At the beginning of every investing year, I would gladly accept the offer of a 20% annual return. That would be double my long-term target and virtually guarantee that my fund was compounding ahead of inflation (I would never rule out a period of hyper-inflation but hope not to see it in my lifetime). And so, it is fair to say that I am absolutely delighted to achieve a 50% total portfolio return this year – a vintage year to round off a bullish decade (or does the decade end next year, lol!).
And be in no doubt that we are still in a bull market following the market correction in Q4 2018. It might not have seemed like that to UK investors for much of 2019, certainly there was a significant drop off in trading volumes leading up to the election, especially in UK small caps. Anecdotally, a lot of private investors moved into cash from the summer onwards and for a couple of months Twitter was awfully quiet. With that in mind, I am delighted to see so many investors reporting very healthy returns this year which is consistent with a FTSE All Share Total Return of around 20%. My internal benchmarks, Fundsmith and Vanguard, achieved 26% and 21%, respectively. The S&P500 was up more than 30% and the Nasdaq100 up more than 40%.
Moving from outcome to process, I traded an awful lot this year. PFAS started the year with 28 holdings. During the year, I exited 17 positions and took 15 new positions to end the year with 26 holdings. With that amount of churn, one would imagine it must have damaged my performance but from a rudimentary analysis it would seem that the trading/changes contributed to 15% of my 50% total return (i.e. if I had not traded at all, my portfolio would have returned around 35%). Let’s explore these changes a little further and how they created value because I am certainly no trading wizard.
For context, I started the year with an overweight position in my largest holding (and largest current winner), Anglo Asian Mining (AAZ). In the first quarter, this holding fell quite sharply and was responsible for a Q1 underperformance. From this point on, I was focused on actively managing risk in the remainder of the portfolio while allowing my largest holding to recover and hopefully thrive. This mindset led me to exit a number of holdings at the first hint of trouble, including Somero (SOM), Bodycote (BOY), XP Power (XPP), Direct Line (DLG), Central Asia Metals (CAML), Victrex (VCT), Polar Capital (POLR), Legal & General (LGEN), Goodwin (GDWN), Duke Royalty (DUKE), Spirent Communications (SPT) and Bloomsbury Publishing (BMY). These are all good companies and history would suggest that I was overly cautious in most, if not all cases.
Against this, AAZ had an outstanding second quarter – along with three takeovers; Manx Telecom (MANX), EU Supply (EUSP) and Safecharge (SCH), all at modest premiums. PFAS put on around 23% in Q2, reversing its performance against benchmarks. AAZ’s strong run also continued into Q3 by which time, I was heavily researching buy targets amid an uncertain geopolitical backdrop and for UK investors, most eyes were firmly focused on the political impasse and the inevitability of a general election (with all the uncertainty that brings).
The next couple of months were uncomfortable for me psychologically as I wrote about here a few weeks ago. Fortunately, it all seems to have worked out brilliantly in the end with most holdings rallying strongly since the election and my largest holding reduced from 30% to 20% weighting. In fact, as at year end, all 26 holdings were in profit which is particularly pleasing because many of them were added in Q4 or late in Q3, including a deliberately increased weighting in three key themes for 2020; UK focused businesses, diversified income and small cap value. The year also finished with PFAS at an All Time High (ATH), having closed at a weekly ATH on 20 previous occasions during the year.
On the subject of income, it was also very pleasing to exceed my income target by 10% during the year and to be targeting a further 10% increase on that amount in 2020 based on broker forecasts (and my own forecasts where broker ones do not exist). At a portfolio level, forecast yield has reduced to 4.28% from 5.11% a year ago but that is in the context of capital that has grown by 50% during the same period. I am very pleased with the growth of the dividend income stream and will continue looking to grow and diversify this cashflow as the year progresses. In particular, I am focused on using a handful of collective vehicles to provide quarterly, diversified income with low volatility (my salary). I wrote an article about this mid-year during my research into these collective vehicles. The ones that made the final cut were Henderson Far East Income (HFEL), Henderson High Income (HHI), Real Estate Credit Investments (RECI), iShares UK Dividends (IUKD), HICL Infrastructure (HICL) and The Renewables Infrastructure Group (TRIG). So far, I have avoided REITs but I might add a couple of those during 2020.
Additionally, I have significantly increased exposure to small cap value plays – defined in my world as less than £1bn market cap, high quality metrics and yielding above 5%. These include Paypoint (PAY), Belvoir (BLV), Amino Technologies (AMO), City of London Investment Group (CLIG) and Rockrose Energy (RRE), along with a couple of midcaps (£1bn to £10bn market cap); Persimmon (PSN) and IG Group (IGG). There are also several small cap holdings that yield below 5% (mainly because their share price has risen) but still offer decent value such as Strix Group (KETL), ULS Technology (ULS) and Vianet (VNET).
From the outside looking in, I’m sure much of my trading activity this year would have seemed nonsensical but the method is beginning to show through the madness. Going forward, I will be managing PFAS through a number of lenses. To do this I have created a dashboard to analyse and adjust my asset allocation. In addition to the sectorial one provided by Stockopedia, I have created six others that will support my decision making and portfolio aims over the next few years. I will update them quarterly, along with holdings and the usual benchmark analysis.
All this said, I still intend to practice bottom up stock picking focused on quality shares, hopefully bought at a decent price and held for the long-term. I have five that are in the red zone as far as value are concerned – Bioventix (BVXP), Games Workshop (GAW), Impax Asset Management (IPX), Rightmove (RMV) and Spectra Systems (SPSY) and therefore, present risk if they do not meet or exceed expectations. These five holdings aside, the rest of the portfolio has a strong focus on value (range 40-80) and as already mentioned, a forecast yield for 2020 of 4.28%. I like to think of PFAS as a growth portfolio covered in the comfort blanket of dividend income.
As ever, there are risks. The biggest one I am carrying into the new year is the same one as I was carrying a year ago – concentration risk. A year ago, Anglo Asian Mining (AAZ) was 28% portfolio weighting and it begins 2020 at 22% weighting despite having sold around a third of the holding during the year. Interestingly, AAZ was not my biggest winner in 2019, that accolade goes to Games Workshop (GAW) which is currently weighted around 5%. I am looking for an opportunity to normalise the AAZ holding and hope that opportunity comes along in the first quarter. Until then, I won’t be fully relaxed about my portfolio balance and risk exposure.
Nobody really knows how long this bull market will continue nor what will eventually trip it up. 2020 is US election year so we will probably have a new level of Trump tweets as that event approaches. Brexit should eventually happen and moreover, a majority Tory government should give business and markets a higher degree of confidence (hence my increased exposure to UK focused businesses). This said, I think there will be some profit warnings in January/Q1 because the UK economy felt like it was grinding to halt leading up to the election. Overall, I remain bullish but am expecting plenty of bumps in the road.
On a personal level, I would like to be running a buy-hold-verify strategy next year with much less trading. However, that will not truly be achieved until the AAZ position has been normalised. I’m also holding a couple of other speculative positions that may or may not last the course but by and large, I would like to end the year with most current holdings still intact.
Thank you for visiting my investment diary. I hope my musings over the year have helped your own investment journey and/or have provided an enjoyable distraction for you. I will try and get back to more regular bulletins again in 2020.
I wish all my readers a happy, healthy and prosperous year ahead.
Disclosure – At the time of writing, I own shares in 26 companies/investment vehicles which are listed here.