2020 Mid-year review

Portfolio review Jan - June 2020

Half way through 2020, it's been a hectic year in the markets, so lets see how the portfolio got on. My goals haven't changed:

• 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. If I start picking stocks from elsewhere, then I might have to change, but it's good enough for now. I'll take a quick look at each of my stated goals to see how things are looking so far this year for the whole portfolio then pull out a couple of points of interest to see which investments were moving the dials.

Don't lose money

The portfolio remains in the green, as do profits, but it hasn't been a comfortable ride in the first half of the year. Excluding new cash invested, you can see below how both the portfolio measured up against my benchmark from January to June.

The portfolio at the half year mark was roughly 6% below where it was in January, compared to a drop of 17% for the benchmark. It might seem strange to hear that I'm quite pleased by losing 6% over the course of 6 months, but I'm trying to build a resilient portfolio, and by comparison to my benchmark I've not done too badly. My investments fell far less than the wider market, but as that elastic has become stretched, the market is bouncing back quicker than my portfolio. I'm quite content with my investments being less volatile that the market as recovering from large falls in value may take longer than expected.

Increase capital by more than the rate of inflation

On a 6 month timescale this clearly didn't happen, the Office For National Statistics latest inflation stats show it as 0.7%, versus a 6% portfolio fall, so we'll have to see if I can claw that back in the second half of the year. We might well end up with some deflation, if so I could sneak through on a technicality... Essentially this goal is to make sure I'm gaining in real terms, accounting for inflation, so a 6 month timescale is too short a measure to be useful

Build a conservative dividend paying portfolio

Over the past few years big blue chip stocks in the FTSE have provided limited capital growth, instead returning excess cash to investors as dividends. This came to an abrupt halt in 2020 as most companies looked to preserve cash to get them through the various lockdowns happening across the planet. My 15 core portfolio holdings were not immune to this, with 4 of them not paying a dividend in the first half of the year. The language used to describe the lack of dividends varied across the businesses concerned, so we'll have to wait and see if the businesses needed this cash, if they can sensibly invest it or it gets paid out in dividends at a later date. 

My preferred measure of the portfolio dividend yield is a rolling 12 month average yield, this has dropped back a bit since the start of the year, from 2.8% to 2.4%, which reflects both a slight reduction in dividend payments, and increased value of the portfolio. My investments are (mostly) in sensibly run, and conservative businesses that I expect to continue to pay out dividends once the current disruption is behind us. Given the axe taken to dividends over this year, I'll consider my dividend receipts a win so far.

Reflections on volatility

I was a little surprised that I was relatively sanguine during the worst of the market collapse. I admit I thought we were going to see the market drop by around 50%, so it faired better than I expected. When it looked like COVID-19 had moved beyond China, I paused my stock buying - in February it looked like the markets were in trouble. This proved to be a good move. I also didn't buy during the March collapse as I was trying to work out which businesses on my shopping list would be hit hard by the virus and/or lockdown measures, and which might be resilient. Not buying in March proved to be incorrect. Although I didn't suffer an immediate loss in Feb, I would have benefited from buying as the markets bottomed in March.  

Porfolio winners and losers

One of my core holdings, Compass, has been hit hard by the lockdowns. It provides catering services and since most events and companies have been either closed or happening virtually, demand for catering took a big hit. Trading updates indicated that around 50% of the business was closed. I'm comfortable staying invested, with the assumption that their scale will be a benefit over the long term. 

The contribution that each of the portfolio has made to the first half results is below:

Compass is the clear outlier dragging down performance significantly. This is partly due to the fall in share price, but also to it being my 4th largest holding at the start of the year. 

Individual performance of investments is below:

The two members of the portfolio I was thinking of selling 6 months ago, I dithered over. As a result Saga and Dignity are still there, albeit very small holdings. I'm in two minds whether to get rid of them, as they are irritants, and I don't regard either as sensible investments. Saga may see a decent bounce if we get good news on the medical front that enables it's cruise ships to set off. One the other hand, they are both very small amounts of cash, so unlikely to have much impact on the overall portfolio whichever way they move.

There are plenty of reasons to be concerned over the state of the markets, with an imminent global recession, US attempts to address the virus seemingly unravelling, a US election, Trumpy's fondness for tariffs, and Brexit. However I suspect all will be ignored if we get good news on vaccines and medical treatments for the virus. Whether that good news is already priced in we will find out in due course...

June 2020 portfolio update

Lock-down restrictions easing off were a bit of a relief, particularly with temperatures increasing. I'm sure once the pubs re-open we'll all be piling in to share our pathogens over a pint. It only took a couple of days of sunny weather to see south coast beaches overwhelmed with people - my fingers are crossed that we don't cause such a spike in infections that schools close in the Autumn.

Markets seemed a bit fragile in June, perhaps with the huge recovery surge in stocks since the March lows investors are looking over their shoulders a little. But there are a few other reasons of course. Trumpy's polling numbers are headed south, giving Biden a lead which will have a few people on Wall Street wondering if their wallets will look a little less plump. Finger pointing from the US and Europe over potential naughtiness involving Boeing and Airbus led to a list of new tariffs being considered on various obviously airline related products such as gin and olives (?). And Whitehouse insiders couldn't quite make up their minds if the US/ China trade deal was still intact. Oh did I forget the massive increase in COVID-19 cases in the US...

This month cash was split into two investments, part went into an Investment Trust and part into an interesting software company. I've been looking into a few Investment Trusts that add to the diversification of the portfolio, particularly into businesses listed outside of the UK. This month I bought a few shares in a Trust focused on Asian/ Australasian dividends, the thinking being that most countries in which this Trust is invested seem to be doing a better job of managing their COVID-19 outbreaks, so should get their economies up and running more quickly.

As for the rest of the investment cash - it's often suggested to buy what you know, which is what I decided on with the addition of Elecosoft. I saw a name that looked familiar in an online discussion, and after a quick bit of digging found that they own a software business I used to work for. A positive trading update and decent set of accounts helped convince me to buy a few shares.

Portfolio performance
The portfolio was up 0.6% in June, slightly behind my chosen benchmark the Vanguard FTSE All Share Accumulation which was up 1.6% over the same period.

Best performers this month:
Lancashire Holdings +19%

Fulcrum Utilities +17%

888 Holdings +14%

Worst performers this month:
Saga -26%
Abcam -11%
Craneware -9%

June share purchase 1: HFEL

A few shares of the Henderson Far East Income Investment Trust (HFEL) made their way into the portfolio this month. It is run by Janus Henderson, and as the name suggests it's aim is to provide a growing source of dividends. I bought in at roughly the NAV, although given the volatility in the markets at the moment I think that NAVs should be taken with a decent pinch of salt. It gets 3 stars from Morningstar, which I take as pretty positive given that it's aim is income focused rather than capital growth.

The holdings are spread across Asia and Australasia, with over 30% in China. It has a range of sectors, with the largest being Financials and Telecomms, with Oil and Gas thankfully making up just over 1%, it's most notable holding is the semi-conductor giant Taiwan Semiconductor Manufacturing. It has around 2% gearing, and has reserves from which to payout around 9 months of dividends should it need to. The Trust's dividends have grown at around 3% - 4% over the last few years, and with the Spring sell off the yield is around 6% - 7%.

The Asia Pacific companies from which the Trust likes to invest have tended to hold more cash than their European and US counterparts and have been increasing dividend payments over recent years. A relatively low payout ratio should mean that dividend growth can continue, although that remains to be seen given COVID-19 continues to circulate without us having adequate medical responses.

June share purchase 2: ELCO
Elecosoft (ELCO) was also added to the portfolio in June. They are a software business focused on architecture, construction, and property management. It is a relatively small business, with a Market Cap just under £60m. They listed on the AIM in 2006 and have been making solid progress over the past few years.

Around 40% of revenues are generated in the UK, with most of the remainder being made in Europe and further afield. Recent acquisitions bolt onto a portfolio of architectural and construction systems, provide multiple cross-selling opportunities and should provide a useful comprehensive end to end service offering.

Elecosoft have a potentially sticky customer base as evidenced through their impressive cash conversion. Their recent trading update covering business until the end of April showed a reduction in revenues that was outweighed by increases in profit and crucially in renewed subscriptions for support and software. Recurring revenues such as these are a great way to ensure ongoing income.

The accounts look sound with a net cash position as of April. Revenues, profits and free cash have all been chugging higher over recent years. The dividend is relatively small but has been increased at an annualised rate of over 20%, and they have plentiful free cash covering the dividend.

I'm sticking with my approach of taking smaller positions in businesses I think might be higher risk - in this case, due to the small size of the business, I consider this potentially more volatile. There's a chance this could get hit by any COVID-19 downturns, although the balance sheet looks healthy, there's no need to take unnecessary chances, so only a small number of shares bought at this stage.