One of the most impactful books I ever read was The 7 Habits of Highly Effective People by Stephen Covey (RIP) and I have tried to live my life largely according to these principles (sad but true). The seventh and final habit identified by the author was one of self-renewal and labelled ‘Sharpening the Saw’. As planned, that is how I spent much of the third quarter – walking/exercising, gardening and sunbathing while listening to podcasts, reading and reflecting. And I am feeling super chilled, even though my portfolio (PFAS) remains underwater YTD.

Performance versus Benchmarks

The portfolio recovery continued in Q3 with a 4.63% gain but still down 6.38% YTD. It flirted with break even during September but dropped back markedly in the final few days of the quarter. Only one benchmark, Fundsmith, was ahead this quarter with a 5.56% gain for an excellent +12.24% YTD. Vanguard (VWRL) was up 3.82% quarterly and +2.41% YTD. Trailing behind was the FTSE All Share TR with a quarterly decline of 2.92% and a YTD loss of 20.32%. The full breakdown can be seen here

Portfolio Changes

It can be argued that my process causes me to over trade but I will save that argument until year end when I can better see if my tinkering has had a positive or negative impact (not forgetting that in 2019 it was responsible for fifteen percentage points of overall performance). Below are the main changes I have made during the third quarter and some commentary regarding my rationale.

Exits

Renewable Infrastructure (TRIG) – on concerns over long-term energy prices and the accompanying effect on asset values.

Craneware (CRW) – I just couldn’t get comfortable with this holding and ultimately had insufficient conviction to build the position further.

Gold Producers ETF (SPGP) – this was a tactical allocation and I might revisit in future.

Money Supermarket (MONY) – I see weakness in travel and money products and there is also the weight of an FCA consultation on insurance renewals.

GlaxoSmithKline (GSK) – The main driver to let this dividend stalwart go was to reduce US dollar/market exposure. This said, my enthusiasm for this holding has waned and I am unlikely to revisit for the time being.

Nasdaq100 ETF (CNX1) – To reduce US dollar/market exposure.

Physical Gold ETC (RMAP) – This is a temporary exit which I mainly used to fund a significant top up of AAZ. I might buy back into this position to some degree during Q4.

Paypoint (PAY) – When I bought PAY during the third quarter, I was aware that it could prove to be a value trap. This week there was news that Ofgem are investigating their exclusive agreements with energy suppliers. This might or might not be significant but the accompanying price fall suggests that it might be. I didn’t have sufficient confidence or conviction to average down and therefore, I decided to cut my losses and move on.    

New Holdings

EKF Diagnostics (EKF) – a very exciting new holding with significant broker upgrades during 2020 and the possibility of further upgrades into the year end. While benefiting from Covid-19, there is much more to EKF which I will cover in future bulletins.

Polar Capital (POLR) – In my view, this asset manager has a number of best in class funds, particularly in relation to technology and healthcare. They also pay a 6%+ dividend and have impeccable quality characteristics. There is a risk that it proves to be a value trap buy my money is on it being undervalued.

Apax Global Alpha (APAX) – A dividend paying private equity company with some interesting holdings, especially in the technology space.

FDM Holdings (FDM) – Impeccable quality characteristics, IT consulting/project skills that are in high demand, a soft but strong moat (Mounties are highly regarded, apparently) and the prospect of continued growth via their ability to pivot into high demand areas such as cybersecurity.

Gamma Communications (GAMA) – Again, impeccable quality characteristics, a combination of organic and acquisitive growth and they seem to be in a hot space at the right time.

iEnergiser (IBPO) – Perhaps this will also prove to be a value trap but this is another business with strong quality characteristics, a 6%+ dividend and seemingly, a decent growth opportunity.

Personal Group (PGH) – This is a rebuy of a former holding and another that might prove to be a value trap. It has strong quality characteristics, yields 6%+, has traded reasonably well during the pandemic. While the second half of 2020 might prove challenging due to the gap in sales pipeline, there is also a longer-term growth opportunity through their technology platform, including partnerships with both Sage and the Post Office.

Smart Metering Systems (SMS) – Following the theme, this company also has strong quality characteristics. Cashflows from their smart meter assets are sufficient to support a yield of 4%, increasing by 10% per annum over the next five years. In addition, they are developing a new range of carbon reducing assets which should provide further growth going forward.

And of course, I have topped sliced and topped up a bit, as per my process. The full list of current holdings can be viewed here 

Current State of Play

As things stand, I have 26 holdings in total – 19 are direct equity holdings and 7 are collective investments (held for either income and/or tactical allocation) that provide exposure outside of my own circle of competence. Overall 22/26 are currently profitable positions with 4/26 still underwater (all are new positions). My aim over the fourth quarter is to give all of my holdings the space to breathe and hopefully progress. That said, I will be ever mindful of bad news should it appear on the horizon, although virtually all holdings have reported good progress over the past 3 months.

Of the 19 direct equity holdings, all have very strong quality characteristics (strong operating margins, a high return on invested capital and good cash generation) while having an intact business model and a plan for growth. The variable factor across this set is valuation – some being expensive high flyers and others being cheaper super stocks. Overall, the portfolio averages Quality (85), Value (37), Momentum (80) and Volatility (3.06) which, if it were a single stock would equate to an Adventurous High Flyer, to use the Stockopedia terminology. Thanks to some useful dividend increases, the natural yield of the portfolio is 4.6% and back on track to meet my start of year expectations. In round numbers, the strategy split is 40% QM, 40% QV and 20% income.  

The main risk I am carrying is an overweight exposure to a single holding, Anglo Asian Mining (AAZ) which I have topped up @ sub 130p a couple of times recently. Momentum has been dampened by the flare up of long-standing hostilities between Azerbaijan and Armenia focused on the Nagorno-Karabakh region. The company have confirmed that these hostilities are not currently affecting operations. Against this, I believe AAZ are on the cusp of some significant developments, most notably in their quest to expand their Contract Area to join up Gedabek and Gosha. This would be hugely significant, in my view. Additionally, the company have announced an increased interim dividend (+29% YoY) and suggested a special dividend will be paid in Q1 2021 if the gold price remains at elevated levels.

At some point, my intention is to reduce exposure to a single company and spread the funds across the wider portfolio. This said, I don’t plan to act until price/volume present me with an opportunity to do so. In the meantime, I am comfortable collecting the dividends while I wait for that opportunity.

Macro Factors

I have spent a lot of time recently considering the macro environment, primarily because I believe we are in unchartered territory and I find it both extremely interesting and intellectually challenging. The most compelling podcast series I have listened to is Grant Williams’, The End Game (highly recommended) where a variety of experts try to make sense of the future given what is going on at present in relation to the debt levels and money printing, especially in the US. To cut a long story short, none of the likely scenarios are pretty and most of them lead to a higher gold price. Who knew?   

In addition to the debt and money printing, there is a US election that is just a month away, a second wave of the pandemic ongoing and some very challenging business conditions across the globe. It remains to be seen how markets behave given that backdrop but I note that the US markets have raised their circuit breaker limits for the month of October, so I guess they are expecting some volatility ahead. Tin hats, sofas and hobnobs at the ready!

And Finally

During the quarter, my wife and I discovered we are to become grandparents for the first time early next year. 2021 is looking better already! Apparently, the child will be part of the Coronial generation. Who thinks of this stuff?    

Happy investing!
Simon

Disclosure – At the time of writing, I own shares in EKF, AAZ, POLR, APEX, FDM, GAMA, IBPO, PGH and SMS which were all mentioned in this article. A full list of holdings as at 30 September 2020 can be viewed here