I've just listened to an interesting podcast on an Investment Trust that I mentioned briefly in passing back in October when the UK was looking unloved and particularly cheap on a historic basis. Fortunately I also bought a few for myself at the end of September at a devilishly good price of 666p and it has done OK since then and the discount has narrowed too which is an added bonus.
The trust concerned is Temple Bar which had a pretty poor run under its previous manager who had to retire hurt, but the new managers have a good reputation as value managers and have some interesting insights on that and the current growth / quality versus value debate, including some interesting comments on M&S, Royal Mail and Microsoft along the way.
You can find the Podcast here and I hope you might find it interesting if you are looking for a way to play a resurgence in Value.
February proved to be a positive month for the UK market as investors and residents of the UK generally gained some hope and expectation that the successful and rapid roll out of the vaccines might bring forward the day when our lives and the economy might get back to some sort of normality. This is shown in the table on the site which can be accessed here as is the out performance by the CI Portfolio for the second month running. This leaves it 3.6% ahead of the FTSE All Share in the year to date and builds on the excellent relative performance shown in the last three and five years and since inception back in April 2015, as shown in the Chart above, which are more meaningful periods of time to look at rather than one month or year to date figures. This also shows that the portfolio has now made it back to an all time high value.
The performance so far this year comes as a pleasant surprise as market moves have in the main been a bit discombobulating as many poor and struggling Companies have soared in price while some quality names have been under pressure. This however is explained in part by the rush of liquidity provided by central banks finding its way into markets, especially it seems in the US, with the likes of Gamestop soaring thanks to Reddit forums and Robin Hood traders buying up call options and creating a short squeeze. More broadly it can be rationalised as reflecting hopes for a return to normality being discounted as the vaccine roll out seems to be going well. Thus plays on reflation, re-opening and recovery from Covid effects are being bought as the natural winners of that process and the lock down winners and more defensive / quality / growth plays being sold off in return as part of this rotation.
This month there were four potential sale candidates that came up based on where their Scores were aside from a couple that I gave the benefit of the doubt to. One of these was Moneysupermarket (MONY) which had results and saw downgrades as a result which led to a decline in the Score as the shares rallied against this background. The outlook statement was quite cautious, but I guess maybe the market is giving them the benefit of the doubt and perhaps perceives them as a potential beneficiary of re-opening and a consequent pick up in Money & Travel comparisons which they flagged. As ever time will tell on this but in the end I decided to go with the Scores and sell it along with another stock which I had waited for results this month which also seemed underwhelming. Since that was a stock I didn't have a strong feel for and there was no improvement in the Score this month, I let that one go through too.
Two more sale candidates that I found more tricky were decent steady businesses which one would might want to hold for their longer term compounding attributes. One of these was Watkins Jones (WJG), which as it is a property developer, some may not view as a quality operation. It does however operate with a capital light model in the main in some growth areas like student accommodation and build to rent and has a decent pipeline of work. As a result it has some attractive looking operating characteristics and should be fairly steady. Again I had waited for results and a subsequent management presentation. These were well received and the price did well despite some subsequent downgrades. While the webinar I watched did highlight a bit of a potential dip in their development pipeline after they had put things on hold post the first lock down. Again I think the market might be prepared to look through this so I wouldn't put you off holding it for the long term. Despite that, given the price move and the effects of the downgrades on the Score I decided to let that one go as well.
The second quality long term compounder that came up as a sell was Unilever (ULVR) after their results were not that well received and they also saw some downgrades which leaves them with a fairly pedestrian growth outlook in the short term. It was also no doubt sold off aggressively as part of the reflation / re-opening trades of selling the winners and buying the low quality losers / recovery plays discussed earlier. This had however left the shares looking very over sold in the short term (as shown by the OB/OS indicator in the Scores sheet) and I suspect might leave the possibility of some mean reversion in the short term if the recent market weakness should be extended or resume. Beyond that I guess it will remain fairly unloved in the short term so I'll review it again next month although personally I'd be more inclined to hold it for the long term as a classic quality compounder.
Against those sales three purchases were made for the portfolio this month. One of these was a specialist operational property REIT as a straight swap for the property type exposure forgone by selling Watkins Jones. A second one was a well run family lending business which operates in some specialist niches which should be a beneficiary of the re-opening and thus plays into that trend against the similar recovery prospects that Moneysupermarket may offer. It did however have a better Score as it offered better value and momentum and it is a business that I know well and hold myself, so I was happy to add that one.
Finally somewhat more controversially perhaps Games Workshop (GAW) made a belated return to the portfolio having been sold early (and badly as it turned out) in the pandemic when the score had deteriorated on downgrades and I was worried about operational gearing to the downside as they had shut all their operations at that time. Now with the shares at more than twice the price when it was sold it feels very uncomfortable to be buying it back up here, especially as it could be seen as a beneficiary of lock down and therefore vulnerable to a reversal of sentiment and fortunes thereafter perhaps? Nevertheless I followed the Scores as it now looks more reasonable value having come back in price from peaks above £100 despite some chunky upgrades. I also believe there should be another trading update this month in which they may still produce some forecast beating results, so it will be interesting to see if the market is more enthusiastic about those this time around if that should come to pass or if they end up disappointing this time around.
Subscribers can see details of these trades and some journal comments too plus the rest of the portfolio. If you are not familiar with the Scores and would like to know more about them and how to gain access, I put up a presentation on the site recently to try and explain the background to them in as clear a way as possible & how you can access them - you can find that here if that is of any interest.
Summary & Conclusion
So a better month for markets and another month of out performance for the Compound Income portfolio despite a dash for trash and recovery plays and a move away from quality / growth and lock down winners. Despite some of the moves (like Gamestop in the US) seeming pretty confusing and inexplicable, in the main the broader moves seem more understandable in the context of hopes for a recovery on the back of central bank & government money supporting the economy and the vaccine roll out and a subsequent re-opening unleashing pent up demand etc. - hopefully!
This also meant something of a switch from growth to value names depending on how you define those, although it remains to be seen if that has run it course now or if it has further to run. Valuations in the US continue to lead to some concerns about these bubble like moves in some stocks and things like Bit coin and especially at a time when inflation fears and bond yields are rising which may impact on valuations if these rates go too far up. For now these moves don't seem to be getting out of hand just yet. So I'll sign off for now but leave you with a couple of tunes that seem to my mind to sum up recent market activity and those that might be getting involved at this stage.
I want my MTV (GYS, AMC)
That ain't workin' that's the way you do it
Money for nothin' and chicks for free
Now that ain't workin' that's the way you do it
Lemme tell ya them guys ain't dumb
I'll keep this brief as I'm not sure that people are terribly interested in this. January was a tricky month for the UK stock market and the World in general as Covid-19 reared its ugly head again. As a result the UK market as measured by the FTSE All Share Index, which I use as a benchmark for the CI Portfolio, returned - 0.81% for the month.
Against this the CI Portfolio had a positive start to the year with a total return of +1.25% for a 2.06% out performance. As you can see in the chart above this took the total returns back towards the peak they achieved early last year with a doubling in value in the 5 3/4 years since inception. Rather than dwelling on that I'll provide a link here to the full performance table for that period if that is of any interest.
There were a few names that came up this month for consideration for sale based on their Scores having deteriorated. In the end I decided to make no trades for a few specific reasons and in the interest of not over trading too. I've added a Journal tab to the Scores sheet to detail the background to these and provide more in the way of updates on stocks in the portfolio as we go through the year. Hopefully subscribers will find this useful as I have probably been remiss in not providing this sort of information in the past. Any feed back from subscribers welcomed via the contact form on the site here or via my e-mail if you still have it from when you signed up.
Summary and Conclusion
So a mixed start to the year in terms of our lives and the stock market. While the markets in the US still seem to be riding high and Robin Hood traders and their band of merry men and women seem to be having fun regardless of valuations or earnings at the expense of Hedge funds. I'm sure you have seen plenty of commentary on that so I will not dwell on it other than to say it does all feel a bit like top of the market / bubble type activity. Indeed I have had a few people who don't normally invest or care about it, contact me and ask about it & one was even asking for a friend - normally a bad sign too.
Now while I'm fairly relaxed about this as the UK market seems pretty cheap against its history and in a global context. We are also looking forward to a recovery from the Covid misery as the vaccines roll out and all the positive benefits of BREXIT to come once the teething trouble are over on that too!?
However, I can't help worrying about the valuations in the US and the bubble like indicators we are seeing currently as highlighted by Jeremy Grantham recently - see video at the end of this piece for more details. While John Hussman continues to make the case for valuations being at extremes in the US in his piece here and as shown in the extracts from that here (continues after charts).
As we all know when Wall Street sneezes we catch a cold in double quick time too. So I'd suggest enjoy the roller coaster ride again this year & hopefully the Fed and other Central Banks and governments Money for nothin' can keep us on the wild ride for a while longer.
Saw the Q4 Dividend Monitor Update from Link Asset Services yesterday. This confirmed previous projections that UK dividends were down last year by around 44% or 38% underlying if you exclude special dividends. More significantly they updated their best case scenario for dividends in 2021 in light of the latest lock down. Within the document which you can see a summary of and obtain from here they said:
Currently with FTSE trading at 6740 that leaves us pretty much in the middle of my suggested range. If however you are of a more bullish persuasion then if the FTSE 100 should trade down to or on the basis of a 3% yield then it might be possible for it to trade between 7800 and 8600 or thereabouts, but I wouldn't bet the house on that happening.
There you go steady as she goes on the dividend front but slightly depressing that dividends might not now bounce back as quickly as previously expected and that it might take until 2025 for the market to get back to where it was in 2019 in income yield terms. It is also worth noting that the Link report suggests that the UK market despite cuts from some of the larger paying stocks and sectors last year, still seems to be prone to concentration risk in terms of where the income is generated. Worth bearing in mind if you are investing in a UK tracker fund.
Personally I'd expect to get back to 2019 levels of income much sooner than that given that our portfolios avoided the worst of the dividend cuts by not being as exposed to concentration risk as the headline indices and thanks to our investment trust holdings. Mind how you go out there and in the market.
"Life is a roller coaster just got to ride it" Ronan Keeting
Well that would have been good advice if only we had been able to live our lives last year, but as we all know we were stopped from doing that in the main by Covid-19. In terms of Stock Market investments it was certainly a roller coaster ride as a record breaking bull market, in terms of duration, finally came to an end. This was then followed by a seemingly record short bear market (certainly in the US) or does that mean it was just a correction? While in the UK we have continued to struggle on back below 7,000 on FTSE as our old economy type stocks and sectors and lack of technology champions in the main took their toll on the index.
Meanwhile we finally managed to leave the EU and agree some sort of on going trading relationship at the last minute as is always the EU way, but as ever time will tell as to how good or bad that might turn out to be. Unbelievably I see that people are already calling for us to re-join even though we have only just left and finally agreed some sort of trade deal.
So early signs of a neverendum mentality taking hold already until remainers / EU get the answer they want I guess. Any way I'm sure you are all familiar with and fairly fed up with all these issues - so I'll move on.
Compound Income Portfolio - Performance
If anyone is interested in this, it managed to outperform the FTSE All Share (which I use as a benchmark) again this year making it 5 years out of 6 now since inception in April 2015 or 4 out of 5 years if you count just full years. As this was set up to try and demonstrate if the Scores had any merit in picking outperforming stocks, I think an 80% or so success rate might be some evidence that they do, but as they say the past is not necessarily a guide to the future.
Having said that though the numbers this year are to be honest a little underwhelming in absolute terms as the CI Portfolio produced a total return of -1.26% versus the -9.8% from the FTSE All Share, although that is still a decent 8.55% out performance. This came as the portfolio produced a 6.01% return in December versus the 3.86% from the FTSE All Share, thereby clawing back just over 2% or around 1/3 of the under performance it saw last month in the vaccine inspired rally.
Since inception the CI Portfolio has just about doubled with a 99.84% total return or 12.8% per annum which compares to the 22.79% or 3.64% total return from the FTSE All Share. See also the graph on the website under the portfolio menu or at the end of this piece for comparisons with the Mid 250 and Small Cap Indices as well as the All Share. I put these on there as the portfolio has tended to have an above average exposure to these out performing part of the market, which will have accounted for some of the performance differential. For example at the end of the year the portfolio was split roughly 50/50 between FTSE 100 stocks and Mid 250 + Small Cap stocks (including AIM).
At the year end I also like to check how the CI Portfolio has done versus widely available pooled funds to see if I'd be better off putting more of my money into those type of vehicles. This year while the returns were not that great they still compared favourably with the UK Equity Income sector where its returns would have put it 5th out of 85 funds and 5th out of 26 in the UK Income Investment Trust sector. While over 3 and five years it has substantially outpaced all of the funds in both of these sectors. So even though the returns were a bit underwhelming in this unusual year I'm satisfied that the Scores are still doing a good job compared to pooled fund / index alternatives.
So I shall continue to use them in helping me to identify and select suitable Companies to help me achieve my investment objectives. The Scores will also continue to be available to subscribers' for a modest fee if they should like to use them to help them with their investing too. A table showing the total returns from the CI Portfolio and the FTSE All Share over the last 1,3 & 5 years is presented below and you can see the full table of returns via the Portfolio menu on the site.
Out of interest I took a quick look at how the Portfolio would have performed if I had left it untouched from it's positions at the end of March & April and it appears that the returns were around 5 to 8% better as a result of the trades that I did subsequently. So not bad for a monthly screening process, although this year was one in which it probably paid to be even more aggressive with your portfolio as evidenced by some of the exceptional returns I've seen reported. Rightly or wrongly I tended to focus on those businesses that could survive and manage their way through all this as it seemed that vaccines might have taken a long time to arrive. As it happens they managed to come up with those in double quick time so recovery plays then came to the fore even more.
This threw up three potential sale candidates this month, based on how they score in the Compound Income Scores. Of these I decided to hang onto Sage (SGE), a fairly recent addition to the portfolio, which has taken a bit of a hit as they are having to invest to stand still as it were as they transition to a software as a service model. Given it is a high return business you'd want them to reinvest if they can, but the wrinkle here is that they are having to invest to update / keep up with the competition. Nevertheless I felt that they still looked reasonable value on an EBIT/EV Yield basis & offer a well covered 3% Dividend yield, even if the PE doesn't look particularly cheap at around 24x.
Another high quality business that looked more of a sell on valuation grounds was Auto Trader (AUTO) which as well as a high rating has seen some substantial downgrades and the car market in the short term still seems to be quite challenged. Thus I let it be sold as per the process but personally feel a bit mixed about it as the valuation certainly feels expensive but it is a high return moat type of business that one would probably want to hold for the longer term. Having said that though I felt the same back in October last year when the process had me sell Avon Rubber at £43.40 due to a poor score based on high valuation and poor earnings trend too. So it will be interesting to see if Auto Trader crashes too on any future disappointment given the valuation. As this post is already getting quite long and taking longer than I thought it would, I'll move on. Subscribers though can see the full details of this and the other sale plus the two new stocks that replaced them on their files as normal.
Brief Economic / Market Outlook.
After such an exceptional year the consensus seems to be that we are through the worst and that some kind of economic recovery is at hand despite the fact that we seem to be entering another National lock down in effect in the short term. The roll out of the vaccines thus far is encouraging investors to look through that and anticipate a V-shaped recovery as all the pent up demand and cash that may have built up in some peoples bank accounts is released as and when we get back to some kind of normality.
While the initial recovery might well be quite perky on the basis of pent up demand and the sod it factor as we hopefully eventually emerge from the grip of the virus, I do worry a bit about the medium / longer term. That's mostly due to the level of debt to GDP around the world, which while it may be manageable if central banks and governments engage in yield curve / financial repression, the conventional wisdom is that debt at these levels is likely to prove to be a drag on growth in the medium term (like Japan as I mentioned last month).
I guess governments might continue to print and spend to offset those effects but it is above my pay grade to forecast where that might all end, although quite a few are expecting a pick up in inflation as a result this time around, which might offer governments a way out from their debt traps, perhaps.
In terms of dividends, as previously discussed and as I'm sure some readers are painfully aware of, these have been cut substantially this year with the UK dividend base expected to be down by around 40 to 50%. Having analysed the dividend flows on the Compound Income Portfolio is seems that the total income received this year was down by 30% year on year suggesting that some of the existing holdings and the changes that were made along the way have helped to lessen the effects of the cuts. So some evidence that they help one to select dividend paying stocks that might be more robust than the average.
That represents a yield of about 2.3% on the average portfolio value for the year which is somewhat lower than that of previous years but not that surprising in the circumstances and also as I have relaxed my value constraints somewhat this year and ran winners on higher valuation more. Based on forecasts the portfolio is expected to generate a yield of 4.2% with some strong dividend growth forecast. While in PE terms it is on 13.7x with an EBIT/EV Yield of 8%, so it looks to be offering decent value and growth on the basis of current forecasts. Again subscribers can see the full details of the portfolio in their Scores file.
In terms of the UK market when Link asset service last provided an update in Q3 they suggested that they thought dividends in the UK could recover by between 6% and 15%. While the FTSE ended the year at 6460.2 and offered a yield of 3.65% to give a dividend base of 235.79 index points. So I thought I would update my FTSE Dividend ready reckoner and see what it looks like if we assume those dividends could remain unchanged or grow by up to 15%. For the bulls I have also added a 3% yield column to see how far we could go if investors really get carried away and bid the market up and consequently down to a historically toppy level of a 3% dividend yield.
Outside of that I suspect that a 3.5% to 4% range is more likely to pertain this year suggesting a trading range for the FTSE of potentially between about 5900 - 7747 or say 6,000 to 7,500 if you wanted to tighten that up a little by looking at the chart from the beginning of this post and where likely support and resistance might come in. Indeed on that basis, while I wouldn't be surprised to see FTSE hitting or exceeding 7,000 again at some point this year, although technically it looks like there is a lot of over head resistance in the 7000 to 7700 range. It seems therefore that we might have to wait another year for the FTSE to surpass its 1999 high. At least it means if it should make it up into that range then we might be able to look forward to 10 to 15% returns this year to make up for last years disappointing returns from the UK market as a whole.
Summary, Outlook, Conclusion & Personal Note.
So very much a year to forget in terms of what happened to our lives and how the stock market performed in the UK at least. Obviously within that and globally there were many threats and opportunities thrown up so congratulations if you manged to navigate that and make decent returns & hats off to you. Equally if you lost some money, don't get too down about it but put it down to experience and try and learn from it I guess.
In terms of economies and markets the consensus seems to be expecting economic recoveries on the back of the vaccine roll out, but that may be tempered by the on going 2nd or 3rd waves and associated lock down restrictions, but hopefully we might be out the other side of all that by the summer, perhaps. Heaven forbid that the new variant of the virus should turn out to be resistant to the vaccines or that they should turn out to have more serious side effects than expected. If either of those came to pass I suspect all bets would be off.
On the market side of things the US market is generally perceived to be expensive (hasn't that been the case for a few years now?) but seems to carry on regardless so far. The flip side of that is that some other developed markets like Japan and the UK in particular look cheap, while emerging markets are widely tipped to do well along with commodities.
Whatever or however you decide to approach things this year may I wish you good fortune in the markets and good health for you and your families and loved ones and my deepest sympathies if you or someone close to you have been hit by Covid in the last year.
Talking of Covid I'm pretty sure that both my wife and I had it back in March before the lock down started and before it was widely known about. Fortunately being fairly fit and healthy (touch wood) 50 somethings we managed to come through it pretty quickly after a few days
of feeling unwell and fortunately did not need any medical intervention. Our planned trip to Berlin at Easter got cancelled and we didn't get to go away at all last year - what a drag.
On the portfolio front across the piece with our overall more broadly diversified asset mix we did at least manage to increase our net worth by 1.5% so thereby just about maintaining the real value of our assets. I should probably say more about longer term compounding and rates of returns but that is probably the subject for a post in itself as this one is already rather long.
For the income side of things my boring diversified stock investing approach together with the use of investment trusts helped to protect us from the worst of the dividend cuts this year. It was also helped by redeploying most of the cash buffer that we'd built up in 2019 during October and November after NS&I cut rates to zero and the market was having a second leg down before the vaccine news broke.
As a result our income was "only" down by about 9% year on year so not great, but not too bad in the circumstances and we can easily live with that. So while we didn't manage to increase or maintain that in real terms this year it does still leave it well up in absolute and real terms since we started full time investing for a living in 2009. So despite this somewhat trying year we have still managed to achieved my objective of growing our capital and income in real terms over that time frame. I still think that accessing quality companies with with good yields and the prospect of dividend growth is still a good way to try and achieve that, although of course others will have their own ideas.
So we literally live to fight another year having survived Covid and the roller coaster ride in the market last year. Here's to hoping that 2021 might be a better year all round, but so far it has not started that well with another national lock down, but perhaps we might get back to some sort of life by Easter or the Summer at the latest and maybe we might even get to travel somewhere too thereafter if we're lucky. Thanks for reading, you deserve a medal if you got this far and sorry for being so boring, take care & good luck for the year ahead.