December proved to be a positive month for the UK market as a “Santa Rally” finally arrived despite the on going concerns in the UK & elsewhere about the spread of the new variant of the Corona virus. It seems that although it has spread rapidly & become the dominant variant it doesn’t, as I hoped, seem to be as severe in terms of the illness that it causes. While some existing vaccine booster shots seem to reduce the risks of hospitalization further and new pills for treatment are either imminent or on the horizon. Thus it seems it was right, in the short term, not to panic last month.
As we entered the New Year traders seemed to be bidding up travel and leisure stocks which seems to indicate that the general consensus is thinking along those lines on Covid. Hopefully we might be through the worst of the latest bout by Spring / Summer without too many more restrictions and learn to live with it longer term thereafter. What follows is a review of the performance for the year & over the longer term for the Compound Income Portfolio and a few outlook comments.
If you are pushed for time you can skip the the Summary and Conclusion which tries to sum it all up briefly.
The UK market as measured by the FTSE All Share index (which I use as a benchmark) produced a total return of +4.68% in December and +18.32% for the year. The Compound Income Portfolio underperformed this month with a 3.66% return but did still have a terrific outcome for the year of +29.9%. I calculated the returns that could have been had from just holding the same portfolio from the end of last year and also one selected from the Top Scoring Stocks alone. Both of these returned around 20% for the year, so still a modest outperformance, but it does suggest that this year at least, the process of monthly screening have added value – which is what I have found in the past too So I’ll stick with that again for the year ahead.
Big winners during the year included Ashtead (AHT), Airtel Africa (AAF) and IMI which have all grown to become top 10 holdings. While Renew Holdings (RNWH) which enjoyed a re-rating and Ultra Electronics (ULE) which received a bid were also big contributors although they have since exited the portfolio. Another former position that did well was Dotdigital (DOTD) which I managed to run quite successfully by relaxing my normal value tendencies to sell on valuation ground until such time as the rating and growth rating did not marry up for me. While a risk control reduction of Sylvania Platinum (SLP) at 130p also helped as they subsequently slumped to under 100p.
Talking of slumping, spread betting company CMC (CMCX) disappointed as lockdowns lifted and subsequently sold. I regretted selling Ultra Electronics early in the bid timetable to buy Qinetiq (QQ.) as they came up with some disappointing contract news and Hikma Pharmaceutical (HIK) proved to be worthy but dull and therefore drifted off despite performing reasonably well as a business. Finally some exposure to other precious metals miners like Polymetal (POLY) and Caledonia Mining (CMCL) & the more diversified Rio Tinto (RIO) failed to pay off in price terms but they did pay good dividends which they continued to pay and increase.
Dividend / Income Commentary
Here it was encouraging to see that the income from the portfolio bounce back strongly this year after the Covid inspired cuts seen last year. The income from the portfolio increased by 125% from the 2020 figure which had fallen by 31%. This meant it was up by around 56% from the level of income achieved in 2019 & 2018 pre Covid. This represented a yield of 5.1% on the starting value of the Portfolio – so a bit better than the suggested income yield of 4.5% which expected from the Portfolio at the start of 2021. Obviously it does reflect some changes to stock positions along the way as I’m not comparing a static portfolio and there were also a few large special dividends included in that which will have boosted the total. So I wouldn’t be surprised if the headline total were to decline a little next year if some of those are not repeated.
On these dividends, it is worth pointing out that I don’t target a particular yield from the portfolio. It tends to be a residual result from the stocks selected from the top decile and held along the way, although obviously the process does direct me towards dividend paying stocks and no zero yielders are held. That’s just the way the process is managed, although others may wish to target a certain level of income or yield and try to increase that each year. Personally I do like to see my income rising each year and try to keep it up with or ahead of inflation in the medium term, which I have managed to do generally over the years.
It is worth noting that the RPI Index has grown at 3% per annum since 1989. So assuming the Government / Bank of England are not trying to inflate away all the debt that has been taken on before and during the pandemic then it might be worth factoring in inflation of at least 2.5% to 3% to your run rate calculations for real returns. It is also worth remembering that UK equities have generally returned around 5% per annum in real terms (after inflation) - so you would probably need a total return of around 7.5% to 8% to maintain the real value of your portfolio in the long term.
Fortunately that was not so difficult this year as dividends bounced back strongly as inflation came roaring back & the market was strong in capital terms. The coming year may be more difficult if inflation remains elevated and various cost pressures such as energy, labour and supply chain issues cause Companies to be more cautious on the dividend front.
Longer Term Performance – 5 years in a row and 6 out of 7 years of outperformance.
The performance for the year and the last two, three and five years and since inception back in April 2015 is shown in the Bar Chart at the start of this post above, which are more meaningful periods of time to look at rather than one month or year to date figures. It is also pleasing to note that the portfolio has now outperformed for five years in a row (a pretty rare event in itself) & six out of seven years since inception in April 2015 so that one wasn’t a full year. This line graph at the top also shows that this and that the portfolio has now almost made it back to almost to an all time high value it reached this summer and significantly outperformed all the main UK Indices. While the table below shows most of that in numbers form.
The table above shows performance year by year has been somewhat volatile, with good years for harvesting returns followed by fallow drought type years for returns. So with that in mind, given the strong returns that the Portfolio and the market have delivered recently I can’t help thinking, along with most commentators probably, that 2022 may be a more difficult year for investors than 2021 was. This is especially so given that Central Banks seem to have started tightening and draining liquidity. While investors have gone all in with US individual investor stock holdings at record highs and the inflows into US equities in the last 12 months having matched those seen in total in the previous 19 years! (Source:Merrill Lynch). Breadth has also been poor with the FAANG stocks mostly driving the headline indices, where the ratings look to be towards the top end of their range seen at previous frothy occasions like 1999 / 2000. While margin debt over there is close to all time highs, although has come of a little recently, which can apparently also be a bearish signal.
Thus I think you couldn’t rule out a rougher ride for the market in the first half with a possible normal type correction if rising rates, slowing economic growth, Corona virus issues and continued inflation hit sentiment. Aside from that the economic indicators that I follow for flagging a recession and a more serious setback in economies & markets are all in positive territory, as are the market timing indicators that I compile. So while I might be a bit more cautious short term, beyond that I think we should be OK provided the Central Banks don’t lose control & have to overdo the tightening. In the absence of that they will probably come back in yet again if things do cut up rough.
Having said that though looking at the Portfolio valuation it shows that at the end of the year it had a weighted average one year forward PE of 14.4x which is around the long term average for the market I would say. While on the yield front the forecast yield for the portfolio for the year ahead is 3.8% with forecast dividend growth of 9.5%. This suggests that hopefully I’m being too pessimistic about the outlook as in the absence of a re-rating either way the portfolio could return around 13% which is not far off the 15.2% per annum achieved since inception in April 2015. Given that the UK market overall continues to look reasonable value compared to some other international market, maybe the UK could buck the trend even if things turn out less favourable elsewhere, but as ever I guess time will tell on that.
Summary & Conclusion
So a better month for markets and although this month the Compound Income portfolio didn’t manage to outperform, it did achieve another year of outperformance against the FTSE All Share. This make it 5 years in a row now that it has outperformed and 6 out of 7 years since inception. Compounded annual total returns since then have been 15.2% versus the 5.7% from the broader market.
Income from the portfolio bounced back well to more than double from the Covid induced cuts last year and represented a 5%+ yield on the portfolio value at the start of the year versus the 4.5% that was expected. This did include a number of special dividends which may not be repeated next year and it is most unlikely that the income will double again in 2022, indeed it could drop back a little if there are fewer specials and as I do not specifically target a level of income when constructing the portfolio.
The outlook for the market looks a bit less auspicious this year, especially in the US perhaps. There private investor seem to have gone all in at a time when valuations look stretched and the market has been led by a few big tech giants. While headwinds abound in the shape of the US Federal reserve aiming to raise rates and drain liquidity to deal with high and rising inflation as the economy maybe slowing a little from its rapid Covid induced bounce back.
While in the UK the authorities and the markets face similar issues in terms of inflation and rising interest rates. While the UK market looks more reasonably valued, having lagged the US and other markets for the last few years and private investors seem less enthused. Being heavily exposed to more commodity type sectors like oil and miners may also help the UK market to perform better if commodities continue to be strong in the inflationary environment. Of course though, an economic slow down and any restrictive measures from the Chinese government could of course undermine that view with a likely dampening effect on commodity prices.
Having said all that the Compound Income Portfolio looks reasonably well placed to weather some volatility if we see it this year. As the PE is around the long term average for the market at 14x and the dividend yield close to 4% based on high single digits suggests it might be able to deliver returns close to its longer term average of around 15% per annum in the absence of any dramatic change in ratings. Thanks for your attention and persistence if you got this far or just skipped to this bit and may I wish you good luck with your investments in the year ahead no matter what markets and the Covid virus throw at us.
...that is the question as November proved difficult for investors as a new variant of Covid-19 was discovered. This was in addition to concerns about inflation, supply constraints, governments debt mountains and the Central Banks response to these. Consequently as shown in the table at the start the FTSE All share has produced a total return of -2.2% for the month and 13% for the year to date.
The Compound Income Scores Portfolio (CISP) outperformed again this month with a smaller negative total return of -1.6% and has delivered +25.3% for the year to date. Since inception in April 2015 the CISP has compounded at just under 15% compared to 5% from the FTSE All Share Index which I use as a benchmark.
Total returns over various periods and each year for both are shown in the table above, while this performance against the FTSE All Share plus the Mid 250 and Small Cap are shown in the graphs at the end. In addition, while not particularly relevant to this portfolio (as it is only invested in UK stocks) I also had a quick look at how the performance since inception compared with an I-Shares All World Tracker (SSAC). It was pleasing to see that it was also ahead of this with the 250% total return versus the 211% from the All World Index especially as the UK market seems to have performed better recently and remains substantially cheaper than many others, having underperformed badly in recent years.
Largest Positive contributors:
Airtel Africa (AAF) after excellent results late last month led to more upgrades plus further positive news flow this month on tower sales, granting of a banking licence and second closing of another investment round in their mobile payments business which has brought in $500m so far for further investment in their mobile businesses in Africa.
Safestore (SAFE) which responded positively to an excellent Q4 trading update which led to a continuation of their positive earnings estimates trend as occupancy levels and rates charged both increased further.
Jarvis Securities (JIM) bounced back from an oversold position as they announced another increased dividend this month.
Largest Negative contributors:
Sylvania Platinum (SLP) sold off after their bounce last month after the results late last month led to earnings downgrades and the platinum price sold off in the second half of the month.
Luceco (LUCE) also sold off again after a bounce last month & a trading update late in October.
Barclays (BARC) fell after their CEO was forced to resign and as the Bank of England unexpectedly decided not to raise base rates which might have been positive for banks in the short term if they had.
After a fairly active October I only decided on one sale this month as Qinetiq (QQ.) fell into the sell zone with a Score of 67, while a few others I gave the benefit of the doubt to. In the case of Qinetiq on further consideration of their recent update I was a bit spooked by the write off on a large complex contract. I recall they have got into difficulties like this in the past so perhaps it is not as good a quality company as I thought and perhaps has not changed its spots. It does look reasonable value and towards the low end of their trading range, so if you trust the management then you may be OK down here. Nevertheless on that basis I let it go and replaced it with an equally boring industrial stock which subscribers will be able to see the details of in their Scores sheets. See here if you’d like to become a subscriber to get the power of the Compound Income Scores working for you in generating new quality income growth stock ideas for your portfolio.
Summary & Conclusion
A tricky month for investors due to inflation & other concerns was capped off by the possibility of a new Covid strain taking hold, although as yet it is unclear how widespread or dangerous this might become. It is also unclear if current vaccines will work against it. I am encouraged however that virus manufacturers seem confident of coming up with a vaccine for the new variant within 100 days. So either way it doesn’t seem that much to worry about as either it will or won’t be a bad and dangerous variant and if it does there should be another jab along shortly. In addition I thought viruses were supposed to become less dangerous the more they mutate, but I'm not a viroligist so maybe I’m being complacent there? I don’t know and I don’t think anyone else does either but as Corporal Jones in Dad’s Army used to say in Dad’s Army and as Coldplay sang – Don’t panic or if you're more of a Smiths fan then I guess you could Panic.
The CISP continues to perform well in both an absolute and relative sense this year to date even if it had a negative return in November. Having limited the trading this month I may undertake more trades and rebalance the portfolio a little when we move into next year.
Seasons greeting to any one who happens to be reading this & I hope you get to have a great Christmas with all your family and loved ones if that proves possible.
Compound Income Scores Portfolio Performance
October didn’t turn out to be such a dangerous or spooky month as it has done in the past or as Mark Twain once joked. The FTSE All share produced a total return of +1.8%, while the Compound Income Portfolio saw a return to outperformance this month with a total return of +2.4%. This leaves the portfolio with a total return of +27.3% in the year to date which is some 11.7% ahead of the FTSE All Share which I use as a benchmark.
Meanwhile the longer term performance of the Compound Income Scores Portfolio compared to the index is shown in the bar chart graph above. It is pleasing to note that the portfolio has compounded at just over 15% per annum since inception just over 6 years ago, which is also around 10% ahead of the FTSE All Share. See the graph at the end of this post for comparisons with other UK Indices like the FTSE Mid 250 and FTSE Small Cap.
Top contributors to this months outperformance were Luceco (LUCE) & Sylvania Platinum (SLP) as they bounced back from particularly steep falls recently having announced Quarterly updates which seemingly reassured investors. The negative side of the attribution ledger was headed by Qinetiq (QQ.) as their updated disappointed on the back of Geo-political and short term supply chain issues which led to some small downgrades. Admiral (ADM) also tacked backwards for the portfolio this month for no apparent reason other than perhaps the fact that Munich Re placed around 12 million shares from their strategic stake at 2940p. While City Of London Investment Group (CLIG) featured on the negative side this month as the former founder Barry Olliff reduced his stake again at the 550p level and the earnings estimates continued their inexplicable yo-yo run with downgrades this month after last months upgrades. Seemingly one house may be marking to market and currency adjusting on a month by month basis maybe?
British American Tobacco (BATS), EMIS, & Paypoint (PAY) all featured again this month together with Renew Holdings (RNWH) as holdings with scores in the second quartile & as part of the process I therefore consider whether they should remain in the portfolio or if there might be better quality or cheaper alternatives available. Of these I decide to give BATS and EMIS the benefit of the doubt again as their scores were still not that far into the second quartile. BATS remains cheap as they continue to manage the decline of tobacco products and invest in new vaping products & the NHS even approved the use of their Vaping Products recently to help those trying to quit smoking, so that could be a drag on as well as a puff to BATS profits I guess. While EMIS continues to trade well as reported in the results recently and they are confident of hitting their full year targets. So I’ll continue to run that one for now as a quality compounder for even though the rating has got a bit richer, although it and BATS did both underperform last month.
As Paypoint came up yet again I decided to get back to following the process as their score remained anchored around 50, although I was sorely tempted to to hold it again ahead of the H1 results in November. These could still be good and lead to upgrades for the full year – or not as the case may be. So I wouldn’t put you off holding them if you want to. That’s just the way the process is supposed to be applied – so I’m getting back to that and locking in a total return of around 20% from Paypoint since it was purchased for the Portfolio in May this year. Indeed Selling Strix (KETL) on a similar basis last month worked out fortuitously as the shares subsequently fell on the back of some chunky directors sales.
Renew Holdings (RNWH) looked a more finely balanced call as their Score was 67 and they also have results due shortly after a recent positive update, although somewhat surprisingly this has led to some downgrades in the last month. While it seems OK and the results should be fine, I decided to sell this one too given it has re-rated to a fairer looking rating. I also have some concerns about their balance sheet and the way in which they finance their business plus the fact that they are quite acquisitive and seem to have had quite a few write off's subsequently along the way in the past. I could of course be too cautious there, so again feel free to carry on holding if you are so minded to do so.
In addition to the two natural sale candidates which I pushed the button on this month, since I have a lot of performance in the bank this year, I also decided to sell a couple of other higher scoring stocks too. The rationale here being that it was possible to switch into higher Scoring similar alternatives which looked better value.
One was City of London Investment Group (CLIG) mentioned earlier in the performance review. This has been a good performer for the portfolio and again I wouldn’t put you off continuing to hold it. I chose however to switch into one of their larger competitors which has also undertaken an acquisition and is also struggling to grow its assets. It is however trading slightly cheaper than CLIG on traditional value measures and around half their level in terms of its pricing to AUM, although the difference in profitability levels they are currently making may explain some of this.
The second relative value switch I undertook was by selling dot Digital (DOTD) which has been a big winner for the portfolio and nearly trebled since it was acquired in April last year. Now I know this goes against all the advice of running your winners, although that is what I had done already by relaxing my usual valuation biases to get to this position. My natural value tendencies just felt offended with this one on around 60x PE, with an earnings yield of less than 2% and a dividend yield of under 0.5%. They also have results due which should be good given their last update, but unless there are dramatic upgrades on the back of those I think the shares could be vulnerable like other highly rated stocks that have come under pressure recently given rising interest rates on the back of higher inflation. Or failing that going sideways for a while to grow into the rating perhaps.
The stock I switched into, while still a bit rich for my own personal value tendencies, looks to be better value than DOTD after a recent positive update and massive upgrades ahead of their own results due soon too. So I guess time will tell if any of these prove to worthwhile. Subscribers will have seen full details of these in the transactions and the stocks that were purchased against them in the transactions and portfolio sections of their sheets along with brief bullet explanations in the Journal section.
Summary & Conclusion
After a disappointing end to the summer in the UK last month we have had a better start to the Autumn in markets and also for the Compound Income Scores Portfolio as we approach a traditionally stronger seasonal period.
I don’t have a lot to add to last months Macro type comments about the inflation outlook as that seems to remain a feature despite the slight fall back in the head line rate in the UK last month. Consequently some eyes are on Central Banks to see what the say and do with regards to easing back on QE or even raising rates perhaps in the case of the Bank of England. While the budget passed by without any further hits to investors.
I say some eyes as markets seem to have remained frothy (especially in the US) as they have rallied again towards their highs and some speculative rubbish and SPAC’s seem to be taking the lead again despite stretched valuations over there. I guess all we can do in poor old Blighty is be thankful that our market looks better value as it has been so far off the pace that it looks quite cheap and has big exposure to the non ESG sectors like oils and miners plus a fair share of Banks that it might just hold up better in a sell off if we’re lucky.
Any way as this is already over a thousand word post I’ll leave you there with the graph of the longer term performance that I promised at the beginning as a picture paints a thousand words and a couple of music videos. Otherwise may I wish you good returns from your investments this month and hope that it doesn’t rain too much in November wherever you are.
Just a brief mid month update again this month as we have had a bit of news flow from a couple of Gold mining related shares which are in the portfolio. Firstly we had Caledonia Mining (CMCL) with their Q3 production update. This saw record production levels of just under 19,000 ounces of gold in the quarter which was 25% up on the same quarter last year. They also firmed up their full year production guidance to the top of the range at 65 – 67,000 ounces as they approach their 20,000 ounces a quarter target.
This meant they were confident in reiterating their production target of 80,000 ounces for 2022 too. This comes after their major investment in the central shaft in their main mining asset but has also allowed them to pay increasing dividends and start exploring further expansion opportunities as announced recently.
This has been a slightly disappointing / frustrating holding, although the dividend increases have been good. Nevertheless it may repay some patience as long as the gold price can maintain the levels it has traded at this year. On that basis it trades very cheaply on 4x PE with a 5% yield. Now I’m sure gold mining stocks are not to every ones taste or risk appetite or for widows and orphans and I have surprised myself by holding some of them these past couple of years. Nevertheless the bull case remains the cheap valuations and the geared play they offer on the gold price if that should take off and break out again above say $1850-1900 in the current inflationary environment. The downside risk would come if gold should breakdown instead through support around $1700 which could then usher in quite a bit of weakness I suspect.
The second update came as expected from one of this months new holdings Capital Limited (CAPD) the mining services company which was the value stock even cheaper than the housebuilder which was bought for the portfolio this month. Their Q3 update read well with their revenue guidance for the full year increased by around 8% and the interim dividend was raised by 33% from 0.9c to 1.2c. They were also positive on the outlook for sustained strong demand from their largely African Gold mining customer base, given the the gold price (as discussed above) remains at close to decade long highs.
The shares have responded positively to this update this morning and look like they are trying to breakout of the top of their recent trading range between 73p and 84p. If they can manage to do this and sustain it then (see chart below) this should open up the possibility of a run up towards the 95p to 100p range where some resistance from old historic highs back in 2011 might kick in perhaps. Nevertheless prior to any estimate changes on the back of today’s increased guidance the shares continue to look very cheap on 7x PE with a modest but growing yield of around 2% based on the current full year dividend forecast of 2.4c.
Meanwhile if that's not enough for you here are some Golden oldies at the end of this piece for you to enjoy or not as the case may be.
Compound Income Scores Portfolio Performance
So the brief spell of Summer like weather gave way to a more soggy end to the month and so it proved in the Stock market too. The FTSE All share after a strong start in line with the weather sold off mid month before recovering somewhat toward the end and returned -1% for the month as a result. This relapse in the market came as there were some concerns about a Chinese property developer going bust and that being a Lehman type moment for the Chinese economy. The authorities there seem to have that under control though, but on going inflation worries and supply constraints in certain areas also weighed on sentiment more generally.
Meanwhile the long run of outperformance by the Compound Income Scores Portfolio since last November finally came to an end in a very disappointing fashion as it returned – 5.9% on the month. The Portfolio has outperformed by over 10% in the year to date with a total return of 24.4% and it has compounded at just over 15% per annum since inception just over 6 years ago.
It is therefore perhaps not too surprising, given the strong run it had prior to this, that some underperformance at some point was probably inevitable. In addition the FTSE 100 held up better than the Mid and Small cap parts of the market where the portfolio has been and remains overweight. That’s just the nature of this investing game and you have to take the rough with the smooth as I always say and not get carried away when things are going well and equally not get panicky or depressed when you have a bad run. As long as you have confidence in your process and are prepared to accept some volatility in your capital in the short term for potential gains in the longer term, which is after all what investing is all about.
There were quite a few contributors to the poor performance this month with 6 stocks underperforming by more than 10% on either fundamental news flow or profit taking in the main. The two worst examples were CMC Markets (CMCX) which fell by around 30% on the back of a poor trading update / profits warning as markets became calmer over the summer and they saw some relapse from the extra trading they had seen in the previous quarters and last year when the pandemic was in full swing.
The other big faller to a similar extent was Luceco (LUCE) which succumbed to a heavy bout of profit taking as their excellent results didn’t lead to any further upgrading of forecasts. This profit taking was probably also prompted by their honesty in admitting that they had seen an extra boost from Covid trading and highlighting cost pressures, although they have been able to deal with those thus far. Their Score fell back to the lower end of the top quartile as they did see a few small downgrades on the month but it stays in the portfolio on that basis and it now also looks better value on a mid teens PE with a well covered 2.5% or so yield.
On the positive side of things there were not too many, but S & U (SUS) put in a good performance after their trading update which led to upgrades which I covered in the mid month update post. While City Of London Investment Group (CLIG) responded well to their full year results reported in mid month which led to some upgrades. While the 10% increase in the dividend for the year was also presumably well received given the dividend background surrounding the pandemic.
British American Tobacco (BATS), EMIS, Strix Group (KETL) & Paypoint (PAY) all featured as holdings with scores in the second quartile this month & as part of the process I therefore consider whether they should remain in the portfolio or if there might be better cheaper alternatives available. Of these I decide to give BATS and EMIS the benefit of the doubt as their scores were not that far into the second quartile. BATS remains cheap as they continue to manage the decline of tobacco products and invest in new vaping products.
While EMIS continues to trade well as reported in the results recently and they are confident of hitting their full year targets. So I’ll continue to run that one as a quality compounder for now although the rating has got a bit richer. I also decided to keep Paypoint again as they enter their close period ahead of the H1 results in November. A further director purchase by the General Council and Head of Compliance just before that helped to sway my decision, while the coming energy price hikes should help to boost their declining bills paying business.
I did however decide to let Strix Group (KETL) go as a bit like Luceco, even though they did report good results they also struck a note of caution on current market conditions and saw a few small downgrades. In addition the rating was not that cheap on still over 21x PE and with a Score of less than 50. Nevertheless it does appear to be a good quality business with a well protected dominant market position, so I wouldn’t put you off holding it for the long term. That’s just the way the Scores process works and it also felt like the time to rotate into some better value given the inflation / interest rate outlook. With the proceeds from this sale and some cash which had accumulated from dividends over the summer I was able to add a couple of better value situations.
One was a housebuilder, despite my own personal reservations about the timing of this, but as several had appeared towards the top of the list I decided to follow the Scores even if they may be a bit rear view mirror in this case. Housebuilders will probably never be highly rated given their cyclicity, but they currently look fairly cheap within their usual 7 to 10x PE rating ranges. This probably reflects concerns about over heating post the ending of the stamp duty holiday, affordability, plus labour costs and materials pricing and availability. Against that interest rates remaining low (for now) and the on going supply demand dynamics continue to offer support. So again I’d leave you to decide if this is a sector you want to participate in. There was also a good Podcast from Money Week which featured an interview with Gary Cannon of Phoenix Asset Management, who had some interesting comments on the builders and remains a bull of the sector.
The other value stock I added, was even cheaper than the housebuilders and subscribers will have seen the details of this in their Scores sheet. In addition to this I also decided to sell CMC Markets (CMCX) on the back of their profits warning (even though it did not score outside the top quartile) and switch into the similar IG Group (IGG) where I prefer the business model and it scores more highly than CMC having had a positive update last month in contrast to CMC.
Summary & Conclusion
After a disappointing end to the summer in the UK we also had a disappointing start to the Autumn in markets and also for the Compound Income Scores Portfolio. This relapse in the market came as there were some concerns about a Chinese property developer going bust and that being a Lehman type moment for the Chinese economy. On going inflation worries and supply constraints in certain areas also weighed on sentiment more generally.
There seem to be concerns that this will retard the on going economic recovery and some of these pressure like supply shortages, commodity price increases and shortages of labour seem likely to put pressure on corporate margins which may well cause the market to continue to struggle in the short term until this picture becomes clearer. Some suggest that this could presage another leg of outperformance for value stocks in the short term if rates rise (or bonds sell off) on the back of higher inflation as hinted at by the US Federal Reserve.
With that in mind I used this months Screening to add a couple of more value orientated shares to the portfolio after taking profits in the more quality growth situation, Strix Group – which had enjoyed a re-rating during its time in the portfolio. While in the UK more widely, the market, for once, seems better placed with its bigger exposure to energy and commodity sectors.
While the UK economy seems to be suffering badly from the after effects of the Pandemic, the resultant supply shortages and the squeeze on energy prices. As a result stagflation fears have stirred given the hit to incomes and coming benefit cuts and tax rises. As a result some fear we might face a Winter of discontent much like the 1970’s which saw three day weeks and power cuts which I remember from my childhood. Despite this politicians have insisted there are no fuel shortages, that Christmas will be fine and that we won’t see power cuts even though some industry representatives claim otherwise.
Given that and the inflation outlook, bonds remain a no go area for me and so personally I continue to rely on a mix of equities and other real & alternative assets to try and maintain and grow my capital and income in real terms. I would highly recommend reading the recent final results from Ruffer Investment Company in this regard and particularly the Investment Managers comments starting on page 19.
After a recent visit to Thatcher’s farm to see their Cider production facilities, it put me in mind of Mrs Thatcher’s comment from the last time we had stagflation & as Maggie May have said "There is no alternative" in terms of sticking with equities. They are simply the best way for me, although I saw that Tina Turner has decided to cash in her royalties which may be the best way for her at her at the age of 81, although I do have a few Hipgnosis Songs Fund (SONG) as part of my alternative assets exposure.
Any way that’s all for now as I must get off down to the shops and get some candles, a frozen turkey before they sell out or go up in price. I’ll leave you with some music appropriate to the above comments.