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.