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. 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.
0 Comments
...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. Monthly Screening 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. |
Archives
May 2022
Categories
All
![]()
|