2019 Mid-year review

As we’re past the half way point of 2019 I thought I should reflect on how the portfolio has performed and how I’ve progressed against my goals during the first 6 months of the year.

Portfolio performance
So far in 2019 the portfolio has increased in value by 15.1% (including all costs, and dividend payments). This compares to an increase of 13.4% in my benchmark (also including costs – as an accumulation fund dividends are reinvested automatically). I'm obviously pleased by this but a number of larger holdings, such as Unilever, have been performing very strongly of late and I would expect them to take a breather at some point soon.

The dividend yield from my portfolio in 2019 has amounted to 1.84% so far. The dividend yield on my benchmark is 3.79%, if half of this had been paid out in the first 6 months of the year, that would amount to a yield of around 1.9%. So I’m not too far away, however, a larger proportion of dividends tend to get paid out in the first half of the year, so I may drift from this. I would prefer the portfolio yield to be higher, but not at the expense of quality.

The best performer in the portfolio so far this year has been Sage, but this possibly reflects an overdone sell off last year, rather than any stellar turnaround from the business. Worst performer has been Saga, presenting a dire set of results that gave the impression the management had been asleep at the wheel. Whilst there are a few laggards in the portfolio, Saga is the only one at the moment looking like getting the elbow.

Analysis
I’ve been adding to the toolset, but it’s too early to say if this is proving effective. I’ve added in cost of capital calculations, and started to analyse performance metrics in a similar way to Terry Smith in his annual letters to investors in Fundsmith. I now have some weighted average performance metrics, and the median for the same metrics for the portfolio. In this way I can get a view of the portfolio as if it was a business, and how it compares to other businesses and potential investments. So an additional consideration for adding to the portfolio is to invest in companies that have performance metrics that compare favourably to those already in the portfolio, and the portfolio as a whole. Some of the key portfolio performance metrics are below:

Weighted average
roce	gross margin	operating margin	net margin	cash conversion	debt: ebit	cash flow yield
18.7%	47.7%	17.0%	13.4%	46.5%	3.5	2.2%

Median
roce	gross margin	operating margin	net margin	cash conversion	debt: ebit	cash flow yield
17.6%	57.0%	21.0%	16.1%	96.7%	2.8	5.6%

Whilst the above stats are helpful in some respects, using them to evaluate a Real Estate Investment Trust (REIT) is a little tricky as REITs are structured differently to most businesses. So I have excluded BBOX from the above. Also the debt related stats are not necessarily a sound reflection of the distribution of the debt across the portfolio. A number of holdings have no borrowings, it is mostly concentrated in a small number of holdings. Going forward, debt will continue to be an important factor in deciding whether to add something to the portfolio, I will prefer any additions to have low levels of borrowings.

Buying and selling
So far this year I've made the following purchases:

• Tritax Big Box (January)
• Manx Telecom (January)
• Fulcrum Utilities (March)
• Abcam (April)
• Reckitt Benckiser (April)
• Somero Enterprises (June)

These are all new additions to the portfolio, I haven't topped up any existing holdings.

Manx Telecom was acquired shortly after I invested, leaving the portfolio for a 32% profit. I have not sold any other shares.

Goals
My initial investment goals were:

• Capital preservation
• Increase capital by more than the rate of inflation
• Invest in quality dividend paying stocks

And by careful selection of stocks and funds, to outperform the FTSE All Share Index. Ultimately I'd like to be in a position in 20 years to get a steady income from dividends to top up pensions, and a solid portfolio of investments to pass on to sleepy junior, to provide not just a lump of cash, but a revenue stream. So far I'm fairly pleased with performance against these goals, but it's very early days.

Personal finance
No need to access the emergency fund during the first half of the year, and we've added to it slightly. Getting this set up has proved a great foundation for the rest of our finances as we now know that any spare cash is genuinely surplus to requirements.

Mortgage overpayments have continued. Mortgage partA is on track to disappear in around 3 years thanks to maxing out the overpayments. This accounts for about 60% of our mortgage payments, so completing this would free up a nice extra chunk of disposable income. We could then decide whether to put this to work overpaying the remainder of Mortgage partB, to a large extent this will depend on interest rates at the time. We have a bit of cash from bonuses, some of which is going into some work on the house, if this comes in under budget then Mortgage partB might get a little extra too.

Arrival of sleepy junior 2 over the winter will likely take a slice out of the budget, but nothing too dramatic as an attic full of stuff used by sleepy junior 1 can get wheeled out.

Conclusion
Fairly pleased with the start to the year, with a decent performance from the portfolio. I don't expect it to continue throughout the second half the year, as the high performing stocks are going to ease off at some point, macro-economic conditions look wobbly, and Brexit will once again take centre stage in the Autumn.

I've noticed myself prevaricating quite a lot over a number of purchases, and tend to want to get a bit more data, crunch some more numbers. Whilst caution and care is a positive, I think there has been a little too much dithering at times. However, overall, I'm pretty comfortable with the investments in the portfolio.