Wednesday, 2 January 2019

2018 Review

2018 was mightily frustrating from an investment perspective, it was the first year I incurred a capital loss since the credit crisis (2008).

My ISA portfolio (individual equities & Investment Trusts) was down -8.44% over the year. I suppose I should be content that this is ahead of the FTSE All Share Total Return (my benchmark) for the year (-9.47%), but it's hard to see the bright side when faced with a capital loss.

Notably -5.58% of the drawdown was caused by my exposure to the tobacco sector,  which had a shocking year after various setbacks including the potential ban of menthol cigarettes in the US (which constitute a sizeable portion of British American Tobacco's revenues.)

The five biggest fallers were BATS - 49.4%, CARD - 41.1%, DOM -33.6%, PZC -33.6% & PM. (US) -31.4%

The five biggest gainers were CMG (US) +55.3%, IGR +46.3%, SBUX (US) +20.7%, AZN +15.0%, GSK +12.8%

Out of interest this year I've calculated some metrics from the portfolio to get an idea of the weighted average ratios. Terry Smith does something similar in his annual newsletter for his Equity fund. I've had to exclude info from the Investment Trusts I hold as well as from Berkshire Hathaway due to lack of data, so just taking the individual stock holdings as a weighted average here are the following portfolio metrics:

  • Forward PE = 16 (UK average = 11.2 - source - Stockopedia Jan 2019)
  • Forecast Div yield = 4.4% (UK Average = 4.21% - Stockopedia Jan 2019)
  • Forecast EPS growth = 10.6% (UK average = 10.5% - Stockopedia Jan 2019)
  • Portfolio ROCE of 31.7%, NB this is skewed around 9% by the ridiculously high ROCE of Rightmove, the figure excluding RMV is 22.7%. Average ROCE of FTSE 100 is 14% - source Fundsmith Annual Letter Jan 2018  
  • Operating Margin = 27.3% (UK average 13% source - Fundsmith letter Jan 2018) 
  • FCF Conversion of 89.2% (FTSE 100 -  96% Fundsmith letter Jan 2018)
  • PEG - 1.51 (1.07 UK average)
Notably the portfolio is a lot more expensive than the UK average on a PE basis, but also a lot higher quality as measured by ROCE and Operating Margin. I was surprised that FCF conversion was relatively low but quite a few of my holding have substandard FCF Conversion (for example BATS - 38.9%) which collectively have lowered the average. EPS growth is similar to UK average although I like to think that many of my holdings have more reliable growth relative to the UK market as i don't have too many heavily cyclical holdings.

Gathering stats in this manner has drawn attention to the holdings that detract from the averages and thus was a useful exercise in my opinion.

Here's a full list of current holdings with percentage weightings:

Rank Company %
1 FCSS 6.88
2 BRK.B 6.38
3 IMB 5.93
4 FEET 5.91
5 IGG 4.80
6 ULVR 4.08
7 BATS 3.60
8 MYI 3.59
9 AZN 3.56
10 DGE 3.39
11 SBUX 3.30
12 GOOG 3.25
13 LLOY 3.16
14 IGR 2.84
15 FCPT 2.68
16 DIS 2.55
17 RB. 2.49
18 LGEN 2.46
19 PEP 2.33
20 RTN 2.25
21 GSK 2.19
22 CMG 1.98
23 SGE 1.96
24 DOM 1.94
25 PPB 1.87
26 IHG 1.83
27 AAPL 1.72
28 PZC 1.28
29 MONY 1.12
30 AA    1.09
31 BKG 0.92
32 DPEU 0.85
33 GOCO 0.85
34 PM. 0.82
35 MO. 0.78
36 IBM 0.68
37 CASH 0.67
38 MARS 0.60
39 CARD 0.59
40 RMV 0.49
41 VVAL 0.35

Total  100.00

There has been some mild chopping and changing and some new positions initiated including AA, VVAL, GOCO, MONY, DPEU & PPB. Positions in AZN and FCSS were reduced slightly.

Trade wars and Brexit aside, I'm quietly confident that the portfolio as a whole will deliver on its forecast EPS growth over the year to come, and hopefully by the end of 2019 the underlying holdings will have re-rated upwards substantially to reflect this. 

In other news, my pension which is invested in a mix of open ended funds performed a bit better due to higher global exposure, but still lost -3.28%

My bearish calls this time last year on Bitcoin/Crypto & and also Nvidia turned out to be correct, but unfortunately I didn't get around to putting any shorts on to profit from their falls. Nvidia's drop was particularly rapid following a profit warning fairly late in the year. It strikes me that it's quite hard to time a short even if you have a reasonable idea of how things might pan out. It's far harder from a timing perspective than long only, buy and hold investing.

That's all for now folks. Fingers crossed for a better 2019!



Monday, 13 August 2018



Modern Portfolio Theory (Harry Markowitz 1952 – not that modern), suggests that portfolio diversification could “reduce risk and increase returns for investors.”

The conclusion is that a diversified portfolio of imperfectly correlated stocks reduces the overall risk to less than the average risk of the individual securities. The downside risk of one investment would be offset by the upside potential of another investment.

Unsystematic risk (i.e. the risk of a particular company performing badly), can largely be eliminated by holding a diversified portfolio. (NB Systematic risk – the risk of a general market fall – cannot be protected against by diversifying within the same asset class i.e. stocks)
Various academic studies suggest that 15 to 20 securities selected at random are sufficient to eliminate most investment-specific risk in a portfolio, however the more securities are added, the more the risk diminishes. (source – Investment Principles and Risk Textbook – CII)

I wholeheartedly agree with the premise that holding more stocks does help to protect against the unknown ‘black swan’ events that can come out of the blue and smash a company’s share price into smithereens, but does holding too many stocks throttle performance by diluting one’s best ideas?
In consideration of this, firstly I’d like to dwell on some personal experience.

Although I have dabbled with shares since the late 90s, my first serious stock pick was in 2009. I’d held a FTSE All Share tracker fund (obviously reasonably diversified) since 2005. I watched it rise for a couple of years, and then subsequently crash monumentally when the Credit Crisis hit. During that crash I decided to take a more active approach and disinvested the tracker fund to buy a handful of stocks that I perceived to be trading at significant discount to their intrinsic value.
Luckily one of those stock picks was Barclays. I bought into them in the early spring of 2009, and subsequently sold in the autumn making over 200% profit. Because this holding represented a relatively large portion of my portfolio, this pushed my total returns for the year to 75% which to date has been my best year in terms of percentage gain.

As time has progressed, the number of my portfolio constituents has grown steadily, and now it stands at 32 individual companies, 4 investment trusts and 11 OEIC/Unit Trusts (which I evaluate separately.)
Excluding the Unit Trusts, which have been a relatively recent addition, my average annual return (after all trading fees but including dividends reinvested) over the 9 years from 2009 to 2017 has been 16.95%. Although when you strip out that great year in 2009 my average annual performance falls dramatically to 11.2%. The All Share Total Return index also had a decent year in 2009 delivering 30.12%. It’s annualised return over the last 9 years has been 11.23% which falls to 9.1% per annum with 2009 stripped out.

To summarise, my personal experience thus far has been that higher returns were generated with a more concentrated portfolio, albeit this experience is heavily skewed by good fortune in one particular stock pick, during a particularly good year to be stock picking. If Barclays had gone to the wall during the crisis my results would look remarkably different. With this in mind, going forward would I be better off ditching some of my holdings and using a more concentrated approach? 

Most money managers with great track records appear to agree that a more concentrated portfolio is beneficial for delivering higher returns. Even Peter Lynch, the US fund manager who averaged an annualised 29.2% during his tenure at the Fidelity Magellan fund, which towards the end of his reign held as many as 1400 stocks, advises the small-time investor to concentrate on 8 to 12 stocks. He explains that his high number of holdings was strictly a result of the size that the fund had mushroomed to. (Source – The Great Investors by Glen Arnold)
Buffett is also quoted as saying that “Diversification is protection against ignorance. It makes little sense if you know what you are doing.” He walked the talk back in the 60s when he invested 40% of his partnership’s money in American Express stock after they’d tanked because of involvement in a scandal. This turned out to be a very lucrative move, and his portfolio returns were turbo-charged by his high concentration in this one stock.

I’d need an incredibly high level of conviction to consider investing 40% of my capital into one stock. I am undoubtedly more ignorant than Buffett as for starters I don’t do as much research as him due to having a day job, therefore I feel I need some amount of protection against bad decisions. My capital will ultimately fund my retirement as well as pay off an interest only mortgage, so my capacity for loss is finite.
This might seem paradoxical, i.e. why have more holdings if you have less time, but it does make sense to me to a degree. The reason is much of my research is done via software packages such as Sharepad and Stockopedia plus publications such as the Investors Chronicle. Using formats such as these you can quickly do a reasonable amount of research on a stock, but to get that extra layer of depth, i.e. go to AGMs, meet management and do in-depth research on competition etc, I just don’t currently have the time or resources to do this effectively. 

There is plenty of proof out there, Mr Lynch included, that demonstrates that you can achieve admirable returns with larger portfolios, especially if you are using a factor-based approach. 
Personally, I have no immediate plans to offload any holdings to meet a goal for a set portfolio size, but as an exercise I have ranked my holdings in order of conviction (easier said than done.) I have made a note of the order and I will evaluate performance of the top half Vs the bottom half going forward to see if there is much difference between my self-proclaimed ‘best’ ideas and my ‘worst’ ones.

The ranking exercise was certainly thought provoking. For instance, the stock that I ranked number 1 was Starbucks (SBUX), yet it only currently constitutes 2% of my portfolio, which means it isn’t even a top 10 holding. Why haven’t I bought more? I am wary that it is a consumer cyclical and could suffer a heavy pullback during a recession, but I do believe it will perform well in the long run, so in theory I should increase my position.

To conclude I think the ideal portfolio size will depend on personal preferences and levels of conviction. If you have the capacity (both mentally and financially), to stomach a large hit on a concentrated portfolio, and have conviction enough to entrust a large proportion of your savings into one organisation, then a concentrated portfolio might be for you. If you are right with your best ideas this should supercharge your returns. Otherwise I do not see that there is significant harm in holding a larger number of stocks provided you have the time to do enough due-diligence on each holding. If it worked for Peter Lynch, maybe it can work for us all.    

Saturday, 30 December 2017

2017 End of Year Results

2017! Where did that go? Time has really flown this year.

To recap: global indices have rallied hard, with the UK lagging somewhat. However I calculate the All Share Total Return to be +12.6% for the year, which isn't too shabby.

My own personal stock portfolio performance totals +15.8%, so a slight out-performance, which makes up a little for the -4% underperformance last year.

My rolling 5 year performance is 82.37%  VS  61.27% for the All Share TR. I'm sticking with the All Share TR as my yardstick, despite a gradual increase in exposure to the US.

The FTSE AIM index has been on fire, returning +33% for the year. Unfortunately I haven't had much exposure to this.

In recent years I have been put off by AIM, because the long term stats for the AIM index are terrible. An FT article written in 2015 around AIM's 20th birthday ( ) mentions that since inception, AIM has lost -1.6% per annum, and states that 72% of all the companies ever listed on AIM would have lost you money.

I have experienced such losses on AIM first hand, mostly via investments in oil/mining exploration companies that talked a good game, but never seemed to achieve what they anticipated.

Hence, due to statistics and experience, I've since tended to stay well away.

However, it strikes me that it is these oil/mining companies that are probably holding the AIM index back. If you stripped these out of the long term results, the returns probably look a lot better. I will endeavour to pay more heed to small/micro stocks in 2018!

Here is a list of my holdings as they currently stand:

Company %
Fidelity Special Situations China 8.79
AstraZeneca 7.26
Imperial Brands 6.77
British American Tobacco 6.58
Fundsmith Emerging Equities Trust 5.94
Berkshire Hathaway B Class 5.72
IG Group 5.50
Murray International Trust 5.38
Lloyds Banking Group 3.78
Diageo 3.01
Alphabet 2.86
Unilever 2.84
F&C Commercial Property 2.66
Legal & General 2.65
Domino's 2.62
GlaxoSmithKline 2.31
Pepsico 2.18
Disney 1.99
Intercontinental Hotel Group 1.86
Starbucks 1.81
International Greetings 1.78
PZ Cussons 1.78
Restaurant Group 1.77
Reckitt Benckiser 1.70
Apple 1.59
Sage 1.14
Berkeley Homes  1.01
Altria 0.98
Chipotle Mexican Grill 0.96
Card Factory 0.91
Philip Morris 0.90
International Business Machines 0.79
Marstons 0.65
P2P Global 0.58
Cash 0.48
Rightmove 0.46
Turnover since last year has been relatively low. My main activities have been to top up IG Group, Domino's & Restaurant Group. Domino's and IGG have rallied nicely since, Restaurant are still in the doldrums.

I've benefited from takeover bids for WS Atkins, which I subsequently sold, and Unilever which didn't go through, but helped buoy the share price.  

I sold some of my position in Glaxo earlier in the year, in hindsight I should have sold it all, as they have been very weak since.

My tobacco holdings, British American and Imperial, were both very weak over the year. I've used share price weakness to top up on Imperial Brands and also initiate new positions in Philip Morris and Altria, which are US based tobacco companies. Whilst morally debatable, tobacco has been the best performing sector over any medium to long time frame you could mention, and I'm hoping for some reversion to mean eventually.

I've also initiated some new small positions in Rightmove, Starbucks, Card Factory and IBM.

You may have noticed that I do gravitate towards the Mega Cap stock, partially because I find it immensely gratifying to see my holdings in action. I spend quite a bit of cash with many of these holdings on a regular basis, begrudgingly in some cases, which is usually a sign of a very well structured moat!

As a side note my other investment, a portfolio of managed OEIC's and Unit Trusts (circa 90% equities, 6% cash, 4% property), has matched virtually identically my DIY YTD efforts.

This year, through work I've had the pleasure of meeting a few great fund managers, including Keith Ashworth-Lord (Sanford DeLand), & Nigel Thomas (AXA Framlington). It's always good to hear from these veterans about how they go about stock selection. It seems the best fund managers are usually very humble, and always keen to share their experience and opinions.

Uncharacteristically I haven't read many investment related books in 2017. A couple of note of the few were Phil Oakley's 'How to Pick Quality Shares' and also Kerry Balenthiran's 'The 17.6 Year Stock Market Cycle', both of which I'd recommend!

A round-up of 2017 wouldn't be complete without some reference to Cryptocurrency and Bitcoin etc. For years I've been saying Bitcoin is a fad, and should not be seen as a viable investment. I likened it to Tulipmania back in 2013 ( .) Amazingly since then it has continued to confound me, with the price per coin continuing its parabolic ascent (currently circa $13,000.00 but has touched $20,000.00.)

I did not anticipate for a moment the amount of people who would get sucked into this, despite it not being a viable currency (too volatile) or a legitimate investment (i.e. it's non productive and has no intrinsic value).

My feelings about crypto haven't changed since 2013, and I still think it will end in tears for many people. I'm now starting to wonder whether it may be possible to profit from the eventual collapse?

Futures trading now allows you to bet against the currency which might be an option. But also I've been looking at potentially shorting businesses that are benefiting from the crypto-boom.

In particular Graphics Card producers such as NVIDIA (US) have had increased sales in recent years as people are buying their product specifically to 'mine' cryptocurrencies. The cards people are buying are very high end (expensive) and if/when this blows over there could be a large oversupply of said cards for some years. NVIDIA's share price has gone up 10 fold over the last couple of years, it might well fall back if sales decline.

I've made initial enquiries into Jan 2020 'out of the money' put options & this could be a viable way of betting against the collapse whilst capping the downside risk. NB I don't generally do this kind of thing and am a total novice, so please don't try this at home unless you know what you're doing!

That concludes my investment year. Many thanks to you all for reading, and in particular thanks to all the Twitterati PI's who continue to be a great source of information and knowledge. You know who you are!

If you have any questions please feel free to comment or alternatively contact me via Twitter

Have a great 2018!