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Private investor's diary: Taking profits

John Rosier reports on changes made to his portfolio in May, and what the uncertainty created by the election means for his strategy
June 16, 2017

Equity markets had a good month, with many of the major indices pushing on to new highs. Global economic growth appears to be accelerating and there is increasing optimism about the outlook. Despite the general election campaign and terrorist atrocities, the UK led the way, with the FTSE All-Share (Total Return) Index up 4.4 per cent. In overseas markets, Hong Kong was up 4.2 per cent, India 4.1 per cent, Japan 2.4 per cent and Germany 1.4 per cent. In the US, 'The Donald' continued to dominate the headlines, but volatility remained at historic lows and the S&P 500 gained a further 1.2 per cent. Russia bucked the trend, down 5.6 per cent on the month, and 9.4 per cent since the turn of the year.

Gold was flat on the month at $1271 an ounce, but the oil price slipped despite Opec and some non-Opec members agreeing to extend the current production ceiling for a further nine months, through to March 2018. Brent crude slipped 1.7 per cent to $50.97 a barrel. While the equity market did not seem to worry about the election, sterling was weak, down 0.6 per cent against the US dollar to 1.287, and 3.6 per cent against the euro, to 1.146.

The JIC portfolio made progress in May, but lost some relative performance against the FTSE All-Share. It was up 2.8 per cent compared with the 4.4 per cent return from the Index. The longer-term picture looks better, with the portfolio up 16.3 per cent since 1 January, nicely ahead of the 8.1 per cent for the [ndex. Since inception in January 2012, it has returned 147.0 per cent, giving an annualised return of 18.2 per cent. Over the same period, the All-Share has returned 75.0 per cent, or 10.9 per cent annualised.

 

The JIC portfolio

Avation (AVAP), the aircraft leasing company, was the best-performing holding in May, gaining 15.2 per cent to a new all-time high on no new information. Patisserie (CAKE), owner of Patisserie Valerie, followed closely behind, gaining 13.6 per cent. It was boosted by strong half-year results for the six months ended 31 March, in which earnings per share were up by 19.2 per cent and the dividend was increased by 20 per cent. It opened 10 new stores, taking the total to 192 and generated operating cash of £9.3m. Net cash on the balance sheet at 31 March increased from £8.9m in 2016, to £16.2m, despite the cost of opening new stores.

One of the largest holdings in the portfolio, Conviviality (CVR), also pushed on to new highs, gaining 12.5 per cent, helped by a positive trading update. XLMedia (XLM) gained 11.3 per cent to new highs mid-month, and long-term favourite Bioventix (BVXP) was up 10.6 per cent, again to a new high. It reacted positively to the news that Siemens was launching its high-sensitivity Troponin test for heart attacks a couple of months earlier than anticipated. The test uses antibodies created by Bioventix, and accordingly the company will receive product royalties based on Siemens' activities in this area.

Two stocks fell more than 10.0 per cent, but luckily they were two of the smaller positions in the portfolio. Somewhat to my surprise, RedstoneConnect (REDS) was off 15.4 per cent. It raised just under £6.5m through a placing of new shares at 1.5p and acquired Anders+Kern, a systems and solutions integrator specialising in meeting room management. It looks a good acquisition for Redstone, and at £1.4m looks sensibly priced. I also welcomed its announcement of a one for 100 share consolidation, which hopefully will lead to it being viewed as a serious investment rather than just a penny share stock.

 

Activity

I spent much of May travelling in the US, but before departing on 18 May sold two holdings and added two new ones. Readers of my website will be aware that I sold my position in Revolution Bars (RBG) (2 May at 217.5p), realising a 38 per cent profit, including dividends, on my purchase last October. My timing was fortuitous given that a couple of weeks later the company issued a profit warning, and the market was merciless, driving the share price down 40 per cent on the day. The main reason it gave for the warning was cost pressures. I sold for different reasons. I started to doubt the merits of the investment after its first-half results at the end of February. Like-for-like sales growth and cash flow were, in my view, a little disappointing. In my blog of 2 May explaining my sale, I said: "When I bought back in November, it was very cheap (9.7x June 2017 with a prospective yield of 3.4 per cent). Having rallied some 35 per cent since then, I think it is fairish value (13.3x and 2.4 per cent yield to June 2017). I sold because I do not feel confident that there is enough momentum in the business and that with an average spend per customer in the high £30s it could be susceptible to a slowdown in consumer spending. Customers may trade down to save money on their night out. There is also the risk that the current fashion for cocktails could be a fad. I was lucky on timing as I could easily have held on for a few more weeks.

I took my profits in BlackRock World Mining Trust (BRWM) (on 4 and 8 May at 319p and 316p) realising a reasonable profit.

My two new holdings were Templeton Emerging Markets Investment Trust (TEM) and Lloyds Banking (LLOY), both previous holdings in the JIC portfolio. John Baron's Investment Trust column in the Investors Chronicle in early May prompted me to add Templeton Emerging Markets. He penned a compelling argument for why emerging markets had further to go, based on cheap valuations and an improving economic outlook.

During my poor 2016, one of my better decisions was buying Lloyds Banking post the Brexit vote in June. Unfortunately, I made a poor decision later in the year, selling in October for a small loss, (£150) after dividends. I bought back in May, as, along with Neil Woodford, I think Lloyds is an attractive investment. It has a strong balance sheet, a commanding position in the UK retail market, is fairly low risk and is a huge cash machine. The current prospective dividend yield is 6.3 per cent, with dividend growth of at least 10 per cent a year forecast for the next few years.

 

Alternative Investment Market

In last month's column, I provided a split of the portfolio showing that over 50 per cent by value was invested in smaller companies, including 45.1 per cent in the Alternative Investment Market (Aim). Equity Development's Gilbert Ellacombe published an interesting note last month, coming to the defence of a market that often receives a bad press. It goes some way to explaining why I am happy to have such a high exposure to this area.

Mr Ellacombe points out that in the 12 months to 30 April 2017 the Aim All-Share Index returned 32.4 per cent compared with +15.4 per cent for the FTSE 100 and +16.7 per cent for the FTSE 250. The Aim 100 Index, up 40 per cent, did even better. He argues that in recent years the composition of Aim has changed for the better, with fewer and higher-quality companies. As recently as 2011, Basic Materials (mining shares make up 80 per cent of the Basic Materials sector) and Oil & Gas comprised 47.8 per cent of Aim's entire market capitalisation. By March this year this area represented just 15.7 per cent of Aim. By contrast, Consumer Goods & Consumer Services has grown from 10.7 per cent in February 2011 to 27.8 per cent today.

At 31 March, a record number of Aim stocks were paying dividends and of the 15 Aim stocks I hold, 12 are in that position.

At the end of March 2017, there were eight Aim stocks with market capitalisations over £1bn (a record), with a further 25 over £500m, 51 between £250m and £500m, and 125 over £100m.

As well as improving quality, tax breaks have encouraged private investor participation (at the end of 2014 an impressive 30 per cent+ of Aim shares were held by individual investors). From August 2013, Aim companies became eligible for inclusion in individual savings accounts (Isas) for the first time and, in April 2014, Aim share purchases became free of 0.5 per cent stamp duty. Additionally, and perhaps most importantly, shares held in most Aim companies, if held for at least two years, are free from inheritance tax. Aim is playing an increasingly important role in private individuals' estate planning.

As well as the odd disappointment (Fairpoint and Interquest spring to mind) I have had some great successes from Aim. My three largest current Aim stock holdings are Conviviality, AdEPT Telecom (ADT) and Bioventix (6.9 per cent, 5.9 per cent and 5.4 per cent of the portfolio respectively). Conviviality, a consumer services company with an attractive 3.8 per cent prospective dividend yield, has returned 70 per cent since I bought in November 2015. AdEPT Telecom, which I have held since September 2013, is up 160 per cent and has a prospective dividend yield of 2.2 per cent. Lastly, Bioventix, held since October 2014, is up 138 per cent and has a prospective dividend yield of 2.6 per cent.

 

Looking forward

In the lead-up to the general election, I thought the best course of action was to do nothing. While it is easy to overestimate the effect of politics on markets, in light of last week's result I am reassessing my portfolio strategy.

I have heard the case that the result will be good for the UK economy as the new government is likely to loosen the purse strings, borrow more and boost public spending. Additionally, some argue that it makes a 'hard Brexit' less likely, which will be good for sterling and longer-term growth. While I have some sympathy with that argument I am concerned that, in the shorter term, politics is likely to have a greater impact on market sentiment. I think it will become increasingly difficult for Mrs May to rule effectively, as even with the support of the DUP the majority is wafer thin. My guess is that there will be another election within the next year and that the Conservatives will turn to someone with the 'charisma' to take on Jeremy Corbyn. Whether that gamble will pay off for the Conservatives I don't know. Mrs May was looking for strong and stable government, but I fear we are now faced with the opposite and are in for a prolonged period of uncertainty. Markets hate uncertainty. I suspect sterling will take the brunt and weaken further.

30 per cent of my portfolio is invested in overseas investment trusts, including TR European Growth (TRG), Fidelity Asian Values (FAS) and Baillie Gifford Shin Nippon (BGS). I am considering increasing that exposure - after all, why not add to faster-growing regions of the world? In addition, a further 26 per cent of the portfolio reports in US dollars, with little exposure to the UK economy - eg, Avation, XLMedia and Bioventix. Much of the remaining 36 per cent (I have 8.0 per cent in cash) is more dependent on the health of the UK economy. This is the area I will be going over with a fine-tooth comb.

 

Private investor's portfolio (at end-May)

 

NameEPICMarket cap (£m)% of portfolio
    
Cash depositCD 8.0
TR European Growth TrustTRG5166.8
Conviviality RetailCVR5906.7
Fidelity Asian ValuesFAS2706.3
AdEPT TelecomADT836.0
BioventixBVXP1025.5
Baillie Gifford Shin NipponBGS2784.9
Biotech Growth Trust (The)BIOG3944.4
AvationAVAP1394.3
Royal Dutch ShellRDSB174,2953.7
Imperial BrandsIMB34,7923.6
XLMediaXLM2513.4
U+IUAI2423.1
India Capital Growth FundIGC1063.0
Templeton Emerging Markets Investment TrustTEM1,9242.9
Lloyds BankingLLOY50,4552.9
Inland HomesINL1212.4
Card FactoryCARD1,1382.3
CrawshawCRAW312.2
AccrolACRL1402.1
SercoSRP1,3041.9
GattacaGATC1011.9
Faroe PetroleumFPM3301.9
RenewRNWH2781.8
PatisserieCAKE3751.5
RedstoneConnectREDS291.5
Elegant HotelsEHG781.5
Satellite Solutions WorldwideSAT401.0
Diversified Gas & OilDGOC680.9
Geiger CounterGCL 0.8
StatProSOG850.7
Fidelity Asian ValuesFASS 0.1