Sunday 25 January 2015

CAPE Crusading in 2015 - Annual Portfolio Review

A belated happy new year to you all! I hope you all enjoyed the festive season? Time for my annual investment review, and I think the only thing hitting a 52 week high at the moment is my weight!

2014 was a difficult year for UK equities, the FTSE AllShare (my benchmark index) fell in nominal terms dropping -2%. However if you include dividends received it made a meagre gain of 1.3% (figures from Jan 3rd 2014 - Jan 3rd 2015).

I managed to outperform a little. My total return including dividends received but minus all charges was 4.9%. Hardly much to shout about, but looking back over a 6 year period (admittedly the bottom of the credit crunch) the All Share has delivered a total return (including dividends) of around 92% whilst my ISA portfolio is up 195% over the same period after all costs.

2014 could have been far more profitable if it hadn't been for a few very poor performers dragging down my averages. Among the culprits were Tesco, JP Morgan Russian Securities, Cairn Energy, Polo Resources, Oakley Capital & Molins. It has been a very bad year for small caps, energy/resource stocks and supermarkets. I have offloaded all these holdings aside from Molins and Oakley capital.

Holdings that made great positive contributions to the portfolio this year include Astrazeneca, BT, Fidelity China Special Situations Trust, F&C Commercial Property Trust & Berkshire Hathaway.

Since my last review I've picked up a few small holdings in Marston's, L&G and also the US tech giant Google. This is how things currently stand:

Company Market Amount % of Holdings

AstraZeneca FTSE 100 £19,602.40 13.00
BAE Systems FTSE 100 £7,943.56 5.27
Berkshire Hathaway (B) S&P 500 £5,910.34 3.92
British American Tobacco FTSE 100 £11,048.00 7.32
BT FTSE 100 £5,593.95 3.71
F&C Commercial Property Trust FTSE 250 £6,519.92 4.32
Fidelity China Special Situations FTSE 250 £10,724.68 7.11
GlaxoSmithKline FTSE 100 £13,110.84 8.69
Google NASDAQ £2,396.18 1.59
HSBC FTSE 100 £8,145.72 5.40
Imperial Tobacco FTSE 100 £11,720.72 7.77
Legal & General FTSE 100 £1,328.40 0.88
Lloyds Banking Group FTSE 100 £17,943.22 11.90
Marston's FTSE 250 £2,006.47 1.33
Molins AIM £952.84 0.63
Murray International Inv Trst FTSE 250 £8,679.84 5.75
Oakley Capital  AIM £4,948.64 3.28
Templeton Emerging Markets FTSE 250 £4,203.68 2.79
Urban & Civic FTSE small Cap £2,317.50 1.54

Cash £5,743.69 3.81

Total £150,840.59 100.00

Looking forward I am still cautiously optimistic. The UK market is still reasonably priced on a CAPE (Cyclically Adjusted Price Earnings) basis.

For an illustration of this check out this article from a few months back

The table on the lower right of the article documents the CAPE figures for all major markets. Note how expensive the US is looking after another stellar run this year. America is undoubtedly the best country in the world in which to do business, but is it a good enough prospect to warrant the valuation premium? I'm not so sure.

Greece and Russia represent the two cheapest markets globally, but I think both countries are in need of a significant catalyst before I would consider investing. If Greece pulled out of the Euro, or if political tensions ease around Russia, the investment case may become appealing. (NB I have recently exited a Russian investment trust because of the worsening predicament there.)

China is getting plenty of negative press lately due to the 'slowing' of their economic growth. There are plenty of issues to consider when investing in China but I'm not particularly worried about their GDP growth figures, which at 7.4% are still over double that of most developed nations. As you can see from the CAPE article above, China is still an attractively priced market so with a bit of luck my Fidelity China special situations fund will have another cracking year in 2015.

Last year I expressed concern about the investment prospect for gold and also long duration bonds. Over the course of the year gold has gone nowhere, and due to its non productive nature has been a poor holding. Long duration bonds however have continued to rally, thanks mainly to continuance of loose economic policy from central banks, the latest boosting factor being the European Central Bank giving the green light to Quantitative Easing (Bond Buying). Many government 10 year bonds are now so expensive (German & Japanese in particular) that they are yielding almost nothing. What is the point in tying your money up for 10 years when the yield is lower than you'd get in an instant access savings account? The rationale of course is that you will benefit from further capital appreciation of the bond price due to the bigger fool effect i.e. the hope that some bigger fool will come along and pay more after you. The bigger fools in question being the central banks. Long dated government bonds are seriously overvalued and I remain convinced they will deliver poor returns in the long run.

As most of you are aware, we had a huge fall in the price of crude oil during the second half of 2014. If prices remain at current levels, we should see a big impact on company profits from a reduction in business input costs and increased consumer discretionary expenditure.  This factor along with the banking sector slowly returning to health, could provide a tail wind for business in 2015.

I hope you all have a happy and prosperous year folks!