Well November turned out to be quite a month to say the least. The fantastic news that a vaccine for the Corona virus had been very effective in tests prompted a record monthly rise in the UK stock market with most of the main indices providing total returns of around 12.6 to 12.7%. While Small caps again led the way following on from them moving above their moving average last month and thereby turning bullish. Thus this month they managed a +15.1% total return.
These moves also prompted a sharp rotation from previous quality / growth / defensive winning names towards low quality / challenged / recovery under performing names in the main, as investors anticipate a quicker return to normal and a more rapid recovery than hoped for in those sectors most afflicted by the virus. Now I'm sure you are familiar with all that by now so I'll move on.
Market Timing Indicators.
Unsurprisingly, after such a large move up in the market in the month, these have all moved above their longer term moving averages. As a result they are giving a positive signal that one should be more positive on and invested in the market. This is backed up by the US Unemployment rate which is used as a back up economic signal to judge whether to pay attention to the signal or not. This has also, somewhat surprisingly, moved down below its moving average, which is bullish, although it remains to be seen if the second wave or the vaccine disrupt or reinforce that trend.
Within that the main indices are now about 6-7% above their trend which is towards the upper end of where they have got to in the past. While the stronger performing Mid and Smaller Cap indices are 12.3% and 17.6% above their moving averages which is a record amount in the six years or so since I've been compiling these indicators. So that might suggest that the run up in Mid and Small cap names has perhaps gone a bit too far in the short term perhaps? Or maybe they just take a bit of a breather while the larger stocks play catch up, although you would have thought in these circumstances the moves might have been the other way around. In addition in the short term, after such a strong move, it might not be unusual to see some mean reversion on the back of profit taking perhaps.
The swing factor in whether this comes to pass might be the binary BREXIT deal or no deal outcome. Press reports seem to suggest that a deal was possible this week, although it is looking as though that could even extend into next week before a key EU summit on 10th December. My best guess is that a deal will be done at the last possible minute as that is the way the EU seem to operate in negotiations with 11th hours agreements often coming at the last moment.
Also it is noteworthy that the Portfolio since the March low to the end of November has returned 27.3% while the market has provided a total return of 16%. So on this occasion the Market Timing indicators have failed to add any value and indeed if one had traded out and were now looking to get back in you'd have also have incurred significant fees and spreads too in addition to missing out on the subsequent recovery. Thus this tends to confirm my suspicion that market timing is a bit of a mugs game and that it is generally better to remain invested and benefit from time in the market. Provided of course you can stomach the downs as well as the up and not panic out at the bottom.
To be fair these type of timing indicators did work well in the 2008/9 GFC as Central Banks were a bit more tardy in responding that time around. On this occasion they were very quick to respond and pump in liquidity which facilitated the turnaround in double quick time. It does of course leave the US market in particular looking particularly extended in terms of its valuation at this early stage of the recovery unless that can surprise dramatically to the upside in terms of its effect on Company profits and earnings.
On the back of that I'll probably stop writing the timing indicators up on here on a regular basis. I may however keep the data going and mention them if it seems significant in the future in terms of the signal. As a result of that I'll be keeping the Compound Income Portfolio still mostly fully invested going forward from here
Compound Income Portfolio.
It was also a positive month for the portfolio, although sadly not to anywhere near the same extent as the +12.7% total return from the FTSE All Share which I use as a benchmark. Indeed in that context the +6.8%, while great in absolute sense was perhaps, a little disappointing and not even a record, as the Portfolio has done better than that on a monthly basis on a few occasions over the years.
Nevertheless it is worth seeing that in context as the Portfolio had outperformed the index since the March low by producing +18.6% versus +3.2% for the FTSE All Share to the end of October. Thus the portfolio in November gave back around a bit over a third of its out performance since the low. As a result the Compound Income Portfolio has year to date produced -6.86% versus the -13.17% for the FTSE All Share. Since inception the portfolio has returned +88.51% or 11.84% per annum which compares to +18.22% or 3% per annum from the FTSE All Share.
Quantitative Factors & the Growth/ Quality versus v Value debate.
This doesn't come as a surprise to me as the process is designed to identify and target quality growing shares with robust finances and ideally supported by improving prospects in terms of estimate revisions. Whereas the winners as a result of the vaccine news were the precise opposite of that i.e low quality, loss making in some cases and with poor balance sheets that had been heavily downgraded. Though if users of the Scores were so minded to make that switch they could have identified suitable candidates by just looking in the lower quintile of the Scores rather than the top quintile as usual!
As someone who has managed quantitative driven portfolios both professionally and personally, this move comes as no surprise to me. Indeed at turning points in the market like this quantitative factors tend to stop working for a short period while the buy crap / recovery stocks is going on before the factors that the model taps into reassert themselves in the longer term.
The monthly screening process does also not lend itself to that and I felt disinclined to throw out the process and charge into recovery plays or skate to where the puck is going to be as one big fan of crap stocks likes to say on Twittter! Sure if you are more of a trader and looking to make rapid short term gains then you will have needed to be buying crap and all those bombed out recovery plays hit by the virus. So congratulation to you if you have managed to do that. Personally as I'm looking to grow and compound my assets and income I still believe that buying and holdings quality stocks for the long run is probably a better way to go in my view, but each to their own.
Now I know that buying quality has become quite a trendy view in recent years after the success of Terry Smith and Nick Train with strategies based on that view. Indeed there has been a bit of a debate before the recent vaccine news about growth versus value and some even declaring the death of value investing as a major value investor threw in the towel and closed their fund in an echo of Tony Dye being sacked PDFM at the height of the dot com bubble. So the vaccine news or V-day was the catalyst for a switch back towards bombed out value stocks as the valuation differentials which had been stretched to the extreme snapped back the other way & previous momentum stocks cratered and previous losers soared.
How long this goes on for remains to be seen as we work through the second wave and await wider distribution of the vaccines. In the short term, given such a sharp move in the space of a month, as I said earlier, it would not be a total surprise to see mean reversion kicking in to reverse some of this move subject to the BREXIT binary outcome. Ultimately though the recovery in value trend might have a bit further to run for now.
While the Compound Income Portfolio and those type of stock that I target didn't fully participate at least I bought some Temple Bar (TMPL) (which I mentioned on here a few weeks back) for my own more widely diversified portfolio and incredibly have seen it rise by nearly 50%. Which is some small consolation and does help to demonstrate how extreme some to the moves have been in such a short space of time.
So I guess readers will have to make up their own mind about how they want to play things from here but for what it is worth I share below an interesting video from Terry Smith where he debates quality versus value. Now obviously he is talking his own book but he makes some good points even if he has probably suffered a bit of under performance in the short term since this was filmed as a result of the V for Vaccine rally in value stocks.
Summary & Concluding Thoughts.
So great news for the World that a vaccine has, somewhat surprisingly, been found to be effective in record time compared to the usual 5 to 10 years or never that had been speculated about. This has led onto a record month in stock markets around the World as investors celebrated this and the stocks beaten down as a result of the virus have had a relief recovery as investors moved to discount an economic recovery and an improvement in their prospects.
In the short term this picture is a little complicated by the current second wave restrictions, but in the medium terms is seems reasonable to assume that some sort of normality might be restored by next Spring / Summer & a sharp year on year increase in economic activity should ensue. Obviously the tricky bit will be how quickly this happens and to what extent the economy gets back to some kind of normality or will behaviour be permanently changed?
The UK market seems quite well placed within this current phase as it is heavy in many of the value sectors like Banks, Miners & Oils which are currently recovering strongly. Beyond that it remains to be seen how long that trend continues and at what point the financial and economic effects of the Pandemic start to bear on the market & the economy. Generally it is suggested that when economies get up to 100% debt to GDP which is where we are headed, then economic growth tends to be harder to come by. Think about Japan and what has happened there since their bubble peaked and how they have since struggled to grow despite low interest rates and lots of fiscal stimulus and their equity index remains below where it was in 1989.
I guess you could say the same about the UK as we have gone 20 years already since the dot com bubble peak in 1999 with the FTSE still below where it was then. So I'd say enjoy the rally while it lasts and hopefully it might have a bit further to go as we are into a traditionally seasonally stronger period. You never know one day this decade maybe FTSE will make it convincingly through 7000!
However as a wise old Stock Broker often said to me "things are never as bad or as good as they seem." So in the same way as I said towards the end of October that you shouldn't get too bearish when FTSE was around 5700. Equally now about 6 weeks on with the market now around 6500 I wouldn't get too carried away. Nevertheless rightly or wrongly I stand by the comment that "in the long run quality dividend paying equities still seem like a decent way to find a growing yield with potential for capital gains in a low yield environment."
So there you go obviously good luck to with your investing and however you choose to go about it and of course it may be possible to get higher returns by trading aggressively and jumping into low quality recovery plays but that's not something I'll be doing for the Compound Income Portfolio.
All that leaves is for me to wish any readers of this a very Merry Christmas if that proves to be possible at the end of this terrible year and here's to hoping that 2021 is a better one all round.
I'll try and keep this brief as there is a lot going on in the world right now & October was, a is often the case, quite a poor one for the market.
Monthly Timing Indicators.
These in the main continue to suggest caution as the generally weak market returns in October kept the headline indices FTSE 350 & FTSE 100 6 to 7% or so below their trends. Somewhat surprisingly given what has been seen on the dividend front in my last post on here, the Mid 250 and Small cap indices fared better. As a result the 250 is only around 1% below its trend, while the Small Cap index has remarkably made it back into positive territory against its moving average trend as it actually saw positive total returns in October.
Compound Income Portfolio
The Portfolio saw a negative total return of -2.65% in October which was 1.17% better or less bad than the -3.82% from the FTSE All Share. This leaves the portfolio with a -12.76% total return for the year to date compared to -22.98% from the FTSE All Share. If I was still a fund manager I'd be delighted with a 10% out performance, but as a private investor I guess it is bit meh, but not too bad for a fairly low attention mechanical / Quant type approach. The full history and total returns over the last 5 and a half years are available in a table here if that's of any interest to you and these and comparisons with various UK indices are summarised in the graph at the end of this piece after the music playlist.
As for this months Screening there were three natural sells which came up based on their Scores. One of these was a long standing House Builder holding which I let go as it seems to me that the current run in the housing market may not be sustainable. That may of course prove to be too pessimistic if the Stamp Duty holiday and the Help to Buy Scheme should get extended next year like many of the other support schemes at the moment. The other two were at the smaller end of the scale. Despite these looking reasonable quality and being potentially cheap and oversold, they are still suffering from downgrades and an uncertain outlook - so following the process I let them go, although personally I might have been prepared to give them the benefit of the doubt for the longer term.
Against that I made some purchases of larger businesses in similar related areas of activity to the last two smaller stocks that were sold. While I replaced the house builder (despite my own reservations about miners) with a larger Gold miner which I'd skipped in recent months as the portfolio already had a smaller Gold miner, but it may now be a time for more exposure to gold perhaps? So I let it be bought this month as it had drifted back with the Gold price in recent months and we are apparently entering a seasonally stronger period for Gold.
Summary & Conclusion
So a difficult month for most UK Indices and the Compound Income Portfolio although it managed to outperform the broader market probably in part thanks to its greater exposure to Mid & Smaller Cap stocks which managed to outperform too.
The UK Market Timing indicators continue to suggest a cautious approach overall, although Small Caps have turned bullish which may or may not be of any significance to the broader market, but here's to hoping it is.
Any way as we enter a second lock down in England I'll leave you with some music to be going on with in a Playlist I made up during the last lock down and have add to since - enjoy (?) and I hope that you and your family manage to stay safe and well through what looks like being a tough winter.
So we are three quarters of the way through what is turning out to be a terrible year all round, as it has been about six months since the dreaded Covid-19 struck and interrupted and end some lives. We still seem to be living with the consequences and struggling to make sense of it in our every day lives.
Monthly Timing Indicators.
Meanwhile in the investment world, after the initial shock, there has been generally an ongoing recovery fuelled by Central Bank & Government support operations. This paused in September as the UK market fell back with the FTSE All Share delivering -1.7% total return.
This leaves it and the other main indices like the FTSE 100 & FTSE 350 around 5% below their trends. While the Mid 250 and Small Cap indices have, somewhat surprisingly, held up slightly better and are as a result only 3% and 0.5% below their moving average trends as a result. This suggests that based on this and the other economic indicators that I use in conjunction with these, that one should still be cautious / hedged or even out of the market if you want to attempt market timing.
This has been the case since the start of the pandemic back in March, although as observed above this has been offset by the authorities efforts and thus far we have not seen the usual second down leg of the bear market. Indeed having said that the US has recovered so far and so rapidly that their sell of could be classified as a correction rather than a bear market. In the UK though, given the make up of our indices and a lack of Technology giants which have led the US rally has meant that our indices have lagged the recovery in the US headline indices badly, although US stocks ex the tech giants are still down a bit.
Compound Income Portfolio
Longer term readers will know that despite the above suggestion from the timing indicators, this has remained fully invested to see how it fares through this more difficult period for markets and economies and also to see how effective the market timing turns out to be.
So six months on since then the CI Portfolio is up 22.5% and the market has recovered by 6.95% helped by the exceptional support measures mentioned in the introduction. So, thanks to the timely support operations, market timing has not been that helpful so far in this GVC crisis, unlike the GFC in 2008 when the support measures were slower in coming to the rescue.
In September the CIP did actually mange a positive total return of 0.5% versus the -1.7% from the FTSE All Share which I use as a benchmark. So with the recovery in the last six months this leaves the portfolio still down by a disappointing 10.4% year to date, although this is still a lot less than the -19.9% for the FTSE All Share. The full history and total returns over the last 5 and a half years are available in a table here if that's of any interest to you and these and comparisons with various UK indices are summarised in the graph at the end of this piece.
This months screening brought up two obvious sale candidates where their Scores had fallen so far that I really had no excuse not to sell them. The first of these was a long term winner for the portfolio, Avon Rubber (AVON) which was first purchased in 2017 at under £10 per share. Thus although I'd given it the benefit of the doubt in recent months, I felt the rating had got too rich at around 35x with a sub 1% yield and earnings yield, and with the poor resulting Score of 44 it had to go - so I reluctantly finally sold out. Not that there is anything wrong with them and they should still grow strongly and their recent deals may improve the picture so I wouldn't put you off holding them if you do, but that's the process for this portfolio.
The second sale, with an even lower score of 32 was a more recent lower quality value purchase Finsbury Foods (FIF). This had singularly failed to respond to the recent market rally and the shares had generally flat lined since purchase earlier this year. The Score had come down on their recent results which were a bit underwhelming, led to downgrades and failed to include a dividend this year too. So given that, despite the value on offer I let the process ditch them, although again they may be fine in the longer term although with less certainty than Avon perhaps.
To replace these I added a couple of high quality classic compounding shares which are both paying dividends and are both cheaper than Avon but more expensive than Finsbury, you pay your money and take your choice. One is a more cyclical business that seems to have handled the pandemic reasonably well and now seems to be getting back into expansion mode again. While the other one is more of a steady Eddie with lots of recurring revenue but seems to have performed well despite its SME customer base and the pandemic effects as it transitions to more of a Software as a service business. Subscribers will have seen all the details of these in their file at the start of the month.
This does represent something of a relaxation of my historic value tendencies as I'm now trying to focus the portfolio more on quality compounders at a reasonable price with a focus on the earnings yield that they offer rather than getting too hung up on PE' s and yields. I guess it will remain to be seen how this goes as there is an on going debate about whether Value is overdue a comeback. It may not help in the short term as at the moment as we are going though the inflection point & crappy bombed out stocks seem to have been doing better alongside high tech giants but i think quality will out in the long run.
As for dividends these are in much shorter supply this year as has been widely publicised. Talking of which on a quick tot up I see that the dividends in the CI Portfolio are down by around 45% year to date compared to what was received last year in the first three quarters, although this will represent some different holdings as well as fewer specials and dividend cuts this year. This I would think is likely to broadly similar to the 50% or so fall that analysts are now projecting for the FTSE 100 this year.
My own more broadly diversified portfolios are in aggregate also down by about 10% year to date. As for the income side of things, as I'm more diversified and use quite a few investment trusts, which have been able to maintain or increase their pay outs, our income has only taken about a 20% hit year to date, again not great but not too bad in the circumstances and in the context of what we'd achieved in the previous ten years. I can live with that.
Now I know there are plenty of more nimble investors / traders out there who are now up and in some cases substantially - so hats off again to them. In reality it is horses for courses and not worth beating yourself up about how others are doing as long as it works for you and your objectives / temperament etc. Personally I'm in this for the long run and seeking to preserve and grow my Net worth and income in real terms in the long term which is what I continue to focus on. So I'll sign off there wish you all well in these current difficult times for everyone and hope that you have every success in achieving your goals in life and investing - whatever they may be.
As August is traditionally a holiday month I hope you managed to have a Happy holiday & commiserations if you have to quarantine on your return. Personally I couldn't be doing with all the restrictions and uncertainty so we didn't bother to book anything after our Easter trip was cancelled earlier in the year.
As mentioned last month I did treat it as a holiday month, by largely taking a break from looking at markets too much and tweeting on Twitter (apart from replying to a few tweets) and using the Eat Out to Help Out Scheme to help some of our local pubs and restaurants. In the UK today is a Bank Holiday so apologies in advance if this post is a little light as I'm not feeling that motivated to spend a lot of time on it - still in holiday mode I guess?
Monthly Timing Indicators.
With UK markets seeing positive return this month these continued their recovery but all still remain below trends suggesting that one should still remain cautious / out of the market if you want to follow a market timing approach to the UK market. With Mid and Small Caps producing better returns this month these indices are closest to getting back into a positive signal but both remain below their trends by 2.3% and 0.2% respectively. As FTSE lagged again this month the headline indices such as the FTSE 350 and All Share, which it makes up a large part of, both remain further below their trends by just over 5% and 6% in the case of FTSE.
Compound Income Portfolio
Not much to report here this month as remarkably the total return was pretty much in line with the FTSE All Share return with +2.49% v +2.42%. This leaves it down 10.8% YTD versus -18.5% for the FTSE All Share, so good relative performance but you can't spend relative performance! If you want to see the full details of the performance history you can see the table of returns (opens in a new window) by clicking here.
In terms of the Screening there was potentially more activity as more companies have updated and there has been more changes to forecasts as a result. So I'm planning to make three changes to the portfolio as a result when the market re-opens in the UK tomorrow. Subscribers will be able to see the changes in their sheet when it updates after the close. If you are not a subscriber and are interested in finding out more about the portfolio and how it has produced the performance shown below then please click on the Portfolio tab in the site navigation or click here for more details.
July proved to be a bit more difficult in UK markets compared to the relatively plain sailing that we have seen so far in the recovery since the lows in March. This was probably caused by some signs of the virus making an unwelcome return with a pick up in cases in some locations around the world, thereby perhaps sowing some seeds of doubt about the V-shaped recovery that investors seem to have been anticipating.
Market timing Indicators
With the main indices such as FTSE 100 & FTSE 350 producing negative total returns of -4.2% & -3.7% respectively this has kept them below their trend by just over 9%. While the Smaller and Mid Cap indices produced lower losses this month of around -1% and therefore are both less negative versus their trend than the main indices being around 4% and 8% below their trends. As such these and the on going economic difficulties as a result of the virus would suggest that one should remain cautiously positioned / out of equities if you are trying to time the market and ride trends.
So far since the March lows this has not paid off given the recovery that has been seen since then, but perhaps a resurgence of the virus and as the economic effects become clearer maybe a second sell off could materialise? As ever I guess time will tell on that, but in my experience that is the normal pattern that you see in a bear market, which we still seem to be in here in the UK, if not in Unicorn land.
Compound Income Portfolio.
This has remained fully invested despite the above and therefore benefited thus far from the recovery. Having lagged the market last month after outperforming in the initial recovery the Compound Income Portfolio this month was able to produce a positive total return of +2.6% compared to the -3.6% from the FTSE All Share that I use as a benchmark.
This was helped by the portfolios overweight in Mid & Small Cap areas of the market and four positions which produced double digit positive returns.
Thus the 6.2% out performance this month more than made up for the -3.5% last month. As a result in the year to date the portfolio is now -13% compared to -20.5% from the FTSE All Share. Not too bad for a monthly screened / traded portfolio, although I've seen others who have been more active / aggressive in their trading getting back to positive territory for the year - so hats off to them / you if you are one of them. Since inception in March 2015 the CI Portfolio is +76.2% compared to +8.3% from the index. That equates to 11.2% per annum versus 1.5% per annum from the the FTSE All Share index.
In terms of this months screening there were probably half a dozen or so stocks that were in or close to a Score at which I normally consider their place in the portfolio and of those two that were sufficiently low to seriously consider a sale. Of these I decided to give one quality play the benefit of the doubt as it is still trading reasonably well in the main (apart from one division which is about 20% of the business) & it is still paying its dividends. In addition it also looks oversold on the over bought / over sold indicator that I have on the Scores sheet so it also seemed that now might not be an ideal time to sell it. The one I did decide to sell had a poor trading update recently and is still not paying a dividend & although it is a reasonable quality play, the outlook remains uncertain as to how the effects of the virus & the governments response might hinder or help it.
This was replaced with a better scoring & better value stock that had a much more positive update recently and even reinstated its previously suspended final dividend and announced an interim dividend together with a profits forecast for the full year in the absence of further virus issues. Any way I'll leave it there but subscribers will have been able to see the stocks concerned and the other portfolio holdings in their file in the Portfolio and Transactions tabs yesterday. If you are not a subscriber then please see the Portfolio tab in the menu and the Scores tab in the menu for more details about them and how you can gain access or click the highlighted text above. Finally you can see a table of the full 5 year+ performance history here and this is presented in the graph below at the end of this post.
In the meantime enjoy the rest of what remains of the summer if you can and enjoy a break if you do manage to get away here or oversea. I'm going to be enjoying a staycation in what is traditionally a holiday month & I'm intending on doing my bit for the economy & the hospitality sector by eating out to help out to support my local pubs & restaurants at this difficult time by treating it like a holiday even though most of those & other things have been cancelled by Covid-19 and the current cancel culture. Take care, relax and have fun if you can.