Annual portfolio review 2020

So 2020 was bonkers. No need to rehash the madness, and with a new year to look forward to it’s time to appraise my investment decisions and performance for 2020

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.

Portfolio performance

Based on unit value, during 2020 the portfolio  increased in by 0.3% (including all costs, and dividend payments). This compares to an decrease of -9.9% in my benchmark (also including costs – as an accumulation fund dividends are reinvested automatically).

Total return:

	FTSE All Share Tracker	Portfolio
2018	-9.6%	1.6%
2019	19%	23.6%
2020	-9.9%	0.3%

Compound annual growth rate:

	FTSE All Share Tracker	Portfolio
2018	-9.6%	1.6%
2019	3.7%	12.1%
2020	-1.1%	8%

The above shows the portfolio unit value, the internal rate of return (XIRR) comes out as 10.7%

The difference between the two metrics is that the unit value excludes cash flows in and out of the portfolio, whereas the XIRR incorporates these – the truth relating to performance is probably somewhere in between…

The portfolio beta - a measure of it's volatility relative to the benchmark was 0.67. Although I'm slightly dubious about the construction of the statistic, it indicates that the portfolio exhibited lower volatility that the benchmark.

Dividend yield

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

Benchmark = 3.03%

Portfolio = 2.5%

The historical dividend yield on the amount invested since 2018 is 4.8%.

 A look back at the 2020 shows how the benchmark outperformance worked out:

The index was slammed at the outset of the virus, and took time to start to recover. Over the last couple of months as the outlook has become more positive, the recovery in the wider market has picked up pace. The portfolio is behaving rather as designed, in that it will tend to lag the overall markets and be less volatile. The defensive nature of the portfolio should lead to shallower drops, at the expense of slower gains.

Portfolio analysis

2020 performance by holding:

The best performer in the portfolio was 888 Holdings, with a 77% increase, 4 other holdings increased by 20%+. Overall 21 out of 33 holdings finished the year in positive territory. Some of the portfolio were only purchased over the last few months, so I don’t expect any particularly exciting gain or loss.

I sold Network International in September, for a 40%+ loss, since when a paper by Shadowfall Research has raised a few questions over acquisitions and links to failed payments provider Wirecard. I’ve no idea what the outcome will be, I’m glad I’m no longer holding it.

Two of the best performers, 888 and Computacenter are beneficiaries of the enforced social distancing we’ve been subject to since COVID-19 made itself known. 888 provides various online gambling services, and there is aggressive M&A happening in the sector as the US relaxes it’s gambling regulations. Computacenter has been helping businesses cope with remote working, and for the second year running has been one of the top performers in the portfolio.

Saga and Compass were on the opposite side of the virus impact. My finger was hovering over the “sell” button for Saga at the start of the year, but as the virus hit, I dithered and the share price was hammered. It now has lost most of it’s value, and makes little difference whether it is in the portfolio or not. It has recovered somewhat since it’s lows, but even if it were to double from here, it would not move the needle on the portfolio. However, it stands a chance of a high % increase as the virus is brought under control in 2021.

Compass had a good chunk of it’s business shut down for most of the year, as many corporate clients had little need for catering with no-one working from their offices, and sports events were either closed or operating with minimal crowds. Under most circumstances I would suggest it is a very defensive business, but the virus blindsided this one. I suspect Compass will benefit in the longer term as smaller and weaker competition fade away, but may take a little longer to stabilise. I don’t imagine 2021 will see it get back to “normal”.

The contribution of each holding to the final position of the portfolio at year end is below:

Thankfully my approach of reducing the size of the investments of riskier holdings (looking at you NETW…) has helped contain the impact of the poor performers.

The performance of each holding since the start of the portfolio:

The contribution of each holding to the total portfolio returns is above, with a split of both capital and dividends. Over time the dividend contribution should increase even if capital moves around.

Poor performers and lessons learnt.

Poor performers were really those impacted by the pandemic – Saga & Compass. Network International looks to have a few issues, or at least some public relations work to do…Saga was on my sell list but the virus hit before I got around to it.

Those holdings most likely to be sold include Saga, Dignity, and the two Solar investment trusts. I think there may be longer term issues relating to power pricing that will impact renewable investments as noted here. Dignity is a wonderfully defensive company, what could be more reliable than people dying, particularly at the moment. But they appear to have been overtaken by other more agile businesses, and are trying to respond to this, and changing regulatory scrutiny. They may be able to turn around the business but it's looking messy.

I’ve been comfortable with most of the holdings this year, in what has been a rather odd 12 months. I couldn’t help staring with wonder at the markets melting down earlier in the year, and should have been more active to capitalise on it. I do tend to want to see trends play out rather than jump in, which means I miss some lower prices. I guess market timing isn’t my thing. However, I didn't feel any panic urge to sell, more a desire to try to understand what was going on.

Buying and selling

2020 saw the following purchases:

• January: Nichols
• February: Nothing
• March: Nothing
• April: PZ Cussons & Sage
• May: QinetiQ
• June: Henderson Far East Income & Eleco
• July: Henderson Far East Income
• August: RELX
• September: Glaxosmithkline
• October: RWS Holdings & Impact Healthcare REIT
• November: Tate & Lyle
• December: Keystone Investment Trust & Hargreaves Lansdown

Most of these were new additions, I bought more shares in existing holdings in Sage, GSK and Tate & Lyle during the year.

Only 1 stock was sold - Network International was sold in September.

Conclusion

I’m pleased with investments this year, although the return wasn't stellar, it just about crept into the positive. It was a mad year, one I'm sure most of us are glad to see the back of. 2021 should see some more interesting events in the markets as economies try to recover, and we start to get a grip on the virus. Trump's gone, a Brexit deal is signed, what's next?...

December 2020 portfolio update

Markets continued to be jumpy during December, albeit in a good way. The huge surges from November died down but it felt like we were feeling aftershocks following the big moves in the previous month. US indices chugged higher, as did the European and UK indices.

Virus mutations detected in the UK and South Africa gave rise to scary COVID-19 headlines once again, with the new variants apparently being more easily transmitted. This led to further UK lockdowns, with the country pretty much back to where we were in the spring. The health services are struggling and businesses are being closed once more.

Trump is nearly gone, his daft challenges to Biden's election have ebbed away. His only noticeable intervention over recent weeks is to get into squabbles over economic support, and a standard piece of defence legislation. He'll be out of the headlines soon thankfully.

A Brexit deal was agreed, it was slimline, but enough to avoid the initial chaos of leaving the EU without agreeing a bunch of rules to help manage the move. Sterling had been wandering upwards, and kind of shrugged as the deal was announced - I guess it was more or less what currency traders had expected.

This month I've nibbled at a couple of positions, with a view to adding to them at a later date. There's lots of chatter about bubbles, froth and valuations, particularly regarding US tech, IPOs and SPACs, hopefully we'll see a pullback soon and a few more bargains will appear early in 2021.

Portfolio performance
The portfolio was up 2.7% in December, behind my chosen benchmark (Vanguard FTSE All Share Accumulation) which was up 3.9% over the same period.

Best performers this month:
Nichols +25%

AB Dynamics +24%

Computacenter +10%

Worst performers this month:
Fulcrum Utilities -14%

Dignity -12%

RWS Holdings -5%

December share purchase 1: HL.

Financials aren't really my thing, it's not a sector I feel comfortable trying to analyse. There's a distinct lack of such businesses in the portfolio, with the one exception being a niche insurance company which I bought on a whim some time ago. I got lucky and it's turned out fine, but my attempt at risk management meant I only put in a small amount. So having a nibble at another may be pushing my luck...however I picked up a few shares in Hargreaves Lansdown (HL.) this month as it has some very impressive operating numbers.

Peter Hargreaves and Stephen Lansdown started HL in 1981, providing financial advice. They quickly grew the business, listing on the stock exchange in 2007. According to their latest annual report they have 1.4m clients for whom £104bn is managed. The founders still own a substantial chunk of the shares - Hargreaves maintaining around 24% and Lansdown around 7%. Another notable UK investor includes Lindsell Train who own 13% across a number of their funds.

Despite the share price being back to levels seen in 2014/15, the dividend has increased by an annualised 2.6%, net profit by just under 15%, and free cash flow by over 9%. All the while they've kept margins and return on capital averaging an astonishing level, over 50%, and zero debt. Perhaps even more noticeable is that they have managed to increase assets under management, new users and new business in a year turned upside down by COVID-19.

So what competitive advantages does an asset manager such as Hargreaves Lansdown have? I don't think it's a great one, but there is a certain degree of network effect, and some economies of scale. The main risks in my view are from low cost platforms, and regulatory changes - potentially with one driving the other. Also, HL was in the headlines for the wrong reasons over recent years following the collapse of Woodford Equity Income fund which caused a slump in the share price, and Woodford investors are looking into potential litigation. This coupled with the pandemic and concerns over the impact of brexit on the UK economy has helped keep the share price from rising.

December share purchase 2: KIT

The second addition to the portfolio this month has been Keystone Investment Trust (KIT). It was launched in 1954, currently has £210m under management, and it's arguably starting to look a little long in the tooth. A quick look through it's top 10 holdings includes banks, tobacco, mining and utilities, and over the last 5 years it's share price has gone sideways. 

Things perked up in early December when the Trust board announced a proposal to change the management team from Invesco to Bailey Gifford. Bailey Gifford have a decent investing track record over recent years, with a very long term approach that appears to pay off. In addition the Trust has asked for the new brooms to deploy their "Positive Change" investment strategy. This strategy has worked well for their open ended Positive Change Fund, the intention of which is to outperform a global benchmark by 2%, and "...to deliver a positive change by contributing towards a more sustainable and inclusive world." It will also have the option to dip into unlisted securities - to which the Investment Trust structure is more suited than an open ended fund.

The top holding in the open ended Fund is Tesla, which will have driven the fund price higher. And since most of the holdings are businesses more concerned with reinvesting cash that paying out dividends, I would expect the current KIT dividend to reduce over time.

The management change is subject to shareholder approval at the AGM in February. It's perhaps a little early to be buying shares in a tired old Trust, before the change is approved, and before it's clear what the new managers will be buying, but I'm happy to nibble. It serves as a reminder, and since the share price has already jumped on the announcement, it's possible that others are of a similar mind, in which case I'll have picked up a few cheap shares and can add to this at a later date.