Compound Income Scores Portfolio
Well I say year end, but I should point out that the performance numbers I am about to talk about are based on closing prices up to 28th December 2018 as I was visiting family and in laws over the New Year period and therefore not around to collect the figures after the last half day of trading on 31st December. As I'm sure you are all aware December was another pretty tricky month for investors and Santa singularly failed to arrive with his rally.
As a result the FTSE All Share provided a total return of -3.74% in the month to the 28th & -9.47% for the year to the same date. By comparison the Compound Income Scores Portfolio (CISP) produced -5.12% in December which meant it produced or rather lost 8.52% for the year to the 28th December. So another year of outperformance, this time by 1% or so, but you can't live off of relative performance, although the portfolio will have produced between 3 & 4% in income which could be used to live off of. Still overall OK but not a lot to write home about as I know some who are prepared to run with much more concentrated portfolios and who have may be made use of stop losses etc. may have produced positive results even in this negative market background.
Now these type of losses may have come as a shock to more recent investors who have become accustomed to steadily rising equity markets on the back of low interest rates and Quantitative Easing by central banks. It is however quite a regular occurrence to see occasional bad years and in a proper recession induced bear market you can get falls of up to or in excess of 50% which you need to be able to stomach or take action to avoid or mitigate losses if you can't.
The CISP is designed to be a demonstration of whether the Scores they are based on are any good at selecting quality, growing dividend stocks and as such is generally run on a fully invested basis to allow it to do this. So far in the relatively short three and three quarter years or so it has been running, it has done a reasonable job by producing Compound returns of +54.4% in total or +12.3% per annum over that period. This compares with +14.3% or 3.6% per annum from the FTSE All Share. Again I'm sure people with more concentrated and actively traded portfolio may well have done better, but for a relatively relaxed monthly approach I don't think it's a bad result for limited effort. It certainly compares pretty well with what one could have got from investing in the index or an actively managed main stream fund for that matter, although here the CISP is probably benefiting form being more concentrated and active than most main stream funds.
Market Timing Indicators & other matters.
Regular readers will know that I have been producing these for the UK market since January 2014 despite my own reservations about trying to time the market. This was after reading some useful research which helped to eliminate the whip sawing that you can get by following these moving average / trend based indicators by adding economic indicators to them to keep you in the market for longer.
Given the falls in markets in December and during 2018 it will come as no surprise that these ind actors, based on moving averages, continue to be negative. Indeed after December they have mostly moved to the most extreme negative position that I have seen since I started producing them in 2014. FTSE 100 is the only one that has seen a more negative reading back in September 2015, so may be it has been helped more this time around by the overseas exposure it brings and the benefits or weak Sterling perhaps?
So these are all very negative and the markets are looking quite oversold, so I guess it is possible we could see a counter trend rally in the short term which could take us back up by 5 to 10% perhaps. I say this because the economic indicators that I track along side these are all still painting a more positive picture, although clearly there have been some signs or economies coming off the boil & some other more local difficulties with BREXIT and trade / growth in China more generally.
It is also worth noting that the US yield Curve (2 Year minus 10 Year) has not yet inverted, which is something that has been a precursor to previous recessions and something that everyone has suddenly become an expert on this year. I guess that's the power of the internet and information being more widely available. If however you don't know what I'm going on about, or even if you do, I would highly recommend this piece from dear old John Mauldin, whose writing I have followed for years and which acts as a great teach in on the subject with lots of useful links on the subject too.
One of the other things I have been following along side the timing indicators, as in the past it was shown to be a good coincident indicator of a turn in the economy, is the trend in US Unemployment. Now this has been firmly trending down and shows no signs of turning up just yet. So again that would also suggest that it too soon to panic or take evasive action.
One thing that did give me pause for thought on this though was a very good video below, which looks at the confluence of the current economic and debt cycles and issues coming out of the demographic situation in the US with baby boomers coming up to retirement. This had some interesting observations on possible trends in employment and other things coming out of that and is well worth a watch in my view. It did therefore call in to question whether the unemployment trend will be such a useful coincident indicator this time.
Monthly Screening for the CISP
This was also carried out just before the end of the year given my travel schedule. It resulted in two sales, the proceeds of which were reinvested into two new positions and a top up to an existing holding which had been halved after it had doubled on risk control grounds, but which had now come back to earth and was therefore now a smaller holding despite still scoring very well. I am not going to be detailing these changes here on the Blog anymore as I am giving a Free New Year upgrade to existing Scores subscribers who will now be able to view the full Compound Income Scores Portfolio together with details of the transactions each month alongside their weekly Scores updates. If you are not a subscriber or are not familiar with the Scores and if that is something that interests you then you can find out more about them and how to sign up here.
Summary & Conclusion
So after the first difficult year for a while for investors one can't help feeling nervous as we come into 2019. That being said I wouldn't be surprised if we saw some kind of rally in the first quarter although no guarantees of course, as the FTSE chart looks a bit like a top and seems to be in a pretty bearish trend in the short term. If anything I'd personally be more tempted to view any such rally as a selling opportunity as we may have entered into a more major bear market as the stock market anticipates the next recession, but as ever time will tell on that.
As for the CISP it will remain fully invested and continue to focus on the top quartile of Compound Income Scores stocks until such time as the economic indicators flash negative too, when I'll then think about what action I want to take for the portfolio on the back of that.