Tuesday, 5 January 2021

2020 - Investing Through The Pandemic

2020, the year that our bins went out more than we did. The year Covid19 kept us away from our friends and loved ones. The year that all non-essential businesses that involved any sort of social interaction were forced to stop trading for extended periods of time, pushing many of them to the brink. You'd think this would have been a terrible year to be a stock market investor, yet somehow it wasn't. Despite a rollercoaster ride, things have actually been okay.

February/March Crash

The initial impact of the virus took me largely by surprise, I had read a little about it in the papers and in New Scientist magazine, but I must confess I was blind to the damage that it was about to inflict. I had incorrectly assumed it would be like SARS, MERS etc and that it would not affect the West to much extent.

By the time I realised I was wrong towards the end of February, the market had already fallen quite a bit. Within my ISA portfolio (a portfolio of individual stocks and a few IT’s) I offloaded a couple of small holdings in Card Factory and Marston’s that had been poor long-term performers and were obviously susceptible, but they were such small positions that it made very little difference to the overall portfolio, and I went into March circa 98% invested with the remaining 2% in cash. In hindsight I could have been more liberal with my selling, I should have also unloaded Restaurant Group and a few other positions.

Within my pension portfolio, which is a mix of active and passive open-ended funds I did nothing. Notably a few of the actively managed holdings (Slater Growth & SDL Buffettology for example) had reasonable cash balances having trimmed some positions, thus went into the crash relatively well prepared.

During March the markets continued to nosedive, reaching their nadir on the 23rd, at which point my ISA portfolio was down -26.88% YTD. The FTSE Allshare by comparison was down 35% YTD at this stage, the US markets were also down by a similar amount.

As horrific as the news was,with people hooked up to ventilators in hospitals without family members present to comfort them, the stats seemed to show that the vast majority of people contracting the disease survived. This suggested that we would eventually get through, and that the economy would hopefully recover within a year or two. Thus, considering the substantial market falls during February and March, share prices were starting to look very attractive.

During late March/April I raised a small amount of capital via remortgage to top up many of my ISA holdings and instigate a few new positions. My plan was to drip feed in the newly raised cash over a period of months as I assumed that things might get worse before they got better, but again I was wrong, and was very surprised how quickly the market rebounded from its March lows. As a result, some of my additional cash has yet to be deployed. Luckily, I did manage to make a decent pension contribution before the tax year end, which in hindsight was well timed. The new portfolio positions were Activision Blizzard, Take-Two Interactive and Electronic Arts (all video games companies) and CarGurus which is a US rival to Autotrader. All are up nicely since purchase.  

Overall, I was reasonably happy with how the ISA portfolio performed during the crash. I’m overweight consumer staples, underweight cyclicals and have a few holdings such as Amazon, Apple, and IG Group, that actually benefitted from the new normal. I didn’t lose any sleep from an investment perspective, which I think is an incredibly important factor. Most of my holdings are well capitalised with strong balance sheets, hence only a couple needed to tap the market for extra funds to see them through.     

Rebound

After the market bottom on March 23rd, stock markets around the globe rebounded sharply following various government stimulus packages. Technology stocks in particular soared. Following the bounce, I exited two holdings over late spring/summer: Chipotle Mexican Grill because of high valuation, and Flutter as I was worried how a betting company would cope with so many sports fixtures cancelled. According to Sharepad (share analysis software package) the Forecast FcF yields for both companies had fallen to less than 2%. Both positions were sold at a substantial premium to purchase price, yet with hindsight it would have been better to hold on as they have both risen further since selling. The Flutter sale is particularly frustrating as they appear to have suffered minimal headwinds from Covid. Sharepad revised their FcF yield forecasts up substantially not long after I sold.   

Performance

My ISA portfolio gained 9.73% over the year, The FTSE Allshare TR Index which I’ve been using as my benchmark fell -9.82%, thus out-performance was +19.55% for the year. Notably the FTSE Allshare TR Index is becoming a less relevant benchmark as US shares become an increasingly large part of my portfolio (US stocks - excluding those held in ITs -  now account for approximately 31% of my portfolio.)

This is a snapshot of how things stand at the beginning of 2021:

Holding

%

Fidelity China Special Situations

9.79

Cash

7.38

Berkshire Hathaway

5.76

IG Group Holdings

5.11

Fundsmith Emerging Equities Trust

4.94

Alphabet Inc

4.06

Apple Computer Inc

3.81

Starbucks Corp

3.61

British American Tobacco

3.41

Walt Disney Co

3.25

Unilever Plc

3.07

Legal & General Group

3.02

Imperial Brands

3.01

Diageo

2.82

Vanguard VVAL

2.77

Murray International Trust

2.52

Pepsico Inc

2.44

Amazon.com Inc

2.26

IG Design Group Plc

2.25

Restaurant Group

2.02

AA Plc

2.02

Domino's Pizza Group Plc

1.85

Lloyds Banking Group

1.56

Rightmove Plc

1.39

Glaxosmithkline

1.38

Intercontinental Hotel Group

1.35

Sage Group

1.34

Auto Trader

1.19

Philip Morris

1.16

GOCO Group

1.13

Altria Group Inc

1.13

Moneysupermarket.com Group

1.02

PZ Cussons

0.98

Take-Two Interactive Software Inc

0.96

Car Gurus Inc

0.92

The Berkeley Group

0.82

Astrazeneca

0.81

Activision Blizzard Inc

0.75

Electronic Arts Inc

0.66

DP Eurasia N.V.

0.26

Flutter Entertainment

0.05

 

100.00

Over ten years my total gain has been 156.18% vs 70.03% for the Allshare TR. Or an average performance of 9.9% per year VS 5.5%. As always, my performance figures include dividends but are net of all fees.

Year

Portfolio Return

Allshare TR

2011

0.50%

-3.50%

2012

16.00%

12.30%

2013

27.30%

20.80%

2014

4.90%

1.20%

2015

5.30%

1.00%

2016

12.00%

16.00%

2017

15.80%

12.60%

2018

-8.44%

-9.47%

2019

19.93%

19.17%

2020

9.73%

-9.82%

10yr Total

156.18%

70.03%

10yr Average p.a.

9.90%

5.50%

A few tougher comparators over ten years could be The US S&P 500 index, which has totalled 298% over the last decade (a whopping 14.8% annualised – based on iShares S&P 500), Berkshire Hathaway (B shares - portfolio holding) – up 190% - just over 11% per annum, or perhaps Terry Smith who, according to Trustnet has averaged a return of 14.7% per annum (This figure includes his tenure of FEET which has detracted from the performance of the Fundsmith Equity Fund which has delivered 18.2% per annum since inception.)

NB the Fundsmith Equity fund and a US tracker are large positions in my fund-based pension.

Funds VS Stocks?

Given that some of the funds I’ve invested in have achieved superior performance to my own share picks, with much less effort, a question I occasionally ask myself is whether it is prudent to maintain a directly held stock portfolio. Holding a global tracker fund, or Fundsmith Equity, for instance, would be a lot less effort.

In my view, holding funds and stocks is mutually beneficial. Certainly, if you are going to select active fund managers, it helps a lot if you understand why they hold the stocks that they do, and experience in stock picking helps when it comes to judging fund managers.

Furthermore, if you are a stock picker, there is a heck of a lot that you can learn by following reputable fund managers. People like Terry Smith & Nick Train have certainly influenced some of my stock picks. Some of my holdings were bought in emulation of funds that I hold, but also, occasionally I have purchased holdings for my ISA which have subsequently been bought by fund managers that I follow. For example, I’ve held Starbucks for a while as I thought it ticked quite a few boxes. I actually mentioned that it was my favourite stock in an August 2018 blog, so I was quite pleased to find out that Fundsmith had bought some shares this year during the March pullback. Similarly, I bought Apple before Buffett did going back a few years, a holding which has subsequently risen over five-fold. It can be gratifying to find out that you’re singing from the same hymn sheet as these guys.

Luckily, my day job means that I get to chat to fund managers regularly (the one’s who’ll speak to me at least), which has been a great and ongoing education in both fund and stock picking.

To summarise the Funds Vs Stocks question, there are various positives and negatives of each. The main positives of DIY stock selection are that you have no liquidity issues or regulatory imposed concentration limits, and also you have no pressure on you to deliver short term performance. The main positives for utilising fund managers are that they can be highly knowledgeable and are working full time - usually with a large team of highly qualified analysts working alongside them, their information set is likely to be superior to the average private investor, something which is very difficult to replicate without a lot of hard work.

I feel that I benefit from holding both individual stocks and funds (passive and active) and thus will continue to do so for the time being.

Active VS Passive

Back in 2012 I wrote a post titled Managed Funds VS Index Trackers. (link - http://www.mattjbird.com/2012/09/managed-funds-vs-index-trackers.html).

It is still the case that the average investor is statistically likely to perform better by utilising passive funds than by using active managers (and probably via DIY efforts – although data is harder to come by).  

Index funds offer broad market exposure, which means that investors won’t miss out on the market’s biggest winners. Also, they generally have very low charges which keep investment headwinds to a minimum. Buying and holding a global index tracker is possibly the nearest thing to a no-brainer for investors with a long investment timeframe and who have significant tolerance and capacity for volatility/loss.  

NB I said the nearest thing to a no-brainer, this does not mean that one should forget to engage a bit of common sense when investing in index funds. Any fund is only as good as its constituent holdings and future performance is likely to be swayed by the quality of these holdings, as well as the average valuation of the fund. This applies just as much to an index fund as it does an active fund. There are plenty of examples of passive funds doing badly over long periods of time. The FTSE All share for instance, has suffered very lacklustre returns over the past twenty years. The US Nasdaq Composite index took about 16 years to regain its former peak after the dotcom bust in 2000. If the top 20 or so holdings of a global index fund became grossly overvalued or became of poor quality (i.e. ex-growth, low margin/ROCE industries), then I would probably not advocate global indexing as strongly.

I firmly believe that there is still a place for active management, and that investors/fund managers that employ business perspective investment principles with an eye on valuation have the ability to outperform indexes over time.

In practice I currently have a foot in both camps. My ISA is predominantly invested into individual stocks and actively managed ITs, and my pension is circa 50% passive, 50% active funds.

ESG (Environmental, Social, Governance) Investments

ESG is currently a buzzword for fund managers. The number of emails I get each week lauding the ESG credentials of XYZ fund beggars belief. The big fund houses seem to be blowing the majority of their marketing budgets promoting it, and I’m more than a little sceptical about the constituent holdings of a lot of these supposedly ESG compliant funds.

One thing is for certain, the trend towards ESG investing is having a big impact on certain equities that are not viewed as ESG compliant. Tobacco companies in particular are so out of favour you rarely see them as a top ten holding of an active fund anymore. Their unpopularity is reflected in their valuation. As an example, British American Tobacco is trading on a current free cash flow yield of 12% with a forecast dividend yield of 8%, and the dividend is forecast to grow by circa 6% for the next couple of years. On the flipside of the coin, a lot of ESG darling stocks (think clean energy etc) are trading at very low or non-existent cashflow yields.

I recently listened to a podcast featuring the investor Howard Marks (https://www8.gsb.columbia.edu/valueinvesting/resources/podcast) and he mentioned that he made a name for himself by investing into junk bonds that were so unloved that most bond funds were not actually allowed to own them, by dabbling in this market where others were uncomfortable treading, he managed to average 20%+ returns for a number of years. I’m not saying the opportunity set is as high in tobacco stocks, but they do seem relatively good value compared to the rest of the market.     

Takeovers  

Two portfolio holdings had takeover bids during the last few months of the year, firstly the AA is being bought by a PE group. My experience with the AA hasn’t been great, after averaging down in March my average purchase price was 40p but the bid price is 35p so it looks like I’ll be taking a hit. The bid price does seem very low considering the company hasn’t suffered much from Covid, plus the share price was above 60p in January. I think the PE group have bought this equity on the cheap.

The second takeover was FUTR’s bid for GOCO, payable mostly in FUTR shares. I’ve been doing a bit of digging on FUTR and they seem like a decent business so I may well keep FUTR shares. FUTR is a top holding of the Slater Growth fund (held in my pension), and Mark approves of the deal. This bid is at a significant premium to my purchase price so I can’t grumble about this one.

Going Forward

Who knows where 2021 will take us, I expect it to be another choppy year. I have a reasonable wedge of cash ready to deploy should opportunity arise. Good luck all! Matt. 

 


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