March was another positive month for equity markets generally including the UK. As a result the FTSE All Share Index, which I use as a benchmark for the Compound Income Scores Portfolio (CISP), produced a total return of +4%. By comparison the CISP had another good month and delivered a third straight month of out performance in Q1 with a total return of +4.9%. This leaves it with a total return for the year to date of +9.9% which is 4.7% ahead of the +5.2% return from the FTSE All Share.
Over the 12 months since the Corona Virus hit the CISP has returned +48.3% versus +26.7% for the Index as the market recovered from its lows. So it is pleasing to be able to report that the Scores and the associated portfolio seem to have weather the Covid storm and subsequent recovery successfully. This continues the decent run it has had over the last 5 years where it has practically doubled as it has managed to compound at around 14 to 15% per annum over the nearly six years since inception which compares to 4.4% per annum from the FTSE All Share over the same time frame, so about 10% per annum out performance.
This suggests that they are not a bad way for identifying attractive quality stocks with the potential to grow their dividends and your income and capital over time. You can see full details of the performance history in the Table of Returns drop down menu on the Portfolio tab in the site menu or just click the Table of returns link above if that is of interest to you. While if you would like to find out more about the Scores and how you can get access to them you can click the highlighted Scores link above or on the main menu and view a brief presentation about them here too if that is of interest.
This month there were five potential sale candidates based on where their Scores were. Of these two were repeat offenders with Scores well below my normal sale threshold (75% or top quartile CI Score) and the other three were more marginal being closer to the cut off line. So on balance and in the interests of avoiding costly / potentially unnecessary turnover I gave those the benefit of the doubt this month which subscribers will be able to read about in the Journal tab of their Scores sheets.
As for the two that were sold, the first was Unilever (ULVR) which I held last month as it appeared to be oversold. That proved to be a reasonable call as it outperformed the index by about 2% this month. While I pointed out last month that personally I wouldn’t put you off holding it for it’s longer term compounding potential, this portfolio’s process is to follow the Scores and try to maintain exposure to stocks scoring in the top quartile in the main – so on that basis I let it be sold this month after the bounce, as the the score remained well below that threshold at the month end. At least this seems to be in tune with the market where the song remains same. That is stocks over bonds, cyclicals over defensive stocks, value over growth and Small-caps over large – for now as the reflation / inflation trade continues to play out and resonate with investors.
The other sale was Qinetiq (QQ.) which has done quite well for the portfolio and has therefore seen its score come down as it has re-rated to leave it looking rather average overall. The portfolio also held another stock operating in similar markets and while they are likely to be reasonably steady growers, it doesn’t seem like a strong enough theme that I want to double up on the exposure, so out it goes. Results are due in a month or so and their pre-close update was reasonable so they may be worth looking out for if you decide to hold on to it yourself.
Against those Computacenter (CCC) was added as their trading has continued to be positive leading to numerous upgrades as they continue to benefit from the trend for businesses to increase spending on IT hardware and services, which was in place prior to the Virus and which was accelerated by it and which they seem to think should continue this year too. Thus it would seem that their improved performance should be sustained rather than sagging back like some other Covid beneficiaries. It is also one I have held personally for some time which made me more comfortable with adding it up here, hopefully that's not confirmation bias!
The other purchase to replace Unilever was in the General Insurance Sector, so a suitably boring replacement, although this one is also well managed but does offer a much greater yield and therefore a higher value score than Unilever, so again playing into one of the current themes that I mentioned earlier. Again subscribers will be able to see full details of that one and all the other trades in their sheets.
Summary & Conclusion
Another positive month to round off a positive quarter and 12 months for the market and the CISP. Who would have thought that would have been possible 12 months ago when Covid first struck? Nevertheless it is pleasing that the Scores seem to have helped to navigate these strange times successfully.
Meanwhile the current theme playing out in the market is to back the on going recovery / reflation and therefore potential inflation and higher bond yields / interest rates down the track. This has meant rotation from previous winners / beneficiaries of Covid / low rates and into loser from Covid plus value and recovery plays funded by sales of more expensive growth stocks which may suffer in valuation terms as growth becomes more plentiful and bond yields rise.
It remains to be seen how long this trend lasts, but for now both Central Banks and governments seem intent on pumping money out so it may well go on for longer than one might think and for now at least the trend is your friend as they say. The market does however seem to be getting a bit frothy with all these SPAC's in the US and quite a few IPO's being delivered to markets even if they were a bit cool on the Deliveroo offering in the UK. I note that the UK regulators are also trying to loosen the rules to allow more SPAC type listing over here so we don't miss out. I guess there is also a chance that the US Fed at some point may start with yield curve control to keep yields down and keep the recovery going, which would be bullish if it happens. Trying to call the top of the market is in any event a bit of a mugs game and as Keynes was quoted as saying: " Markets can remain irrational longer that you can stay solvent."
Having said that though the UK market does still appear to offer some value and still trades some way below previous highs unlike the US where ratings are higher and indices there are hitting new highs. You would also think that the UK market's larger exposure to Miners and banks etc. should also help it with the current rotation into more value laggards that is going on, but we'd still no doubt suffer if there was a US led sell off.
So for now for me the Song remains the same and I'll carry on Compounding with attractive looking stocks identified by the Scores. I'll leave you to enjoy your Easter eggs or whatever outdoor excitement you might have planned for this Easter assuming it is not cancelled for you. Otherwise I hope that markets continue to be kind to you - rock on, ciao for now.