Wednesday 26 January 2022

2021 Investment Review


The total return for my ISA during 2021 was +13.21%. This includes dividends received and is net of all fees. Although the double-digit absolute return is pleasing, on a relative basis it was a disappointing year.

The FTSE Allshare total return managed +18.32%, therefore underperformance against this benchmark was -5.11%, the worst since inception. The S&P500 managed a mighty +28.71%. I did half expect to underperform the UK market after such a wide out-performance last year, but to underperform so heavily against the US market was more of a blow.

For the first time by weighting, I now own more US stocks than UK, so I will start paying more attention to the S&P500 as a benchmark.

My pension, which is a mix of active and passive funds (46.81% passive), returned +18.26%. The IA Global sector managed +17.7%. The passive funds did very well but a couple of active funds caused a drag, most notably Lindsell Train Global Equity which managed a very poor +0.6% return during the year.

LT Global is a very concentrated fund, and several of its top 10 holdings did poorly last year, yet on reflection the holdings remain solid fundamentally, with reasonable valuations, hence I have no plans to ditch the fund just yet.  

ISA Portfolio return history:

Year Portfolio Return Allshare TR Outperformance
2011 0.50% -3.50% 4.00%
2012 16.00% 12.30% 3.70%
2013 27.30% 20.80% 6.50%
2014 4.90% 1.20% 3.70%
2015 5.30% 1.00% 4.30%
2016 12.00% 16.00% -4.00%
2017 15.80% 12.60% 3.20%
2018 -8.44% -9.47% 1.03%
2019 19.93% 19.17% 0.76%
2020 9.73% -9.82% 19.55%
2021 13.21% 18.32% -5.11%
11yr Total Return 190.02% 101.19% 88.83%
11 year average p.a. 10.17% 6.60% 3.57%

ISA Holdings as at 1st January -

Holding %
Fidelity China Special Situations 6.97%
Berkshire Hathaway (B) 6.72%
Alphabet 5.91%
Cash 4.86%
IG Group 4.21%
Fundsmith Emerging Equities Trust 4.17%
Starbucks 3.49%
Diageo 3.46%
Apple 3.41%
Facebook (Meta)
British American Tobacco 3.01%
Legal & General 2.95%
Imperial Brands 2.77%
Amazon 2.73%
Restaurant Group 2.60%
Pepsico 2.56%
Disney 2.47%
Unilever 2.41%
Costco 2.32%
Murray International IT 2.25%
Philip Morris 2.17%
Future 2.16%
Tencent 1.90%
Domino's Inc 1.73%
Rightmove 1.48%
Altria 1.30%
Autotrader 1.29%
Activision Blizzard 1.27%
Domino's Pizza Group Plc  1.27%
Intercontinental Hotel Group 1.20%
Alibaba 1.14%
Visa 1.11%
Take-Two Interactive 1.09%
Paypal 0.96%
Car Gurus 0.86%
Electronic Arts 0.86%
Flutter 0.85%
AstraZeneca 0.84%
Intel  0.84%
Games Workshop 0.83%
International Greetings 0.78%
Money Supermarket 0.74%
Domino's Pizza Eurasia 0.43%
Boohoo 0.41%

China was a drag on my ISA performance during 2021. My biggest holding, Fidelity China Special Situations Investment Trust fell approx. -18% during the year, and to compound the issue I bought new positions in Alibaba and Tencent which have also fallen since purchase. Chinese company valuations look very appealing at these levels, but I'm increasingly concerned about the CCP and their influence over Chinese businesses. Disappearing business leaders, swift regulatory changes, and the prospect of war & sanctions pose a significant risk.   

Other notable portfolio setbacks include a small purchase of Boohoo which has continued to fall in value (it had dipped a fair bit before I bought), and a failure to offload International Greetings (despite significant warning signs - director selling & dodgy accounting) which has since issued profit warnings and imploded.

Recently in his annual Fundsmith letter to shareholders Terry Smith waxed lyrical about the importance of high gross profit margins and how these can protect against inflation using L'Oreal and Campbell's Soup as examples. Unfortunately, I am learning this lesson the hard way. Both Boohoo and International Greetings have managed to grow turnover during Covid, but inflation and supply chain issues have hit margins which has decimated earnings per share and thus share price. The question is whether to sell and move on (cementing a loss) or wait until supply chain issues resolve and trade normalises to exit at a more favourable price. They are both small holdings, so shouldn't cause too much upset but the situation is frustrating nonetheless.

I recently top-sliced 25% of my Apple holding @ $180.50 which resulted in a c. 620% gain since purchase, which was a pleasing result. I sold on valuation grounds and am now regretting not offloading more, as they have since fallen to $162.95. I find selling a much harder art than buying. 

Since the new year Microsoft have made a seemingly successful bid for Activision Blizzard which is frustrating. The shares are up nicely on the news, but I'll be disappointed to see ATVI go. I think it has tremendous long-term potential on its own without Microsoft, who have bought well in my view. Considering the company had traded at a higher valuation than the bid price less than 12 months ago it does seem quite short-termist to accept such a paltry bid, but hey ho. The company was having some troubles relating to harassment claims against management, but these were issues that would have been resolved over time. Now the company will be a mere footnote in Microsoft's accounts, assuming the deal goes through.

I have calculated a few weighted average metrics for the ISA portfolio (excluding funds). The weighted average EV/Ebit is 22.7x. The weighted average Free Cash Flow Yield is 4.2% and weighted average forecast EPS growth is 26.82%. weighted average ROCE is 20.08%. Weighted average forecast dividend yield is 1.82%.

Forecast EPS growth is higher than would normally be expected as certain companies rebound from the pandemic, and historic ROCE is depressed a bit from the impact of covid on those businesses.

During 2021 I read a couple of investment related books - Morgan Housel's 'Psychology of Money' and also Howard Marks' 'The Most Important Thing'. Both books were interesting to read but ultimately quite basic and didn't really teach me an awful lot, however I did like the way that they both explained some popular topics.

For example, Howard Marks describes market cycles as having a pendulum effect whereby sentiment swings between times of huge pessimism thereby creating huge investment opportunities, then subsequently over time the pendulum swings back towards irrational optimism.

Marks comments that during times of irrational optimism it becomes harder to outperform the market as certain high risk (high beta) securities can perform very well but rational investors would do well to stay away from these because of the potential downside of valuation contraction. These swings in sentiment can take a long time to play out. Kerry Balenthiran postulates a 17.6-year Stock Market Cycle in his book of that name, and it would appear that performance of high beta securities can vary sharply from one decade to the next as shown by the QQQ (Nasdaq100) results in the table below.


It certainly feels like the pendulum has been swinging towards irrational exuberance for some time now. Speculation on Cryptocurrencies, SPACs and high beta stocks all point to a very 'risk on' environment. Near zero interest rates and stimulus money during Covid seem to have fanned the speculative flame. 

As I write, Jerome Powell (US Federal Reserve) is laying out US interest rate policy and it appears that imminent hikes are on the cards. Also, he is discussing plans to unwind their QE policy. US stocks have had a tough start to 2022, could this monetary tightening cause the sentiment pendulum to gather momentum in the pessimistic direction? If so, I may get a chance to deploy some of my cash holdings.

All the best for the rest of 2022 - Matt.