2020 Goals & strategy review and update

Taking a look back at previous performance with a critical eye is a good discipline, I find it helps to reset. It's useful to find those areas of success and failure, to pat oneself on the back and dust off any hubris at the same time. But it is inherently backwards looking, so with the 2019 review out of the way it's time to look ahead and to think about goals, my strategy for achieving them, and how to track progress against them.

Long term goals
My investment goals posted at the start of last year were modest, but realistic:

• Don’t lose money
• Increase capital by more than the rate of inflation
• Build a conservative dividend paying portfolio

And I would also wanted to beat the UK stock market, as measured through the FTSE All Share. The reason for this final ambition was simply one of risk vs. reward. If I was unable to beat an index fund  by picking individual stocks, then I should buy the index fund as this would provide better reward for (arguably) less risk (see my post on index funds for more thoughts on this).

The above long term goals are fine I believe, and do not need to change. However, I think they do need more detail which is below:

Don't lose money.
Hopefully self explanatory...

Increase capital by more than the rate of inflation.
The price of the shares that I own is going to fluctuate, but over the long term, if I have invested in quality businesses they should increase in value. So long as they increase in value faster than inflation, should I decide to sell them, I will end up with more money than I started with - in real terms. Perhaps an unambitious goal, but very much linked to the first one above.

Build a conservative dividend paying portfolio.
This is the key goal for me, as I want to use this investment to generate income in the future. I want the portfolio to have a relatively low level of volatility, and to be consistently paying dividends, and for those dividends to be growing. The dividend growth will be partly organic - through the businesses in which I'm invested growing their dividends, and I will continue to increase the amount invested to also increase the dividend return.

Not every investment will be dividend focused. If I notice an interesting business, that is attractively priced, I may invest - but these will generally form the smaller, non-core elements of the portfolio. 

Goals for 2020

The shorter term goals for 2020 are unexciting, which is essentially to do more of the same. Investing in quality, low risk businesses that pay dividends.

My strategy for the upcoming year is to continue to build a low risk portfolio of dividend paying stocks. As at the start of January 2020 I am invested in 24 businesses but only around 12 of those I consider to be core holdings. I would rather continue to diversify before building the existing core holdings. Some of the small positions I have I will add to if the prices are appropriate, others I will keep as smaller holdings as I think they have greater risk. I would like to get to around 30 core investments with roughly equal amounts invested into each. I will continue to search out lower risk businesses that look to have certain indications of quality - high returns on capital, good margins, good cashflow, and preferably low debts. The portfolio will continue to maintain larger holdings in relatively low risk investments, with a few small racier positions to complement them.

Selling activity is likely to be limited, but if the business no longer meets my investment criteria it will leave the portfolio. As a result the portfolio churn will hopefully be minimal.

Valuations

I have also considered what value my portfolio might be and what dividends it should pay at the point that I decide to retire. Perhaps surprisingly the value is of lesser concern, I have plotted a path on the chart below which indicates an annual growth rate of 8% which is just over the total return of the FTSE All Share for the past 10 years. This doesn't seem to be an unrealistic target but time will tell if I'm able to keep up.

Of greater concern are the following:

• rate of investment
• dividend payments

If I want the portfolio to generate income, then I need to pay attention to dividends. They need to be sustainable over the long term, the businesses in which I invest should have demonstrated that they can manage their capital sensibly and are not forced to cut dividend payments, and they should return a dividend that increases over time. 

This is deeply connected to my ability to increase the amount invested in my portfolio. I can't control the prices and movements in the underlying value of the portfolio. Nor can I control the capital allocation decisions made by the management of the companies in which I'm invested - so I don't control the dividends either. However, I can choose to invest each month, and will track my progress of this against a realistic target. Although I can't control them, I can model dividend income based on a few assumptions, such as suggested here. Assuming I continue to invest I can model the potential increases in dividend payment as the following:

• If the dividends paid on my investments increase by 2.5% each year then my retirement portfolio will receive in dividends the same amount I intend to invest each year. In other words at the point of retirement the portfolio would still grow at the same rate but without any additional funding from me, it would happen entirely through dividends.
• If the dividends increased by 10% each year, then my retirement portfolio would pay out annually 2.5x the amount I am investing.

So in the 2.5% increase scenario, if I invested £10k per year, at retirement in 20 years, my portfolio would pay out £10k in dividends each year.

In the 10% increase scenario, if I invested £10k per year, at retirement in 20 years, my portfolio would pay out £25k in dividends each year.

I won't know a realistic figure for a few years, so I will track progress against the 10% increase intially:

If I want to hit the 10% increase target, I was 19% adrift at the end of 2019. As above, time will tell if this is a realistic target.

So with 2019 behind us, bring on 2020. Happy investing.

Annual review 2019

With 2019 behind us and a new year to look forward to it’s time to appraise my investment decisions and performance for 2019.

Investment goals:

• Don’t lose money
• Increase capital by more than the rate of inflation
• Build a conservative dividend paying portfolio

Through doing the above, I will hopefully also outperform the FTSE All Share Index. I have chosen the FTSE All Share as a benchmark as it most closely matches the pool of companies from which I’m investing. It is also the most likely vehicle into which I would invest if I decide to stop stock picking and passively invest in a tracker fund. All costs related to buying, selling and maintaining investments are included in the details below.

My specific benchmark is the Vanguard FTSE All Share (Accumulation) tracker.

Portfolio performance

During 2019 the portfolio has increased in value by 23.6%. This compares to an increase of 19% in my benchmark.

Total return

	FTSE All Share Tracker	Portfolio
2018	-9.6%	1.6%
2019	19%	23.6%

Compound Annual Growth Rate

	FTSE All Share Tracker	Portfolio
2018	-9.6%	1.6%
2019	3.7%	12.1%

Dividend yield

At the end of the year the dividend yields of both benchmark and portfolio were the following:

All Share Tracker yield: 4.08%
Portfolio 2019 trailing yield: 2.5%
Portfolio total yield from January 2018: 3.1%

Of the portfolio growth, 85% was from capital, 15% from dividends.

In summary, I'm pleased at the portfolio performance over the year, but most markets across the globe were on an upwards trend after a significant sell off during Q4 2018. I think a good chunk of positive sentiment was a recovery from that sell off. In the UK specifically we had Brexit to contend with, and the election of the Conservatives with a large majority helped to clarify the path forward for this a little. Since we won't have the same positives buoying the markets in 2020, and we have heightened expectations after a good run in 2019 it wouldn't surprise me to find returns a little lower in 2020.

Portfolio analysis
The best performer in the portfolio was Computacenter, with a 78% increase, 6 other holdings increased by 20%+. Overall 17 out of 24 holdings finished the year in positive territory. Some of the portfolio were only purchased over the last few months, so I'm not expecting to see much movement from those.

Summary of 2019 portfolio performance

Portfolio holdings and 2019 performance

The large international stocks lost a little ground when Sterling started to climb out of the doldrums and have mostly traded sideways since. I’m comfortable holding these for the long term and am unconcerned by a little volatility. If prices continue to drop then I will be looking to top up.

I don’t imagine Computacenter will put in the same performance next year, but it is a well run and growing business, and I have no qualms continuing to hold.

The poor performers were Fulcrum Utilities, Saga and Dignity which have a more detailed write up below.

The contribution of each holding to the final position at year end was as follows:

Contributions of holdings to portfolio performance in 2019

Once again the outlier is Computacenter, but there are another 9 companies contributing between 5% and 10%. The under performing holdings don't have such a significant impact as the investment is smaller. My risk averse strategy of keeping riskier holdings smaller until they prove themselves I believe to be correct and has helped contain the impact of the poor performers. I would be comfortable increasing investment into those smaller holdings that are providing a positive contribution.

The contribution of each holding since the start of the portfolio in 2018 is below. It also shows the split of capital vs. dividend for each holding:

Historical contributions showing split of capital and dividends

Over time the dividend contribution should increase even if capital moves around. I intend to increase the dividend yield during 2020, but not at the expense of quality. Finding quality investments that offer a higher yield than the 2019 2.5% yield should be possible and several on the watchlist meet this criteria.

Poor performers and lessons learnt.

The worst performer was Fulcrum Utilities. Whilst I looked at the financials and the business prior to purchasing, what was missed was the share price movement. Price was slowly declining when I purchased, and that continued during the following few months until it bottomed around it’s current price. It has since moved sideways for a number of months. It has potential in my view and I’m optimistic about a couple of strands of it’s business: smart meters and electric vehicle charging points. I intend to continue to hold but will be keeping a close eye on this one.

The two other notable laggards are Saga and Dignity. Both of these were purchased a while ago and followed the same pattern. Both were companies that had a drop in share price following bad news, and were purchased as a contrarian recovery play. The inadequate thought put into the transactions has been rewarded with a significant reduction in value. The only saving grace is that I had the good sense to keep the investment small. The share price of both companies has staged a decent increase over the year and I will keep both for as long as that price momentum holds.

Saga is, in my view, un-investable. It is not a business but a collection of activities, based around the notion that after a certain birthday people need/ want to be treated differently. This is nonsense. Watching my 70+ parents and in-laws fit and well and using the latest technology, illustrates the flawed concept on which Saga is built. There is now a stake in the company by Elliott Advisors, an aggressive Hedge Fund activist investor from the US. Their involvement would indicate that they see value in the company that is greater than the current share price. They have made noises to break up the company into separate travel and insurance business, which could then be either sold off or streamlined. There may be further recovery here, but we will part company if it stalls.

Dignity is a great sounding investment idea. Relying on people dying is about as certain an income stream as I could imagine. However the business has not been effectively managed. An acquisition spree was funded by borrowing, and that strategy was taking too long to generate returns, at the expense of a deteriorating balance sheet. In addition there has been significant regulatory scrutiny. Cancelling the dividend and a period of introspection are both the correct paths forward for better long-term prospects. Having worked in businesses needing a significant turnaround I am aware of the extent of the internal disruption that it can cause to a business. For this reason, and the extent of the borrowing, Dignity is also to be sold when the momentum behind it’s price recovery slows.

During the year I added in cost of capital calculations to the stock selection criteria, and an indicator of recent price movements vs. the share price 52 week high. I now have a list of businesses I’m comfortable investing in that I’m gradually growing. I have been aggressively rejecting watchlist candidates that don’t come up to scratch, and only intend to buy from this list. And only when the price looks attractive. The increased analysis, and change in approach I’ve adopted resulted in 1 of the 13 investments this year significantly under-performing. This could have been avoided had I waited until the dropping price showed signs of stabilising.

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)
• Craneware (July)
• AG Barr (July)
• Network International (August)
• Telecom Plus (September)
• Foresight Solar (October)
• Next Energy Solar (November)
• AB Dynamics (December)

These were 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.

Conclusion

I’m pleased with investments this year, with a good performance from the portfolio. It has balanced the performance from last year so that across the two years I have a solid return.

Who knows what the coming year will bring. Macro-economic conditions continue to look wobbly, Brexit could once again take centre stage later in the year with concerns over trade with the EU, and US elections in the Autumn will probably cause a stir.

Looking forward to more investment fun in 2020.

December 2019 portfolio update

So that's 2019 finished. The highlight of the month saw Tweedledum taking the honours in the Westminster egg and spoon race. Tweedledee was left scratching his beard, blaming everything except the bonkers set of policies in his little red book. At least that's one lot of nonsense out of the way, and should provide some clarity on Brexit. Hopefully some day soon it will be safe to turn on the news on the telly again and not want to throw things at it.

The Sterling rally I was hoping for duly appeared as soon as the election exit poll was released. And then disappeared when someone forgot to keep Boris in his kennel, letting him create another Brexit cliff edge for us. So the FTSE100 xmas sale I wanted didn't materialise. I suspect the China deal with the US won't hold together, and a crazed Trumpy will want to go on a tariff rampage early in the new year, so I hold out hope for some January bargains.

So in expectation of a few market wobbles early in the new year, I'm staying patient and am continuing to research potential purchases.

Portfolio performance 
The portfolio was up +3.6% in December, ahead of my chosen benchmark the Vanguard FTSE All Share Accumulation which was up +2.8% over the same period.

Best performers this month:
Somero +39%
Computacenter +17%
Telecom Plus +13%

Worst performers this month:
Fulcrum Utilities -15%
Jersey Electricity -6%
Unilever -5%

December share purchase: ABDP
AB Dynamics (ABDP) joined the portfolio this month. ABDP provide technology for car manufacturers to test their vehicles, including various aspects of vehicle dynamics, safety features, and automation. I looked at this company a long time ago but never bought any shares, the price took off and never glanced back. All the time I was like a nervous toddler at the bottom of an escalator - trying to work out if I should step on. A 30% pull back in the price over the past few months encouraged me to indulge, but they are still expensive, so I have kept the purchase small.

It might seem a bad time to get involved in the car industry given the slowdown in economies across the globe, especially since cars are expensive and likely to be hard hit if people are tightening their belts. However, ABDP get their money not from car sales but from manufacturer R&D spend. Clearly if car sales collapse - R&D will likely reduce too, but should be more resilient that simple revenues. Cars are undergoing a fair degree of change including the move away from fossil fuels, and automated vehicles looming on the horizon. It is these sorts of longer term trends that ABDP have benefited from, and hopefully will continue to do so.

The ABDP financials are extremely solid, with ROCE and net margins averaging 19% and 16% respectively since their listing on the LSE in 2013, and they have no debt. They are also managed in a manner that I like, demonstrated earlier in the year when they raised capital through a share placing in order to fund a couple of acquisitions, rather than borrow. I think the last thing a high growth company such as this needs is a load of debt to complicate life. 

The founder of the company remains on the board and holds around 20% of the equity, with his wife owning a further 6.5%. Despite a bit of selling from the pair of them in the Autumn, as significant shareholders they should have the interest of investors front and centre of their thinking. 

The main negative is the price - if business performance wobbles then I expect sellers to be out in force. There is also a tiny dividend, but I'll forgive that if growth continues at anything like the pace it has done over recent years.