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.
Another positive month for equity markets around the world as investors seem keen to look over the valley of the Covid-19 lock downs and towards the sunny lit uplands of the re-opening of economies. Consequently there continues to be something of a dichotomy between this performance and the numbers coming out of the economy in the short term, although as we all know the markets tend to look ahead and are a discounting mechanism.
Aside from that there have been a few signs of further outbreaks which could bring on further localised shut downs and the threat of second waves etc. but again investors seem quite relaxed about that too. As ever all the liquidity provided by Central Banks around the world is no doubt helping to keep markets / investors afloat despite the on going virus / economic storm.
Market Timing Indicators
Regular readers will know that I have been producing these moving average based indicators for the UK Market for a while now and that they triggered as a sell at the end of March, since when the UK equity market and other equity markets around the world have staged recoveries to varying degrees with some such as the tech heavy Nasdaq Index actually achieving new all time highs. No such tech excitement in the UK and as a result the recovery in the Indices here has lagged that seen in the US in particular.
As a result all the UK indices remain below their moving average trends by around 4% to 8% with the Small Cap index being the strongest and the Mid 250 the weakest or furthest below its trend. So these together with rising unemployment claims in the US still suggest that one should be out of / cautious on the markets based on these technical timing indicators, although thus far it would only have cost you from missing out on the subsequent rally that we have seen since they triggered aided and abetted by the Central Banks largess as mentioned above.
Compound Income Portfolio
Again regular readers may re-call that I decided to ignore the market timing indicators as I'm more of a fan of time in the market that trying to time the market. See also Terry Smith in the FT today. I also felt that it would be more useful for subscribers to see how the Scores performed over this challenging period and what stocks the portfolio ended up trading.
Thus the portfolio was able to participate in and indeed enjoy a decent recovery in April and May when it recouped about 80% of its losses from March and outperformed the FTSE All Share, which I use as a benchmark, by 9.4% in the process. This recovery however came to an end in June as the portfolio returned -2% versus the +1.5% total return for the Index. This leaves the portfolio with a negative total return of 15.2% for the year to date which is some 2.3% ahead of the -17.5% total return from the FTSE All Share.
This was largely explained by only a handful of stock managing a positive return and despite last months value pick, City of London Investment Group (CLIG) soaring by 20% on the back of their deal. Against this the rest of the portfolio fell and a handful of stocks by a double digit percentage. Most of this was on little or no news and therefore probably reflects a bit of selling in not so liquid stocks in the main and perhaps a dash for trash as investors try to anticipate a recovery from re-opening perhaps?
In terms of this months screening there were five stocks, three expensive winners and a couple of more neglected value rated stocks which came up with Scores in or around the zone where I normally think about selling. On this occasion, given the market conditions, I decided to give most of them the benefit of the doubt for now. However, given the recovery we have seen, I did let one position go which had seen downgrades and some uncertainty to the effects of the virus on its operations. Despite this it had recovered to trade on around 30x and had a fairly low yield as they had also passed on paying their latest interim dividend. They have also been quite reliant on acquisitions to boost their growth in the past and I guess it remains to be seen if the fall out from the virus / recession makes that harder or easier for them to achieve going forwards.
In place of this I added what might still be described as a relatively expensive quality play which trades on a little of 20x, but does offer a yield of over 3% which is nearly twice that of the stock it was replacing. They have recently paid an increased dividend and seem likely to again in the current year as they benefit from 78% recurring revenues and operate in a fairly defensive area which is probably benefiting from the virus in terms of new business opportunities going forwards.
Any way I'll leave it there but subscribers will be able to see the stocks concerned and the other portfolio holdings in their file in the Portfolio and Transactions tabs. 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 have a great summer where ever you are able to enjoy it if you can and good luck with the return to the new normal and whatever that turns out to be - cheers.
Further to my last update I felt it would be remiss of me if I didn't provide another update, as somewhat unexpectedly City Of London Group (CLIG) have entered into a merger with a similar US outfit today. I say unexpected because they have not made a habit of this, although apparently they have been open to the idea and also a bit surprising that it didn't come with their year end trading update perhaps?
Any way it comes as part of a trend of Asset managers merging to cut costs etc. as they struggle against the rising tide of passive investment management. In this case it is not so much about cost cutting and more about putting together two similar businesses in terms of the way some of their portfolios are managed to include closed end funds, but brings diversification in terms of client type and geography and thereby will help to dilute their current bias towards more volatile emerging markets.
You can read the full announcement and details of the price they are paying (in shares) from this announcement on their website. While there is a useful sponsored note from Hardman & Co. here - which give more details on the Company Karpus that they are buying and also includes some upwardly revised forecasts reflecting the potential from this acquisition and the recent market recovery.
This seems to suggest that it could be on a prospective 6 to 7x earnings with a 9 to 10% yield assuming the deal is consummated in the third quarter of this year, that markets remain OK and that they do not see too much in the way of outflows from the target. They do apparently have some limited protection in the terms to allow for this though apparently. It won't help the liquidity much as they have now also acquired a (retiring) founder shareholder with a large stake in the business having just seen their own founder sell out in recent years.
Thus assuming that they haven't dealt at the top of the recovery and we are about to be hit with the rest of the bear market, then it doesn't look like a bad deal. Indeed if the market does remain benign going forward then it might be possible for the shares, over time to return towards their previous peak around 470p or so which would still only leave them on around 10x with a 6% yield which is levels they have attained in the past. As ever I guess time will tell on which way that pans out from here.
May saw another positive month for markets on top of the recovery seen in April. This comes as quite a relief given the nervousness that was around and as it turned out, unfounded fears of a relapse and rapid re-test of the March lows, so far.
Indeed with the ongoing Central Bank support and some evidence that the worst of the virus effects may be behind us as some economies start to unlock, investors seem to be betting on a V shaped recovery. Indeed market action, in the US in particular, has stayed above the long term trend and with the S&P 500 recently recovering above its 200 day moving average it could even go onto to test recent highs potentially. (See Chart above).
Within all this after early narrow breadth with the FANG technology type stock leading the way, more recently there has been something of a broadening out and even a small rotation into value stocks. This came as some pointed out that the value versus growth performance and valuation comparisons had reached extremes last seen in the dot com era, although it remains to be seen if this will be a lasting shift and indeed if the rally will last or continue.
Market Timing Indicators
These which are based on the trend in UK Equity markets remain in negative territory about 10% below their trend, as the FTSE UK Indices largely lagged the recovery (as usual these days it seems) in other global markets. Thus this would suggest remaining cautious or out of the market if you are trying to time it. This would be reinforced by the large spike upwards in US unemployment that we have seen which has taken that indicator above its trend.
Thus even if markets should carry on rallying and turn the market indicators positive, the theory underlying this model would require the US Unemployment to come back below its trend and this seems some way off. Thus if you are in cash / market timing this would suggest that you will need nerves of steel and the patience of a saint to wait this one out while the markets continue to confound the bears and wait for them to come out of hibernation.
Compound Income Scores Portfolio
Having ignored the timing indicators and kept this pretty much fully invested this continued to benefit from the positive market background. Thus in May it produced a positive total return of 4.2% which leaves it with a negative return of 13.5% for the year to date. This compares to +3.4% and -18.8% for the FTSE All Share Index over the same time frames. Since inception just over 5 years ago the comparison is +75.2% v 10.6% or 11.5% per annum versus 2% per annum from the Index.
Not too many trades this month as few if any of the Scores justified action and one needs to be a little cautious of most figures these days any way given that Companies are reluctant to forecast and predicting outcomes is largely guesswork educated or otherwise.
I did however top slice one of the big winners in the portfolio, breaking the old adage of running your winners. This did however reflect a deterioration in its score, large driven by its valuation moving up toward the top decile as it hit new all time highs. The proceeds were reinvested into a much better value play, which remained oversold having lagged the market recovery despite being sensitive to it. This move therefore played rightly or wrongly to my natural value tendencies.
Summary & Conclusion
So another positive month for markets confounding hopes and fears of a further bout of weakness to potentially re-test the March lows. This was driven by on going support from Central Banks around the world and perhaps better than expected or not as bad as feared outcomes on the Virus front as some economies started to reverse their lock downs.
Consequently investors seem to have bought the dip and be anticipating a V shaped recovery and as such the longer term bullish trend still just about remains intact for now. Of course it remains to be seen if investors current expectations are realised or if something less positive comes to pass which might force a reassessment on markets. Aside from the the timing indicators for the lagging UK market still suggest that one should remain cautious but you might need to be patient to reap the benefit of that as thus far the markets seem to be remarkably chipper despite all the bad news that has been thrown at them recently.
Avoiding all that angst the Compound Income Portfolio continues to, well Compound away quietly in the background, albeit in a losing fashion this year so far, but at a slower rate than the overall market. Time will tell if those loses will continue to shrink or expand again from here. To be honest I really don't know having been surprised by the robustness of the rally, but personally I still wouldn't rule out some more volatility as we go through the rest of this year and get a clearer view of the impact of the virus shut down and subsequent new normal on the economy and the Corporate sector.
Whatever you do, mind how you go, stay alert and safe or whatever the latest sage advice is from the government and enjoy the hot / fine weather while it lasts. I hear that apparently there is a nice Castle in Durham which is worth a look if you fancy a drive and are feeling up to it!