It has been remiss of me not to write up a quarterly portfolio review earlier. In short, it was a poor quarter with a 12% decline and significantly underperforming all three benchmarks, mainly due to being overweight UK small caps. The only real positive was that dividends were ahead of expectations with 28% of my annual forecast now banked. The full breakdown of my quarter can be viewed here. My portfolio as at quarter end can be viewed here. However, since quarter end I have made a number of changes (see graphic at the foot of this article) to be better prepared for what might be coming down the road.

Before I get to that, let me just say that the events still unfolding in Ukraine are truly sickening and mind bogglingly senseless. Let us hope that the suffering ends soon. It seems wrong to be writing an investment blog related to these events but I believe it has triggered the start of some potentially seismic scenarios in the macro environment and without wishing to be too melodramatic, I would like to capture my thoughts and actions at what could be a critical juncture.

Perhaps the most significant macro event that has occurred is the freezing of Russian Central Bank assets by the West, forcing a likely default on Russia’s sovereign debt. How confident are other central banks around the world going to be that their assets, for example, their US dollar reserves, are secure? Add in the energy, commodity and food shortage that is unfolding, China’s zero Covid policy and its effects on the supply chain along with their continued support for Russia, rampant inflation and the inability of central banks to raise rates either too far or too fast without crashing the whole house of cards and you begin to wonder how this all ends and what might come next.

The direction of travel suggests that a significant East-West chasm is emerging which I am referring to as the Silk Curtain (as in Silk Road and Iron Curtain – geddit?). Even if such a chasm doesn’t develop completely, how confident are countries around the world going to be transacting in dollars, especially for critical commodities such as oil, gas and food when those assets could be frozen if they displease the US and their economic allies? One compelling argument put forward by Luke Gromen (there was an excellent interview in March with Luke on the Grant Williams podcast which has been made free to access, such is the importance that Grant places on the interview) is that the Eastern part of the equation along with their economic allies and key trading partners will be seeking to use a Neutral Reserve Asset such as Gold or perhaps a basket of other assets. Further, Luke refers to the extreme supply shortage of oil caused by the sanctions against Russia that are yet to fully feed through into the market. Perhaps we will find oil and other commodities will be priced in gold or an alternate NRA in order to reduce dollar dependence?

Either way, we are in the midst of a commodity shock that does not currently show any signs of subsiding which in turn is further fuelling inflation and reducing discretionary spend. I believe the best we can hope for at this juncture is a short, sharp recession. With the dollar index currently printing over 100 (which will be really hurting emerging market economies) perhaps the Fed will try to prolong the party by resuming bond purchases or limiting rate rises but I fear a day of reckoning is approaching and perhaps sooner than we expect.  

How to play this toxic mix of macro factors from a portfolio perspective? Judging by the lack of liquidity in many UK small caps it would seem that plenty of retail investors have opted to step out of the market and frankly, their prudence might be proven to have been the right course. For my part I remain fully invested with sufficient cash reserves outside of the market to support 6-9 months living expenses which in turn, are also covered by dividend income on a quarterly basis. This gives me sufficient comfort to try and play the game at this tricky juncture while accepting that the market risks are elevated. My asset allocation and rationale follows:

UK Small Caps

With a critical eye I have challenged my conviction in all of the small cap holdings. The lower conviction ones have been jettisoned while I have topped up the higher conviction ones. These are Jarvis Securities (JIM), Fonix Mobile (FNX), Bloomsbury Publishing (BMY) and Polar Capital (POLR). In each of these I am prepared to accept the added liquidity risk on the basis that if they fell significantly due to a market sell off then I would, with little hesitation, buy more.
Current Asset Allocation = 18%

UK Mid Caps

I have approached this segment in a similar way to the Small Caps but have retained a couple of holdings where I have slightly lower conviction and have reduced exposure rather than exiting the position entirely. These are Emis (EMIS), Gamma Communications (GAMA) and Spirent Communications (SPT). The remaining higher conviction Mid Caps are Games Workshop (GAW) and Impax Asset Management (IPX) both of which I have topped up quite significantly and would do so again should there be a significant market sell off.
Current Asset Allocation = 17%


This is where I have made the most significant changes. Thankfully, I exited Polymetals International (POLY) in January as invasion tensions mounted. I replaced this exposure to gold with an ETF of global, large cap gold miners (GDGB) which has so far returned around 10% while providing me with leveraged exposure to the gold price should it move significantly. I also have gold exposure via Anglo Asian Mining (AAZ) which carries its own idiosyncratic risks and opportunities, a holding that I have reduced so that it is roughly equal weight with GDGB. I had vowed never to own an oil company again but when the economics are compelling and it’s a fat pitch, it can be hard to resist and so it was when I bought into i3 Energy (I3E) with a fair amount of conviction at around 18p. With the price currently nudging 30p, this has now become my largest holding. I have recently added (again, with some considerable conviction) a fourth commodity holding, mining royalty company Anglo Pacific which is shifting its focus towards a low carbon future (currently ~25% legacy coal and ~75% battery metals) with a specific eye on low carbon/carbon neutral projects.
Current Asset Allocation = 27%

Real Assets

My income strategy has shifted away from equities to a diversified mix of real assets. These include Commercial Property REITs – Supermarket Income (SUPR), Impact Healthcare (IHR), AEW UK (AEWU) and Ediston Property (EPIC); Renewable Infrastructure – Foresight Solar (FSFL), Gore Street Storage (GSF), Bluefield Solar (BSIF), NextEnergy Solar (NSEF); Digital Infrastructure via Digital 9 Infrastructure (DGI9) and Secured Debt via Real Estate Credit Investments (RECI).
Current Asset Allocation = 27%

Large Cap Equities

My main exposure to large cap equities is via the Vanguard World ETF (VWRL) alongside a holding in Polar Capital Technology (PCT) where I can gain enhanced exposure to the more sensible US technology stocks which I believe will be resilient through any incoming recession. Price discovery of course is another matter but with PCT trading on a 10%+ discount there should be an enhanced upside at some future point. An obvious gap in my portfolio is UK and European large caps which I might address but am unlikely to do so with any urgency despite the FTSE 100 outperforming most other indices YTD. I do however retain a holding in European Assets Trust (EAT) which provides exposure to small and midcaps while currently yielding around 8%.
Current Asset Allocation = 7.5%

Completing my portfolio of 27 holdings is Nasdaq listed Arqit Quantum (ARQQ) which I have written about on these pages previously. It is a long-term play on the cybersecurity theme and has already returned my entire invested capital via a healthy top slice at around $35. It is not only a free ride per se but mentally I have locked it inside the coffee can and thrown away the key.
Current Weight = 3%

I have no idea if the scenarios in this article or anything like them will play out as the remainder of the year unfolds. And neither do I know whether my strategy or the stocks and investment vehicles I have chosen will work out. So please do not follow me blindly into any of the investments mentioned. I could be batshit crazy or I could be a total genius. As ever, history will be the judge of that.

Thank you for indulging me and if you have any comments on my strategy or any of my individual holdings, I am happy to chat on Twitter where I go by the handle @BrilliantLeader


P.S.  Next week I am scheduled to participate in the latest round of Sell it to the City where I shall be pitching one of my direct equity holdings (it is a very narrow field to choose from). Wish me luck! EDIT – Here is the link to the April 2022 edition of Sell it to the City where I pitched Fonix Mobile (FNX).

P.P.S. I am also adding a link to a video of the controversial Dollar Milkshake Theory as popularised by Brent Johnson as I believe this might be playing out at the present time.

Disclosure – At the time of writing, my portfolio holdings and weightings are as per the graphic below.