Introduction / background comments
Another tricky month for investors as economies Worldwide struggle with the fall out from the Russian invasion of Ukraine in terms of its impact on supply chains and inflation. In addition these macro economic concerns are reinforced by the Geo-political concerns as NATO countries ramp up their military & humanitarian support for Ukraine. This is being done despite the potential of Ukraine & other Eastern European Nations joining NATO having led to the invasion, according to the Russians. As a result they now accuse the West of fighting a Proxy war, although I guess they were damned if they did and damned if they didn't. Hopefully it might come to some peaceful resolution soon, although a long drawn out messy affair or a War of attrition seems more likely at the moment.  Markets continue to struggle against this background and as Central Banks grapple with the now non transitory inflation along with trying again to reduce the stimulus that they have been dishing out to varying degrees since the GFC and more recently during the Pandemic.

As a result Bond yields seem to have finally broken out to the upside to bring to an end (for now) the long bull run they have enjoyed since the early 1980's. I say for now as if these moves lead to an economic slowdown / recession and a market rout then it is always possible that inflation could come down quicker than expected & the tightening might not be as large as currently discounted. Some also worry about deflationary pressures resuming after the current inflation surge is over, although I'm not personally convinced by those arguments at present.

Alternatively, as in the past, Central Banks may again halt their tightening programmes and once again open the liquidity taps again if markets cut up rough and economies seem to be heading for a serious downturn. This might lead to another rally in bonds if inflation is by then showing signs of coming down again and equities might then join in the fun down the line if any or all of that comes to pass.

Of course that could be wishful thinking or it "could be different this time" to coin an expensive phrase - with more persistent inflation and Central Banks therefore having to push on with rate rises and draining liquidity to bring inflation under control despite the damage to economies and stock markets. Or there is an outside chance that they could pull off a dampening of inflation along with achieving a rare soft landing. I won't  believe in either of those until I see them, but as ever time will tell I guess.

For now the sell off in bonds and equities seems likely to continue as investors anticipate further rate rises from Central Banks and are starting to worry about / discount tougher times or a recession ahead. Having said that though some of the economic stats like PMI's and unemployment are still showing positive trends, so a recession is not guaranteed just yet, but it remains to be seen how long that lasts. 

Performance Review
April proved to be another negative month for the Compound Income Scores portfolio (CISP) which was disappointing as the FTSE All Share did manage to eek out a positive return as shown in the table at the start of this piece. Thus for the YTD the CISP is - 9.3% versus the +0.8% for the All Share.

As mentioned last month this is partly down to the make up of the CISP versus the FTSE All Share in terms of exposure to large caps. By way of illustration it just over 60% in FTSE 350 stocks and within that it is skewed towards Mid 250 stocks which have been hit harder than the big FTSE stocks. AIM and small cap holdings have also suffered bigger hits in a reversal of their previous outperformance in recent years. 

There were quite a few names that therefore suffered double digit falls and not enough risers to offset this overall. One of the bigger fallers was Ashtead, which at least was reduced in last months screening, but with the benefit of 20:20 hindsight I obviously wish I'd sold it all. Which brings me on to an update about this months screening

Monthly Screening
There were quite a few names this month which had seen their scores deteriorate sufficiently to be up for consideration for being sold. 6 of these were repeat offenders from last month, including Ashtead again, plus one recent purchase.

In the end I decided to give all of these the benefit of the doubt this month as in some cases the reasons for holding remained the same and in others like Ashtead they seemed very oversold. So I was reluctant to sell them on that basis in the expectation that we might see some mean reversion in the next month, as is often the case after a big move. In addition some of the possible replacement candidates did not look that cheap and on the flip side had pretty strong one month performance. ​Thus having put through quite a bit of turnover the previous month and as it seems hard to add much value from trading currently unless something is obviously at risk. So it seemed prudent to save on turnover in what might have been poorly timed / marginal trades. 

Just a quick note for subscribers, in case you are not aware, brief notes on the Monthly Screening and candidates that are considered on both sides of the ledger are shown in the Journal tab, but these appear below the news flow comments. Since this may not have been obvious, I have therefore moved those this month to the foot of the Transactions sheet where more logically they can then be read in conjunction with the trades actually carried out in the rows above. 

Summary & Conclusion
Another difficult month for investors as bonds and equities continue their sell offs. While for the more general public it is becoming increasingly difficult to make ends meet as inflation continues to soar and as Central Banks tighten monetary policy and look to drain liquidity. 

As a result bonds seem to have ended their long bull run for now and equities have generally entered what would be deemed a correction or even a bear market depending on which index you are looking at. This is on expectations of further action to come from the Central Banks and some rising concerns that this will likely lead to negative economic growth and a potential recession later this year or in 2023. 

Apart from a brief inversion of a yield curve last month as an early indicator other economic indicators such as PMI indices and unemployment data are not signalling trouble ahead just yet and the UK headline indices continue in a bullish trend for now as FTSE 100 stocks have performed well overall this year as Commodity producers have prospered. Outside of that the Mid, Smaller and AIM indices have all slipped into bearish downtrends to the detriment of the CISP as shown in the table at the top. 

Nevertheless I shall be sticking with the process as I believe it remains sound as demonstrated by the longer term track record of nearly 15% per annum compound returns since inception. Overall as I always say you have to take the rough with the smooth in this game and not get too carried away when things are going well nor too depressed when things are tougher. Indeed Ray Dalio of Bridgewater (one of the largest Hedge Funds in the World) said as much when he was reviewing the current state of play recently on Linkedin. 

So mind how you go and I hope markets are not being to cruel to your portfolio & it's not going down like a Led Zeppelin! However you are managing it remember not to get too down if things are tough as that is all part of the investing game and you have to learn to live with Good Times, Bad Times.

Introduction / background comments
Not a great quarter for markets or the World in fact as the terrible Russian invasion of Ukraine is on going. While Covid seems to be doing its best to continue to disrupt things despite many Countries  moving on from restrictions and trying to live with it as a mild endemic kind of thing. Coming out of that on the economic front we are facing inflationary pressures brought about by a hangover from the pandemic, the effects of the Ukraine invasion and in the case of the UK the on going issues arising from BREXIT, if I dare mention that? 

As if that were not enough we also have behind the curve Central Banks trying to play catch up and put the inflation genie back in the lamp even though that is what they wished for. As indicated by Fed Chairman Powell when he updated their policy back in August 2020 when he said they would allow inflation to run hot for some time above their 2% target. Be careful what you wish for as the old saying goes!
 
With Central Banks and the US Fed in particular now ramping up their intention to raise rate we have seen an early inversion of the 2 year to 10 year yield curve there which has historically been a reliable indicator of a forthcoming recession within the next couple of years. There has been quite a bit of debate about the significance of this at present given the Central Banks policy of financial repression by keeping short rates artificially low. 

So there is probably no need to panic about equities on the back of this just yet, but it does suggest that at some point as short rates rise then some problems may arise in the financial system. That in conjunction with the on going squeeze in living standards could then lead to a recession perhaps later this year of in 2023. However for now the economic indicators I follow and the market timing indicators for the main UK equity indices (FTSE 100, 350 & All Share) are still suggesting it is right to stay invested, although Mid Caps and Small Caps remain in a bear trend for now. Of Course you'd have to decide for yourself based on your own risk tolerance etc.

Performance Review
March was at least a positive month for the Compound Income Scores portfolio (CISP) with a +0.4% total return, although this again lagged behind the FTSE All Share which returned +1.3%. Thus in the year to date after declines in January & February the CISP has a -7.5% total return for the YTD versus the +0.5% for the FTSE All Share. See the table & graph at the top of this post which show this & performance together with longer time periods and since inception.

This recent underperformance and indeed some of the outperformance in the longer term is partly explained by the portfolio tilt towards Mid & Small cap names and away from FTSE. More of the FTSE has held up or have even gone up in the recent market conditions marking a rare moment in the sun compared to recent years when investor generally shunned them and chased tech shares in the US and elsewhere. This had left them looking pretty cheap and with a heavy exposure to Commodity names this outperformance may well continue for now. 

I suspect the Mid & Smaller cap parts of the market may, in the main, be more sensitive to an economic pressures brought about by commodity prices and problems brought on by the cost of living squeeze. So I suspect the CISP may continue to struggle against that background, but I will try and address it as far as I can with the forthcoming monthly screenings. 

Monthly Screening
Which brings me onto this months screening which did throw up quite a few names where the Scores had deteriorated enough to make me consider their position in the portfolio. There were 6 of these which I decided to keep as I am happy with their recent updates and fundamentals etc. in the current environment. One of these though, Ashtead (AHT), I did top slice given the lower score,  as it had grown to be the second largest holding, but I will run the rest for now as it seems like a quality compounder.

Aside from that I did process three natural sales based on their Scores and the fundamental outlook. These were Kingfisher (KGF), which I must admit does look fundamentally cheap, although there are question marks about the outlook on the consumer / housing front etc. While the portfolio also has another name which is exposed to some of the same categories in a more limited way, but I'm trying to reduce duplication in the portfolio and increase the diversification by business type too when carrying out transactions, unless there is a strong trend or theme I'm looking to play to a greater extent.

In a similar way the portfolio also said farewell to a more successful position than Kingfisher with the sale of Jarvis Securities (JIM). This had been a beneficiary of the boom in trading during the pandemic, but that seems to have come to an end now. While they may be a beneficiary of rising interest rates, they have seen some big downgrades and the forecast outlook is pretty flat. This one has in the past gone to sleep in price terms & I suspect it could be entering another one of those periods, although it does seem a pretty good business in terms of its financial metrics for the longer term, so I wouldn't put you off holding if you want to. In the context of the CISP this is a another situation where it also holds a similarly exposed business but in this case it is the bigger, better diversified and cheaper IG Group (IGG). So with the waning of the dealing boom by private punters and a more difficult market back ground it seems reasonable to reduce exposure to that theme, but retain IG group which at least seems to benefit from tougher markets.

The final sale was of another seemingly cheap share Barclays (BARC) which has seen its score slip on the back of downgrades post what seemed like ok results. While it may also be a beneficiary of rising rates, it could also be more vulnerable to worsening economic and market conditions. Their case was also not helped by them over issuing a ETN offering which they will now have to pay a large sum of money in compensation. So out it went as it is a bank after all.

Against those sales on the purchase side I did add a couple of financials to replace the two sold which bring in the main a different kind of exposure to markets. One was a strong recent momentum play, while the other was a much smaller more contrarian value type of play. Aside from those I added a well managed, if somewhat boring packaging distributor Macfarlane (MACF) which has traded well and continues to look cheap on the back of some decent upgrades. Aside from those I also reinvested the proceeds of the Ashtead (AHT) top slice into another quality / growth  situation which has de-rated quite a bit along with other higher rated names recently. So now seemed like a reasonable time to bring it up to an average weighting in the portfolio after their recent in line trading update seems to have reassured investors.

Subscribers will be able to see full details of the transactions in their Scores sheets. May I also take this opportunity to welcome all the new subscribers this quarter. If you'd like to join them then you can do so here. 
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Hopefully the rest of the year might be more productive for the CISP and your investments. So may I wish you well with your investing, mind how you go and don't forget to be careful what you wish for.

Introduction
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.

Performance Review
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.
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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.

Outlook Thoughts
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.