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.