Performance & Background Commentary
Unfortunately September saw a continuation of this years downward trend & under performance against the FTSE All Share which I use as as benchmark as shown in the table above. The structure of the index and the bias of the portfolio towards mid & small cap names which have suffered more in the downturn in the market this year, helps to explain this reversal of some of the previous out performance that the portfolio had seen from having this positioning.

As discussed previously the on going tightening by Central banks to tackle rampant & persistent inflation have helped to start and continue the current bear market as I feared it might after what turned out to be a bear market rally in the summer. On top of this the war in Ukraine and its effects on gas prices have continued to weigh heavily in Europe and led many nations to introduce another round of big bail outs for citizens and Companies to cope with higher energy costs. Indeed the UK's efforts to to shield households and firms from higher energy bills for up to two years, comes at a cost equivalent to 6.5% of GDP in the next year, more than it spent on its furlough scheme and support for the self-employed in 2020-21 (Source: The Economist).

In addition, the recently elected Prime Minister & her new Chancellor followed through on her campaign promise of big tax cuts & reversals of previously announced increases at a cost of around £45bn, or £43bn now they have u-turned already on scrapping the 45% rate. They neglected to say how this would be paid for and as a result Sterling temporarily crashed and 30 year Gilts spiked to 5% before coming back below 4% as the Bank of England was forced to intervene to save Pension Funds apparently. This was due to a strategy of Liability Driven Investing (LDI) which has apparently also been used as a way of gearing up the funds and it is this and the speed of the move in yields which caused the problem. I must admit that I found this surprising and call me old fashioned, as I thought the whole idea of LDI was to neutralise the risks not magnify them!

Any way it does make one wonder what other unidentified risks might be lurking out there caused by clever consultants and Merchant Bankers as rumours of Credit Suisse & Deutsche Bank seem to be doing the rounds now too. As dear old Warren Buffet said "It is only when the tide goes out that you discover who has been swimming naked." So it seems there might be more pain to come before this is all over, although sentiment does seem quite extreme at the moment so I wouldn't be surprised to see a counter trend rally in the short term.

Portfolio Review
Once again I present a fact sheet on the portfolio at the end of this post which details last months Top & Bottom 3 contributors, transactions, a breakdown of the Portfolio's Sector & Index exposures together with details of the Top 10 holdings.

In terms of transactions there was just one switch in the mining space with a marginal sale of Rio Tinto on a lower score and a poor price trend into a smaller, more specialised miner that was cheaper and better scoring, although a month on this has not proved to be a good idea so far. A couple of others I gave the benefit of the doubt to or awaited results & one of those (BA Systems) at least appeared in the top 3 contributors. While S & U reported good results with a confident statement, but only managed a small out performance on the back of that.

Summary & Conclusion
More of the same unfortunately as far as the bear market is concerned. I suspect we might be due another rally shortly and if that arrives it will remain to be seen if that is just another bear rally or the start of a recovery. I have to say that it feels like this might still have a little further to run in terms of duration and declines but I wouldn't want to get too bearish down here. We just need to try and navigate our way through this and preserve as much capital as possible in whatever way you choose to do that, while it plays out. 
​

March so far has certainly been a challenge for investors as the markets finally seemed to have panicked as the number of Corona virus cases continued to ramp up around the world and Italy went into lock down. 

Against this background Central Banks including the US and UK have undertaken emergency cuts in interest rates as they seek to protect their economies from the negative effects from the virus in the short term. In addition to this governments are also likely to be coming forward with various measure on the spending and fiscal side to provide support and bolster economies too. 

So given that and the fall in the markets so far, which is getting on for a fairly normal 20% correction it may not pay to get too bearish down here. That is unless this all leads to a larger and longer lasting recession rather than a v shaped affair if the virus effects and counter measures work out satisfactorily. As ever time will tell on that one, but as of now the other economic indicators I follow are not yet signalling a recession, although there does seem to be a increased risk of one in the short term. If that does come to pass then you would need to be prepared as Warren Buffet says for your holdings to be cut in half in the short term. If you are not prepared for that then obviously you would need to make other plans.

Meanwhile the Compound income Portfolio has been hit along with the rest of the market, but given it has no direct exposure to the oil sector, I think it should have fared reasonably well again in a relative sense at least. Indeed looking at the various metrics on the CI Portfolio as at last nights close it seems to be on 13x forecast PE with a 4% expected net yield on the back of forecast 1 year dividend growth of 18%. We should however take those forecasts with a pinch of salt as they could be vulnerable to downgrades if a recession does really take hold rather than a short sharp shock from the virus. 

Meanwhile it is budget day today and this is widely expected to include quite a number of spending commitments on infrastructure type things with road, rail, telecoms and flood defences already being mentioned as recipients I think. On that basis I think it should be quite good for a stock called Renew Holdings (RNWH) which recently entered the CI Portfolio based on its good Scores and decent value metrics.

This one jumped on the Conservative Election victory but has drifted off a bit with the market recently, although it has out performed by falling less. It seems to tick many of the boxes of areas which are likely to be seeing extra government spending as follows:

• Rail
• Roads
• Wireless Telecoms
• Nuclear
• Thermal & Renewable Energy
• Water including flood risk management programmes​

In addition to that it is rated as a Super Stock & highly ranked on Stockopedia and qualifies for 8 of their Guru Screens. So seems pretty attractive and it doesn't have too much debt and raised some cash recently via a placing when they did an earnings enhancing acquisition, so it has had earnings upgrades too.

What's not to like? Apart from the fact that it is construction related, which is often bad news when you are talking about contractors (see Costain today). The saving grace here may be that most of their stuff is more related to on going maintenance and upgrades etc. which should make their revenues & margins more predictable. I also seem to remember Paul Scott mentioning working capital financing by clients seeming hefty & negative assets etc. See here if you are a Stockopedia Subscriber. If not and you'd like to check it out here and if you sign up I might get a referral credit off my subscription. 

The only other thing that slightly concerns me about the limited assets on the balance sheet, from reviewing past accounts, this seems to result from a few asset write downs in subsidiaries over the years which I don't quite know what to make of. It could mean that past profits were overstated and they have taken the losses through the balance sheet to hide this. They did however have a stated aim of raising margins over the last few years so maybe they were just tidying up an old structure by closing down lower margin operations to focus on the higher margin maintenance type work. Any way I'll give them the benefit of the doubt for now and don't forget to do your own research and make sure you are comfortable with these aspects if it is one that attracts you too. Happy Budget Day - hopefully barring any nasty surprises on the tax front! 

March turned out to be another positive month for UK equities with a total return of just under 2% from the All Share Index. This rounded off a positive quarter as global equity markets recovered in a v shaped fashion from the big sell off at the end of last year as the US Federal reserve blinked and stopped raising interest rates. Thus for the quarter the All Share returned 8.67% and this has helped to turn the monthly timing indicators that I produce for the UK market positive again for the main indices such as FTSE 100 & the FTSE All Share. The Mid & Small Cap indices remain below their averages, probably reflecting their greater exposure to the domestic economy and the fears about the effects of BREXIT on the UK economy, but more on that later.

Meanwhile the Compound Income Scores (CIS)  Portfolio had a stronger month in March with a total return of 4.4%, thereby recouping most of the under-performance seen in February. This leaves it up by 13% in the quarter & year to date some 4.34% ahead of the All Share. Since inception it is now up by 74.43% or 14.95% per annum over the four years it has been running. This compares to 24.16% & 5.57% over the same time frame and annualised for the All Share index which I use as a comparison. See the Portfolio link above or at the top of the site to see the full table of returns over that time frame and a graph of the performance against various UK indices. As it is an anniversary of sorts, I am hoping to do an update post on lessons from investing full time for a living over the last 10 years for me personally and for the CIS over the last four years. So do check back for that later in the month.

In light of the return to a positive reading from the timing indicators I have reinvested the cash that was retained last month and added two new positions funded by this cash and the proceeds from one stock that flagged up as a sell due to the fall in its score. I was happy to see that one exit. There were two other stocks whose scores had fallen into the potential sell zone, but as they are both decent dividend growth stocks suitable for long term compounding given their long history of dividend increases I decided to give them the benefit of the doubt for now. Subscribers to the Scores will be able to work out which stocks I'm talking about from the Portfolio and they will see the stock sold and the two new positions in the transaction and reflected in the Portfolio when the Scores are updated today. If you'd like to learn more about the Scores and how you can access them, details of the portfolio and transactions then please click here or on the Scores navigation tab at the top of the site or in the three bars if you are on a mobile or tablet type device.

Despite my reservation about the outlook for global growth etc. and the potential for a recession at some point in the next year or two it does seem that all the BREXIT shenanigans have left the UK market looking pretty good value and this could protect it from some of the downside if the worst should happen on the economic front down the line. In this regard I would refer you to a recent interesting set of slides from Research Affiliates which showed that the average retiree in the UK should be OK going forward as a 60/40% portfolio in the UK is forecast to offer fairly attractive real returns if their projections turn out to be any where near right. They also suggest UK equities are priced to provide very decent future returns, albeit with potentially high / normal volatility of close to 20%. You should note that these are unhedged US$ returns, so I guess they could also be factoring some recovery in Sterling into that too perhaps?

​So despite all the BREXIT concerns in the short term the above suggests that the outlook may not be as bad or as bleak as the main stream media make out or maybe it has created an opportunity? As you know I tend to agree with that view that it is time in the market that counts, but nevertheless I'm still keeping an eye out for trouble on the economic horizon, but in the short term that too seems to have cleared up a bit as Central Banks seek to keep the show on the road.

Meanwhile on BREXIT I suspect it will be resolved one way or another fairly soon. There is an outside chance that we could crash out without a deal on 12th April. I would however attach a small probability to that as the majority of MP's don't want no deal and they have stupidly ruled it out any way. In addition the EU don't want us to leave either and since a no deal would be worse for them then they are almost certain to grant another more lengthy extension I would have thought. I then believe this will lead to a much softer or BREXIT in name only, if at all. Alternatively as I have suspected from day one we may be forced to vote again and get the "right" answer as far as the political elite / EU are concerned. Indeed they have already suggested that the second referendum should be a choice between whatever "deal" on a soft BREXIT in name only they eventually come up with or on remaining, with leave not even being on offer on the ballot paper, which I guess would ensure the result they want! See this interesting piece on the likely way forward called UK Independence Day Cancelled which appeared recently on the Market Oracle web site & included a link to his very prescient piece from about two years ago about the Game Theory Strategy the UK should have followed to win, which then predicted the shambles we find ourselves in now. 

Thus given the UK market looks cheap, the pound is probably undervalued, institutional investors are largely underweight and BREXIT ain't happening I think the UK could actually do relatively well. So you probably should keep calm and carry on compounding for now, although as I said earlier I remain on alert for signs of deterioration in the economic outlook which might signal more difficult times ahead. I think this is especially important given how mature the current economic and stock market cycles are at this point and the levels of debt in the world which have been encouraged by Central Banks super easy monetary policies over the last decade. Plus the fact that it is not clear if we are out of the woods yet as markets remain below their recent highs, so this could still be a bear market rally for all we know. 

With that in mind if you have read this far, as a reward I'll leave you with this link to the Q4 letter from one of the Top Performing Macro Hedge Funds last year, who benefited from their bearish stance and who still see us as being in a market which is vulnerable given their Macro Model has topped out, valuations, debt levels etc. Enjoy and don't get carried away out there with this Q1 rally, as if we end up with a Corbyn led government then heaven help us and all bets are off!

Now I'm sure you are all bored with all the BREXIT chaos too, I know I am, but I can't stop thinking about it. As from the start, as soon as leave won the vote, I feared that we will either never leave or effectively not be allowed to leave - which is looking more likely by the day. Especially when Mrs May seems to be saying BREXIT means (back my bad deal or we'll make sure there isn't) BREIXT.

Like a lot of people I'm pretty hacked off about this especially given the history of how we got here in the first place. Amazingly this is the first time I've written a post actually about BREXIT, although I probably mentioned it in passing along the way.

See the following links to see how my parents generation were misled when we signed up for the EEC which was supposed to be a free trade area only.

https://www.express.co.uk/news/politics/882881/Brexit-EU-secret-document-truth-British-public

https://eutruth.org.uk/fco30.html

Plus how John Major got us to sign up to the Maastricht treaty by threatening to hold a vote of confidence in his shaky small majority government - sounds familiar. 

So for what it's worth my guess is that they'll either force the unpopular deal through somehow or make sure that we don't actually leave as the majority of MP's are Pro EU and don't want a no deal scenario to play out, when they should have used it as their main negotiating tactic and been prepared for going down that route. I reckon they might even use it as an excuse to have another vote which will be worded in such a way as to make sure that remain wins this time - which the EU has had a history of with previous treaties etc.

This piece was also interesting background on this from the Market Oracle.

Finally as a bit of light relief here's a little ditty I re-wrote  - with apologies to Don McLean

Brexit Pie – (Sing to the Tune of American Pie).
A long, long time ago
I can still remember how politics used to make me smile
And I knew if I had my chance that I could make those people vote
And maybe they'd be happy for a while

But the BREXIT vote made me shiver
With every paper I'd get
Bad news on the internet
I couldn't take one more step
I can't remember if I cried
When I read about the Maastricht Treaty
But something touched me deep inside
The day that democracy died

So bye-bye, Democracy Pie
Drove my Rover to Dover, but BREXIT was over
And them good old boys were drinkin' Champagne and Schnapps
Singin' "This'll be the day that UK Democracy snaps
This'll be the day that I die"

Did you write the BREXIT withdrawal agreement, and do you have faith in May above
If the whips tells you to?
Now do you believe in free trade, can democracy save your mortal soul
And can you teach me how to BREXIT real slow?
Well, I know that you're in love with the EU
'Cause I saw you votin' in the commons
You all hacked off your voters
Man, I dig those referendums and blues

I was a lonely teenage Thatcher’s child
With a Tory Tree and a BREXIT vote
But I knew I was out of luck
The day that democracy died
I started singin' bye-bye, United Kingdom
Drove my Rover to Dover, but BREXIT was over.

As some of you may know the former (?) Tory Chancellor was / may be Philip Hammond who was also known as spreadsheet Phil as he apparently has a fondness for spreadsheets. Now regular readers will know that I have a fondness for generating income from my investments and compounding the returns. Now while I try to do this as much as possible in tax free wrappers which are generously provided by the government. Outside of those one is potentially liable for income and capital gains tax on assets held outside of these tax free wrappers.

Now until recently, income on UK Shares benefited from something called the tax credit, which basically accounted for basic rate tax and one therefore only had to pay tax on income if your income in total, after taking account of the personal allowance, exceeded the higher rate threshold. That tax credit was abolished by the previous Chancellor George Osborne, who at the time he introduced a 7.5% basic tax rate on dividends rising to 32.5% and 38.1% for higher rate and additional rate tax payers and also introduced a £5,000 dividend allowance to make up for this loss of the tax credit. This however failed to fully make up for the loss of the tax credit as this change was one of the biggest revenue raisers in his budget at that time. Since then Philip Hammond decided that this allowance was too generous and proposed to cut it to £2,000, although I note that the legislation required to get this change into law was not passed before the election. I have however seen comments to suggest that this will be forthcoming post the election, assuming the Tories are returned.

As the legislation is likely to be passed (as discussed above) the allowances and tax rates for the current tax year are as follows:

                                            Income                                           Capital
Tax Free Allowance  £5,000 (going to £2,000)        £11,300
Basic Rate                            7.5%                                             10% (18% on residential property - why?)
Higher Rate                        32.5%                                           20% (28% on residential property)
Additional Rate                38.1%                                          20% (28% on residential property)

My question to Philip Hammond, or whoever is the next Chancellor, is why is investment income on shares treated & taxed differently and unfavourably compared with Capital Gains on share investments?

Supplementary question - I presume the higher capital gains tax on residential property is designed to discourage buy to let landlords? This has in fact encouraged some to register as a business instead, but that's another story.

So in conclusion my suggestion would be why not align these allowances and rates for the sake of simplicity and for equal treatment of capital & income? Now in my mind that would mean giving a £11,300 dividend income (& maybe include residential property income within this) and align the tax rates at 10% & 20%. This might go some way to replacing the loss of the tax credit & greatly simplify the current messy system they have introduced. No doubt they won't like that as it will probably cost them money. Alternatively I guess there would be a risk they could bring the Capital Gains Tax allowance down to the level of the income allowance to raise more money perhaps? Therefore not sure I'll send this idea to Spreadsheet Phil, strong and stable Theresa or my local Tory MP.