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.