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!



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