The first quarter was the most extraordinary I have ever witnessed – When Everything Changed. Frankly, the second quarter has been no less extraordinary but with a much better outcome in terms of market/portfolio returns. Alas, the same cannot be said for the madness that has affected the world with lockdown fever giving way to civil unrest. And with pubs open again this coming Saturday, what could possibly go wrong?   

What a mess we’ve gotten ourselves into! 

For my part, Lockdown quarter has been pretty chilled, aided by a recovering portfolio. During the first half of the quarter I continued the rebuilding process that began in late March and for the second half of the quarter I have done very little, other than enjoy the weather and observe the markets and thankfully also my rebuilt portfolio, recover. 

The Rebuild 

To recap, I started the year with 26 holdings, was down to 15 holdings by the end of Q1 (16 out and 5 in) and have added a further 10 net during Q2 to end the quarter being fully invested with 25 holdings. This breaks down as 10 collectives (7 investment trusts, 3 ETFs) and 15 direct equity holdings. 

During this process, I reflected that at the start of the year, I had been guilty of reaching for yield. Therefore, a key shift for me now is to focus on total return. Yield is still part of that equation but I am far more interested in the growth characteristics of my direct equity holdings. The collectives provide a steady income stream, much of it quarterly and those collectives are focused on generating a return from parts of the market that I cannot usefully access directly (e.g. private equity, infrastructure, property, overseas equities) leaving me free to actively manage a focused portfolio of UK listed quality growth shares.  

For the record, in April I added 5 new holdings; Emis Group (EMIS), Nasdaq100 ETF (CNX1), Jarvis Securities (JIM), Avast (AVST) and Spirent Communications (SPT). In May, I added 2 new holdings; Blackrock World Mining (BRWM) and a gold producers ETF (SPGP) while moving my physical gold holding to the Royal Mint ETC (RMAP). And in June, I added 3 new holdings: Games Workshop (GAW), Craneware (CRW) and ULS Technology (ULS) – GAW and ULS were rebuys having been spooked out of both in mid-March. 

My focus for the direct equity holdings is for them to have an intact business model, high quality earnings and a runway for growth. That is a tall order in these current economic circumstances. 

Performance v Benchmarks 

Pleasingly, my portfolio (PFAS) has continued rebounding during the quarter, from a low point of minus 33% to “only” minus 10.5% YTD at the end of this second quarter. 

The quarterly gain of 23% is a larger rebound than all three benchmarks; FTSE All Share Total Return (+12.5%), Vanguard World (+17.3%) and Fundsmith (+16.9%). However, on a YTD basis I am only ahead of the FTSE All Share TR (-17.9% YTD) while still trailing the tougher benchmarks of Vanguard World (-1.3% YTD) and Fundsmith (+6.3% YTD).  

Dividends for the first half of 2020 were 32% of my annual target which itself is now 10% reduced from the start of the year. This said, my dividend flow will be second half weighted as both the interim and final dividends from AAZ fall into that period. 

What Happened? 

Virtually everything in the portfolio is up during the quarter (or from my buy point during the quarter). The only laggard was Craneware (CRW) (purchased in June and down less than 5%) with all other holdings contributing to the quarter’s gain and 23/25 holdings now positive YTD. Top among them was new holding Avast (AVST) up 40% and also strong performances from Jarvis Securities (JIM), Bioventix (BVXP) and largest holding Anglo Asian Mining (AAZ) where I hope the best is yet to come. 

When taking into account the Quality (81), Value (32), Momentum (79) and Volatility (2.79) characteristics that I monitor, my portfolio can be labelled as an Adventurous High Flyerto use the Stockopedia terminology. Notwithstanding this, the portfolio also has a natural yield of 4.42%.  

What Next? 

Hopefully, I will be able to do very little over the next quarter other than continuing to get fitter and more deeply tanned – and I do not focus on these two things lightly. I am trying very hard to avoid any exposure to the virus but if I am unfortunate enough to get it, I want to be a) as fit and healthy as possible and b) loaded with natural Vitamin D.  

As far as the portfolio is concerned, Q3 will be a period where I have the opportunity to verify my investment thesis for several holdings via trading updates in July and interims in September. I will also be patiently awaiting strategic developments at Anglo Asian Mining (AAZ) which hopefully will play out during the quarter and if circumstances permit, I have my eye on a couple of other companies that I would like to add to the portfolio.  

As far as the markets are concerned, I really don’t have a scooby what is going on. Economies around the world, including the UK, are in deep trouble and yet the markets appear to have priced in a V-shaped recovery. I think that probably masks a fair bit of rotation that has been going on (myself included) but nonetheless, markets do not appear to be priced for a deep recession. Can a deep recession be avoided? Personally, I doubt it but perhaps the world’s central banks, led by the Fed, have other ideas.  

My view is that you simply cannot increase the money supply without consequences. What form those consequences take and when/how they kick-in, I shall leave to smarter people than myself to speculate. In the meantime, I am currently carrying around 40% portfolio exposure to gold (which finished the quarter just shy of $1800/oz) via AAZ, SPGP, RMAP and to a lesser degree, BRWM. This seems like a reasonable way to hedge against some of the ugliness that might be around the corner, although I am mindful that the portfolio continues to carry concentration risk with such a large weighting in AAZ.   

As ever, I shall be updating throughout the quarter via Twitter where I use the handle @BrlliantLeader and where I am happy to chat about any aspect of my portfolio or strategy. 

Useful Links 

Current Portfolio Holdings 

Portfolio Performance and Analysis 

Disclosure – At the time of writing I own shares in all the companies mentioned in this article, as per the tags below