining my position in physical gold and gold miners.

I am a subscriber to the “time in the market, not timing the market” strategy of building long-term wealth. I am therefore eager to get my limited cash balance working again. I have set levels for individual stocks, where I think in a year I will look back and be pleased with my purchase. SDI Group at 62.8p, on a forecast PE ratio of 14.5 times April 2021 earnings, is a case in point.

I tend not to look at performance on a daily basis, but currently I am. In these volatile conditions, I think it can be instructive. My aim is for the portfolio to keep up with the market on 'blue days' and maintain its value on 'red days'. I’m having limited success, with the portfolio at lunch time on Tuesday down 1.9 per cent in March verus a 6.9 per cent drop for the All-Share and since 1 January, down 9.1 per cent versus a fall of 17.9 per cent. 

NameEPICMkt.Cap (£m)Risk  Low, Med, HighReward  Low, Med, High% of Portfolio
      
Cash depositCD LL10.5
WisdomTree Physical GoldPHAU LM8.0
Rockrose Energy PLCRRE184LH7.6
Worldwide Healthcare Trust PLCWWH1555LM6.1
Biotech Growth Trust (The) PLCBIOG354MH5.7
Anglo Asian Mining PLCAAZ136MH5.5
Sylvania Platinum Ltd SLP136M/HH5.2
Renew Holdings PLCRNWH388MH4.9
L&G Gold Mining UCITS ETFAUCO MH4.7
Tremor International LtdTRMR218MH4.7
Duke Royalty LtdDUKE99MH4.7
SDI Group PLCSDI59MH4.4
Syncona LtdSYNC1626MH3.6
Serica Energy PLCSQZ262MH3.3
Games Workshop Group PLCGAW2059MM2.7
Aberdeen Standard European Logistics Income PLCASLI199MH2.6
L&G ROBO Global Robotics and Automation UCITS ETFROBG MM2.5
Baillie Gifford Shin Nippon PLCBGS397MM2.5
VanEck Vectors Junior Gold Miners UCITS ETFGDXJ HH2.5
Bioventix PLCBVXP192MM2.4
Bloomsbury Publishing PLCBMY185MM2.3
SigmaRoc PLCSRC107MM2.2
Vietnam Enterprise Investments LtdVEIL881MM1.4