So another year over and a new one just begun...as the Christmas music fades for another year it is now time I got around to writing up a year end review, so here goes.
Compound Income Scores Portfolio (CISP)
This is the portfolio I have been running to test / demonstrate the effectiveness of the Scores in identifying promising income shares with which to grow and compound my income and net worth. The chart above (which is also available on the portfolio in the site menu) shows how this has done over the 4.75 years since inception against the main UK Indices.
It demonstrates over that period that my use of the Scores has been quite effective in helping me to pick some decent shares. This has led to the portfolio doubling over the period with a total return of 102.4% or 16.03% per annum which has far outpaced the FTSE All Share which I use as a benchmark, which has provided total returns of 36.15% or 6.72% per annum.
Since I like to tilt towards better performing Mid & Smaller stocks and the Scores & the use of a broadly equally weighted portfolio help me to do this, I include the Mid and Smaller Indices for a broader comparison. It is worth noting that the Scores also help me to assess some attractive income and growth stocks which are listed on AIM (yes there are some). I haven't managed to find a source for total returns on AIM although the FTSE AIM 100 for example is up by about 55% in capital terms over this period so being able to fish from that broader pool of stocks has probably helped too, assuming I catch some good ones. So don't forget if you would like to access the Scores and see what is in the CISP then you can find out how you can do so in the Scores tab in the site navigation panel.
As for 2019, in common with many other investors I've seen out there it was a pretty good year for the CISP with a total return of +31.12% versus the +19.16% from the FTSE All Share. This is a great outcome in a year which seemed quite difficult and dangerous in the main for investors, but by keeping calm and carrying on it was able to deliver some great returns in a year quite frankly when nearly everything went up in the end, probably against prior fears.
So I won't be getting too carried away or letting that short term success go to my head as this is a long term game and I'm using a fairly "mechanical" monthly screening process, with a common sense overlay, to select the portfolio. I have to say with the outcome of the election in the UK and the expected signing of a US / China stage one trade deal this month the background seems to be a lot more helpful than seemed likely when we went through the second half of last year.
That being said though I'm sure as it is an election year in the US we will no doubt get some more surprising tweets from Donald Trump and as I write the Middle East has just flared up again. So no doubt we will have plenty of "events" to look forward to and keep us on our toes. I think the jury is still out on whether we will see a recession or if we have just passed though a mid cycle slowdown in an extended cycle thanks to low rates & QE etc. and soon to come government spending. Markets certainly seemed to be discounting this and celebrating it toward the end of last year so if that doesn't come to pass then we could be in for a rough ride again.
Market Timing Indicators.
Which brings me nicely onto a quick update on these which I keep for the UK market along side other economic indicators which might indicate an approaching turn in the cycle / recession. One of these, the yield curve, inverted last year ( remember that?) and this has usually preceded a US recession by around a year to 18 months. Nevertheless the timing indicators remained in and pushed further into positive territory in December. Thus these are again suggesting that we should remain calm and carry on investing, although as ever with an eye on news flow and "events" but without getting to panicked. As one wise old stock broker always used to say to me "Nothing is ever as good or as bad as it seems."
So with that in mind I'm going to carry on compounding for now as market timing is generally difficult to do effectively. I'm sure many found that last year when they ran to cash against the worrying background, only for markets to confound those fears making it difficult and expensive to get back in again. Which I guess begs the question why bother with the timing indicators and certainly if you are just starting out or are at the younger end of the spectrum it may not be.
In my case having been Compounding for 30 years now and being in the middle of the Spectrum I can still (just about) take a longer term view, but also might like to protect some of my gains if things should obviously cut up rough as this is what 30 years of Compounding at 16%+ per annum looks like from an indexed base of 100.
November turned out well for investors with a few potentially positive developments and consequently positive returns from equity markets around the world. Firstly there seemed to be some positive developments towards a scaling back of the US / China Trade War, although this was subsequently delayed.
Meanwhile in poor neglected UK there were some hopes of a BREXIT deal being done which then led onto the announcement of a General Election. Now while this introduces another layer of uncertainty into an already cloudy outlook, at least there were some positive looking polls for the Tories. This has led some to believe that they might be able to get a working majority and thereby "Get BREXIT done" as their campaign slogan says.
The upshot of this for the under owned UK market & the more domestic focused sectors found in the Mid Cap and Small Cap sectors, was that they enjoyed stronger gains than the rest of the market and the larger more internationally exposed blue chips as the pound also rallied a little on election / BREXIT resolution hopes. In terms of the UK Market timing signals that I calculate, given the positive returns across the board all the main indices are still above their moving averages signalling that one should remain invested.
Given the news flow and the moves seen in the Mid and Smaller Cap parts of the market these are more bullishly placed than the broader indices. This also helped the Compound Income Scores Portfolio (CISP) to a strong month - see the highlighted links for more details.
In summary the CISP returned 6.5% in the month versus the 2.2% from the FTSE All Share. For the year to date this leaves it with a total return of 21.4% versus 15.3% for the index.
On doing the screening for potential sales and replacements this month proved to be less positive. As the few names that were potential sales looked a bit marginal and I'm inclined to give them the benefit of the doubt for now given the forthcoming General Election and the likely winding down thereafter for Christmas. In addition I struggled to find many attractive looking alternatives that were not already highly rated. So I'll look to do more of a refresh in the New Year.
Talking of which that's probably it from me on here for this year, unless I get any good ideas or have any thoughts I wish to express post the election outcome. But barring that may I take this early opportunity to send Seasons Greetings and I hope that the markets are positive for you too in the next month and next year too for that matter,
Further to the last post about the possible benefits of Investment Trusts I see or rather heard the FT Money Show Podcast is talking about this too this week. The episode covers Family Trust where wealthy families like the Rothchilds hold a large stake so you can invest along side them. Coincidentally it also covers the Dividend Heroes and also the benefits of the IT structure and independent boards etc.
Along the way it also touches on investing for income and see the closed end structure as an ideal way to do this via alternative assets like property and infrastructure or Green energy etc. They did mention though that many of these (like the Green energy funds) stand on big premiums. If that sounds of interest you can listen to it here.
With premiums and discounts in mind I did notice some results from an interesting looking Property REIT yesterday, called Residential Secure income (RESI) which in common with many other REIT's is standing on a discount, around 15% in this case and offering a decent yield of around 5.4% with the price at 92p and the NAV having moved up to about 108p from launch. Unusually it invests, as its name suggests, in Residential Property let to Housing Associations, part rent part buy owners and in the main Retired folk. They are just about fully invested after coming to the market just over two years ago and are now paying their target dividend of 5p which they hope to grow in real terms over time and achieve an 8% total return. So while overall it may not be that exciting and could I guess go to a bigger discount it does seem like a reasonably attractive way of becoming a social landlord without all the hassle.
While housing is quite a battle ground in the election presumably this type of operation could face some political or regulatory threat or opportunities depending on the shape of the next government. So maybe dull and not without it's risks but seems an interesting play on residential property and the housing shortage at the affordable end at a discount with a decent and potentially index linked yield, unless I'm missing something.
I saw some good article in Money Observer recently which highlight the benefits of Investment Trusts or IT's over their open ended cousins. The table above highlights this, although worth noting that the 10 year period covered was obviously positive which will have helped those IT's with gearing. You can read the full article from which this table is extracted here if that is of interest.
You may be sceptical about this and I know that many are keen on either Indexing to avoid the risk of picking and paying for an active fund manager who then goes onto under perform. I'm sure that many hit by the Woodford fall out will be feeling that way. Indeed even the IT structure of his Patient Capital Trust didn't save investors from his poor strategy, highlighting the need to understand the risks that managers are running when selecting a fund to invest in.
Talking of risks, others I know prefer to go it alone and go their own way, often with very focused or concentrated portfolios, which is fine when things go well but could be painful when things don't. Indeed I have done that successfully myself in the past (although I'm more diversified these days) but I have been doing it in recent years with the Compound Income Scores Portfolio. This has out performed well over 4 and half years or so that it has been going (see here for details) but that has not been without some volatility along the way, although the rewards have been more than adequate to compensate for that. If you're interested in trying that yourself you can read how you can gain access to the Scores here if you'd like to use them to help you run your own income portfolio.
Aside from that the other way to go, apart from Index Trackers, would I suggest be a portfolio of quality IT's to give you a diversified and less volatile ride (than a concentrated portfolio) with a decent chance of income growth on top from a selection of the well know Investment Trust Dividend Heroes as they are known as they have grown their dividends for decades. Again see the image below from Money Observer for details of these and you can read the full article here if that is of any interest. Again you would need to investigate the strategy pursued by the manager and the markets they invest in to make sure you are comfortable with the risks they are taking.
Whatever you are doing or if you decide to go your own way or invest in Heroes, however you decide to invest in the future, watch how you go in these interesting times.
The month passed without too many alarms but with a few surprises and political shenanigans along the way. This included an unexpected deal which seemed at one point to have a chance of going through, before being scuppered by the remain favouring majority in the houses of parliament.
Market & Portfolio Returns Comments.
For UK equities this meant a pick up for the more domestically sensitive sectors and indices like the Mid 250 and Small Cap which delivered positive returns in the month. While the broader more international larger indices the FTSE All Share, FTSE 350 & FTSE 100 all saw negative returns as the effects of a relief rally in Sterling hit sentiment on some of the larger stocks and sectors. For the Compound Income Scores Portfolio, with its bias toward Mid & Smaller stocks, this meant a better month relative to the broader market as it clawed back some of the under performance from last month. The small positive return left it up by 14% YTD which is 1.2% ahead of the FTSE All Share. If it is of any interest you can see the full performance history since inception in April 2015 here and detail about the Scores which help with the stock selection here.
Market Timing Indicators & Outlook Comments.
Despite this the Market Timing indicators that I produce for the UK markets remained in positive territory to varying degrees with the 250 being the most bullish & the Small Cap Index the least with FTSE 100 in between. Given this and despite a small tick up in the US unemployment rate, no sell signal has been generated again this month. So despite all the political worries domestically over BREXIT and the forthcoming election and the on going trade dispute and global economic slowdown one should probably remain invested.
Worth bearing in mind though that the US Manufacturing ISM index remained below 50 this month (recession territory) and the US yield curve went negative a few months back (an advance warning of recession). Thus far though, despite the economic slowdown, a robust employment and wages background seems to have been sufficient to keep things ticking over kept consumers spending. Corporate spending however seems to have turned quite cautious with investment spending tailing off quite dramatically and not just in the UK due to BREXIT, while share buy backs and dividend have continued to support markets.
This has however left UK equities looking pretty unloved and good value compared to both their history and other asset classes. This also suggests it is probably worth remaining invested as if a few things turn out better than expected then there could be quite a decent rise in sterling based assets including equities. If not then at least the lower valuations than elsewhere mean they might offer more downside protection than some other markets.
Summary & Conclusion.
So we survived the often tricky October without too much harm despite all the scares along the way. Timing indicators and valuations suggest that in the UK at least one should remain invested for now. While in the UK we also have the General Election and associated BREXIT bullshit to look forward to. We are also entering a seasonally stronger period with the potential for some resolution of the political log jam, if any party can come out of the election with a working majority, big if I know. I must admit for about 5 minutes there I thought that might have been possible if the Tories had done some kind of leave pact with the BREXIT party, but Nigel Farage seems to have ruled that out now. This seems to make a split of the leave vote more likely while remain favouring parties seem to still be talking about some kind of rebel alliance and many are already talking about tactical voting (sigh).
To me it looks like a hung parliament or or perhaps some kind of remain coalition might be the end result but who knows?!