Introduction
We have reached the half way point in the year & perhaps in the bear market as I speculated in my last post. It was apparently one of the worst six months in markets for the last 50 years. We might see another bear market rally in the next few months if all the pessimism has been over done in the short term and as we enter the summer doldrums, but of course it could still get worse before it get better too as we see more rate rises & a potential recession become a reality perhaps.

Forecasting the market though is quite frankly a bit of a mugs game, but for now at least the bear trend seems firmly in tact and spreading further, the headline indices look to have rolled over gently in a top formation, while there could well be worse to come in the next earnings reporting season, but as ever time will tell.

Market timing Indicators
Having said that, the Market timing indicators that I maintain (another mugs game perhaps) have all now turned negative, with this months falls finally dragging the larger headline indices such as FTSE 100, FTSE 350 & FTSE All Share into bear territory below their moving averages. In the past research had found that it was worth ignoring this signal and only selling out when and if other indicators turned negative or indicated a likely recession. So while the ISM indices in the US remain above 50 & US unemployment has not yet turned up this suggests it may still be ok to remain invested for now. 

Nevertheless with recession widely anticipated it seems likely that these indicators will turn negative before too long, by which time the market may well have discounted all that and be going up again as by then, it will be discounting a recovery, once again demonstrating the futility of trying to time the market perhaps? Indeed this is what we saw in the Covid sell off as these indicators turned negative near the lows, but then that was in unusual circumstances and the authorities stepped in with support in double quick time, whereas this time around they have limited flexibility.

Portfolio & Market Returns
June was pretty poor month with the FTSE All Share providing -5.98% total return and  hence -4.57% year to date. Against that the Compound Income Scores portfolio also fell but for the first time this year did actually manage to outperform the index by falling less and providing a total return of -5.59%. So a small glimmer of hope there, but one swallow does not a summer make, as this was largely down to the unexpected bid for EMIS (EMIS) which soared by nearly 50% on the back of it. 

Longer term this leaves the portfolio with -16% returns year to date & now lagging the index YTD and over 1 and 2 years. So quite a lot of damage in the short term, but given the bias it has towards mid, smaller cap & AIM names which currently make up roughly 80% of the portfolio, this is perhaps not so surprising as Mid 250 is -19.4% TR & Small Cap Index -15.1%  TR YTD. While the All AIM index is down by 28% in capital terms this year. So they have all seen much greater falls than the FTSE 100's -1% TR thanks to its higher exposure to more resilient oil and mining names this year. By the same token the portfolio benefitted from that tilt in prior years and thus the longer term track record is still looking good with total returns of 14% per annum since inception in April 2015 versus the 5% or so from the Index.

Over that time period it is interesting to note in the chart at the top that the Mid 250 has now underperformed the All Share Index in total returns terms. That is certainly a turnaround from previous experience, but probably reflects the greater domestic exposure of Mid cap names and possibly a BREXIT effect? Small Caps remain well ahead, but I guess they could still play catch up to the downside perhaps if the bear market continues and broadens out, although there have been some pretty painful losses in some Small cap and Aim names already as seen in the index returns mentioned above and as I'm sure some readers may already be painfully aware. Of course some of the worst pain has been felt in previously excessively exuberant areas such as meme stocks, tech stocks and dare I say Crypto, but then I don't do crypto!

I am however happy to stick with good value quality income stocks which are forecast to increase their dividends. The current Compound Income Portfolio of 29 stocks currently trades on a weighted average year one forecast PE of 10.6x with a net yield of 4.45% assuming they deliver the forecast 10% dividend growth, which should just about keep up with the rampant inflation we are seeing this year. Looking at the income ledger the portfolio has earned  about half of the forecast income for the year at the end of June so seems on track to deliver the expected income, although the running yield is now higher due to the fall in capital values in the first half. 

On a personal note my net worth has held up a little better, being down by 11.5%, although it is notable that this translates to a fall of 16.5% in real terms once you factor in the effects of the current rampant inflation. While the income from my portfolios is up by 3.3% in the half. So I can live with that even if the current inflationary episode is detracting from my efforts to grow my capital and income in real terms this year at least, although it comes after many years when that was the case. 

Monthly Screening
Having minimized turnover recently by giving some stocks where their Scores had slipped the benefit of the doubt, I decide to try and get back with the process and put through a few more trades this month. Having said that I still gave the benefit of the doubt to a few names where  based on the Scores it looked quite marginal and also where they had news flow due in then next month or so.

One example of this was the recruiter Robert Walters (RWA) which has de-rated significantly to historically low levels compared to their history. While in their last update they were still trading well & I'm conscious that a more specialised competitor of theirs S-Three upgraded their full year outlook recently. On that basis I've held onto it as the market seems to have moved to discount a downturn which may not yet have appeared in their business, but I guess it could down the line when and if unemployment turns up in a recession presumably. Having said that it is also possible that they could still do ok form the on going labour shortages and rising wage pressures coming from the inflation problem we have at the moment.

Of those that I did sell one for me was a more straight forward call - B & M European Value (BME) which had a Score of just 42. I say easier because despite their recent update maintaining their Ebitda guidance, I still suspect that they may have a profits warning in them as their sales and margins seem likely to come under pressure as the boom from Covid that they enjoyed seems to be unwinding. On top of that it is often a bad sign when a founder either chooses to or is forced to step back from the business. Superdry (SDRY) and Ted Baker (TED) spring to mind as recent examples of that. We have also seen problems for US retailers having to de-stock, but maybe B & M are a bit smarter with their buying perhaps.

In addition to that looking at their margins & rating versus other retailers like Tesco, JS, Kingfisher & Halfords covering the same kind of categories they are involved in, it seems their margins are out of line and their rating, even though it has come down, still looks rich compared to those competitors unless they can maintain their margin premium, which I have doubts about, as discussed above . To replace that I bought some M. P. Evans (MPE) which I had ducked previously but which was now again a top scoring stock and offering better value than B&M as they benefit from the firmer pricing for their Palm Oil production, although the price of that has come off recently & some government interference, hence the set back in the price presumably. 
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Another sale that I struggled with a bit more was in Ashtead (AHT) where I had top sliced successfully earlier in the year and given the benefit of the doubt to previously ahead of their finals. These were fine and they had a pretty confident outlook statement and suggested further progress this year as their business is now more diversified than it was the last time they saw a recession and less geared too, although still with a fair bit of debt. Thus with the de-rating that had already occurred I was tempted to try and look through that & sweat it out. In the end as they had still seen some downgrades I let the Score of 70 guide me & switched in to a more UK cyclical name which Scores better and offers better value.

That was brick maker Forterra (FORT) which has already demonstrated pricing power this year, has some self help and organic growth investments and where the outlook for demand and supply still seems fine for now as house builders still seem to pumping out houses for now. They also seem to be coping ok with energy prices too, but I guess that could still become a bigger problem in the future perhaps & a big recession could also clobber them down the line too I guess. 

Aside from that I made another less straight forward relative value switch. In this case I decided to take profits in Cerillion (CER) which I had also acquired as a relative value switch out of Dot Digital (DOTD) before it collapsed last year. My thinking here was although it seems to be trading well it has seen some downgrades after the interims as they warned about the possibility of potential timing delays in their lumpy contracts. If that comes to pass I feel it could be vulnerable to a sharp correction given the relatively high 28x rating as we have seen many other highly rated stocks under the cosh this year, which this one seems to have escaped for now given their expected growth. Against that I switched into a former holding Auto Trader (AUTO) which had drifted back recently after decent results & a positive outlook statement . This had left it with a better Score & value than Cerillion with a  sub 20x PE and around twice the yield. Again time will tell if that was wise or not.

Summary & Conclusion
So we have had a very poor first half to the year with very few places for investors to hide as bonds joined in the falls along with equities. So even the traditional 60:40 balanced fund has suffered this year. Only players majoring in oil stocks and commodities or successful traders / macro investors are likely to have seen much in the way of gains this year. While I get the impression most smaller investors have suffered similar or worse falls as their focussed portfolios skewed towards small caps have been hit hard by the developing bear market. 

It remains to be seen if we will see another bear market rally or indeed if we may have seen the worst already. As per my last post it looks like we might have further to fall or another leg down if earnings start to disappoint and a recession is confirmed. That could set us up for the market to bottom at some point in the second half if investors have capitulated and Central Banks led by the US federal reserve stop raising rates or even start cutting again as a recession takes hold. 

Indeed bond markets have staged a rally recently as they have started to try and anticipate that kind of outcome. Of course it remains to be seen if any of that comes to pass or if the Central Banks have to keep on going if inflation refuses to peak out. I think the best I can say is to borrow the phrase from J.P. Morgan I think it was, that prices will fluctuate. Mind how you go, good luck with your investing in current markets and here's to hoping for a better outcome in the second half of 2022 and beyond. 

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.

 Compound Income Scores Portfolio Performance
So more blue in evidence on investors screens this month as UK equities continued to rise and thereby provided total returns of +1.1% as measured by the FTSE All Share which I use as a benchmark for the Compound Income Scores Portfolio (CISP). This did better than the market again this month with a +2.6% total return and thereby continued its winning streak against the index this year and over all periods since inception.

That actually makes it six month in a row since November last year, although I should probably point out that this is more clawing back a sharp underperformance that the portfolio saw in November 2020 on the back of the vaccine inspired rally when many financially challenged and low quality names led the way. Nevertheless it is good to see the portfolio now pulling further ahead having made up the underperformance seen in November as the market has perhaps focused more on fundamentals again and maybe started to question how great the re-opening benefits will be in some cases. If it is of interest you can see the full performance history here. 

Monthly Screening
With practically a years worth of outperformance in the year to date, I decide to do some portfolio tidying in addition to the regular sells that were suggested by the Scores. This involved trimming back a couple of big winners that have been run successfully.

The first of these Sylvannia Platinum (SLP) has gone up 3.6 times since purchase in October 2019 and as such it has grown to become the largest holding in the portfolio and has been flirting with a 10% weighting in recent months. Thus I decided to reduce it on risk control grounds. Now call me a wimp, as I know some people like to run with massively concentrated portfolios, which is fine if you are comfortable with that, but that's not how I roll as I like to run with a broadly equally weighted portfolio of around 20 to 30 positions. As this one still looks cheap and continues to Score very well it has been maintained as the largest holding, just not 9 to 10% any more.

The second reduction of a still high Scoring stock was done on valuation grounds and involved Dot Digital (DOTD) which was bought in April 2020 based on its Score and as a SaaS business with 90% recurring revenue I felt it would  be resilient to the Covid crisis & could even be a beneficiary. Since then it has gone up 1.5x and re-rated and I feel that the rating has got a bit rich for my tastes with a PE of > 50x seeming expensive for the single digit growth that is currently forecast. The yield is also now < 0.5% and the EBIT/EV yield is also looking rich too at 2%. On that basis and given the current trend for switching away from expensive tech / growth stocks and towards more cyclical recovery / growth plays I feel OK with going against the old adage of running your winners, although in this case I have retained a position as despite the valuation it still Scores in the top decile.

Aside from these there were two sales based on their Scores with Avast (AVST) also confirmed by the new treble momentum trends that I mentioned in my last post. The other one Mondi (MNDI) was suggested  as a hold on those trends so I wouldn't put you off holding it if you do. It has however been coming up as a potential sale for a few months now and having given it the benefit of the doubt a couple of times I decided to let it go as part of this month more active trading round as it Scores pretty averagely across the piece. 

The proceeds from all these sales gave sufficient fire power for three new positions which takes the number of holding up to 30 which is the upper end of my preferred range. The new positions did however all bring something different  to the portfolio and help with the diversification which after all is the whole point of a more broadly based portfolio, but as I say each to their own if you want to do it differently. 

Summary & Conclusion
Another positive month for UK equities and the CISP  as the recovery rally which has continued to gather pace since the vaccine news in November last year shows no sign of flagging despite some concerns about inflationary pressures. 

Given the out performance by the portfolio this year and the extent to which some winning holdings had moved I took the opportunity for some portfolio house keeping in terms of risk reduction and profit taking on valuation grounds in addition to the normal sales thrown up by the monthly screening process (see above for more details). This leaves the portfolio with decent exposure to the factors underpinning the Compound Income Scores and it still looks to be offering a decent mix of value and growth with the overall PE being 16x with a 3.6% yield for the current year based on forecast dividend growth of 11% which excluding any rating change tends to suggest that the portfolio could still deliver close to its compound return since inception of around 15% per annum. So I'm happy with that and the progress shown by the portfolio in the year to date and indeed since inception. 

Subscribers will be able to see details of all the new purchases and the resultant make up of the portfolio on their sheets, together with the new triple momentum trend suggestions for Buys, Holds, Avoids and Sells for every stock in the Scores. I hope this might help you with your decision making process when using the scores by tapping into the power of momentum too.

Aside from that on a personal & musical note it was a welcome change to see some blue sky outside in addition to the blue on the portfolio. Hopefully we are through the worst of the Covid crisis now and can look forward to finally enjoying some fun in the Summertime. While I probably won't be enjoying a Dreadlock Holiday any time soon it is good to see some cricket back on TV as I don't like cricket, I love it. Whatever you are up to this summer, assuming we are allowed out, take care and may the sun continue to shine on you and your portfolio. 






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