Pause for thought

As we are coming out of such a crazy year I wanted to ask myself a few questions about my investments. My goals remain the same, and the strategy to achieve them is fine I think. I have a few holdings I’m not convinced about so I’ve it’s worth asking a few questions about each:

• Why are you invested in that business?
• If you weren’t already invested would you buy it today?
• Given that you are invested, would you buy more today?
• If it’s underperforming, why not sell it? You can always buy back when the business is back on track…

So I’ve been through each holding in my portfolio, the initial exploration being to examine each holding in some detail to be sure that I want it in the portfolio.

I’ve put each holding into one of 3 buckets: slow and steady, income, growth. And a 4^th bucket for those with a question over them. It is these that I am reviewing in detail first.

 

Slow and steady	Income	Growth	Naughty step
AG Barr Compass Diageo Hargreaves Lansdown Nichols PZ Cussons Qinetiq Reckitt Benckiser Relx RWS Holdings Sage Group Unilever	GlaxoSmithKline Henderson Far East Income Impact Healthcare Jersey Electricity National Grid Tate & Lyle Telecom Plus Tritax Big Box	888 Holdings AB Dynamics Abcam Craneware Eleco Keystone IT Somero Enterprises Computacenter	Dignity Foresight Solar Fulcrum Utilities Lancashire Holdings Next Energy Solar Saga

Most of those in the “Slow and steady” box are businesses that I expect to hold for a long time, that are generally well run businesses that I’m happy to own a slice of. I’m expecting these to be slow steady compounders, and whilst they all pay a dividend (or did until the pandemic) they are not there primarily for the income. Despite these being a pretty defensive bunch of holdings, some have been hammered by the pandemic. Beverages for example you would expect to be a fairly dependable business, except when all bars, pubs, restaurants get closed for long periods. Catering, equally – shouldn’t be exciting, but has been slammed this year. I’m happy to hold these for now to see how they come out of the pandemic.

The income stocks pay a decent dividend, I don’t expect a lot of capital growth here, but this should be compensated by steadily increasing dividends. I may move some of this bucket into investment trusts over time as these have proven to be a safer income bet, and came up trumps during a rather testing period this year. Glaxo is an interesting one as they recently announced that as part of the split of the consumer health and pharma businesses they would reduce the dividend…one to think about.

Growth stocks I expect to generate capital returns, with any dividends being a bonus. I would expect these to be smaller businesses with better potential runway for growth. They have done just that. With the exception of AB Dynamics they have each come out of 2020 with a creditable performance, a couple were in the right place at the right time, just like a few others in the portfolio were in the wrong place. ABDP are uniquely placed and have a nice wide moat. They still need to deliver however, so I’ll be casting an equally critical eye over them too.

When I look at the distribution of my investments I have invested 44% in the slow and steady group, 28% in income, and 17% in growth. The growth bunch have put in an overall 45% return, compared to 14% from income and 3% from the steady mob. I’m not sure what the correct distribution should be, but I might try to make these more equal over time.

 Under review elevator pitch summary:

Dignity

Messy turnaround, regulatory scrutiny and management changes.

Foresight Solar

I’ve become sceptical about future power pricing which will impact NAV and potentially dividends.

Fulcrum Utilities

Activist investor wanting to delist the business, behind the scenes political shenanigans, board changes who appear reluctant to buy their own shares.

Lancashire Holdings

Don’t understand the business well enough.

Next Energy Solar

I’ve become sceptical about future power pricing which will impact NAV and potentially dividends.

Saga

Unconvincing business model – however likely beneficiary from vaccine rollout so may hang around in the portfolio a while if the price momentum is upwards.

January 2021 portfolio review

Markets remained pretty frisky during January, with a Santa rally initially in full swing. This was particularly evident in the UK as a Brexit deal was struck on Christmas eve. The FTSE 100 motored 6% higher in the first week of the month, but it then lost momentum and proceeded to slide back down for the rest of the month. Even the US markets stuttered, despite great results being posted by some of the tech giants.

So Trump finally left the building, at least he did it in a dignified and low key way, handing the baton of the presidency to Biden with a generous and humble speech 😁.

Vaccine deployment is apparently going rather well in the UK. Something that I find quite surprising, but it's happening. I can't quite wrap my head around the sheer volume of people that we are processing. The EU seem to be tripping over their own feet in a manner that I would have expected us to, which led to a rather unseemly spat over access to the vaccine. Despite this there does appear to be some genuine light at the end of the tunnel.

The month also saw plenty of talking heads voicing opinions over wallstreetbets and their Gamestop short squeeze fun. It has a very similar feel to the run up in crypto a couple of years ago, although much smaller in scale. It's entertaining but I'm sure in a few weeks it will be consigned to the history books. However, a tip of the hat is necessary to those who managed to orchestrate it.

This month the portfolio just nosed ahead of the benchmark as markets started selling off. Lots of reassuring updates from the businesses in the portfolio this month. I've added more consumer staples and a REIT top up in January.

Portfolio performance
The portfolio was up 0.8% in January, ahead of my chosen benchmark (Vanguard FTSE All Share Accumulation) which was down -0.4% over the same period.

Best performers this month:
Somero Enterprises +22

Elecosoft +18%

Hargreaves Lansdown +12%

Worst performers this month:
Dignity -10%

Telecom Plus -9%

Qinetiq -6%

January share purchase 1: DGE

January saw a bit of booze poured into the portfolio with the addition of Diageo. Even if the name  of the business isn't familiar, it's brands probably are, and include Johnnie Walker, Tanqueray, and of course Guinness. The business found it's current form in 1997, when Grand Metropolitan and Guinness merged, but the many of the brands it sells have been around quite a while longer. It's largest contributing category is it's Scotch Whisky portfolio which chipped in 23% of 2020 revenues.

As might be expected at the moment, the pandemic is having an impact on Diageo, bars, pubs, restaurants are no go areas as social distancing measures are insisted upon. Despite this, the interim results posted in January showed some resilience. Organic net sales were up 1%, volumes essentially flat, and somehow US sales (it's biggest market) were up over 12%. Free cash flow and debt both increased, as did the dividend. Arguably they should have been paying down debt rather than raising the dividend since their debt crept outside the preferred debt/EBITDA range stated by the business. Whilst operating numbers dipped this year, their margins and return on capital have been good, and consistently over 20% and 10% respectively for the last 10 years.

Their brands are their key competitive advantage, many are known and loved. The churn in their portfolio is a result of a strategy of "premiumisation", which this year involved acquiring a couple of bolt on premium gin brands. Coupled with their brands is scale - both economies of scale and their exposure through the booze aisle in supermarkets, and regulation - the age requirements for purchasing alcohol limiting the ability of new entrants to find a foothold in the market. I'm also not sure how you can compete with a product that needs to be aged for multiple years, as is the case with many of Diageo's brands, the cost of storage and maturing that inventory would make a tricky barrier to entry.

The risks of investing in a booze purveyor seem obvious - the most stark are regulation and taxation. If governments are looking at increasing debt burdens, will they look to apply more taxes to non-essentials such as Diageo sell? Maybe more regulation and cost is on the way. Or a post-COVID public decide they want to get healthy and extend their dry January. Or COVID simply doesn't go away in the timeframes we hope for, leading to prolonged social distancing and further restrictions on bars and restaurants. I suspect we'll all need a tipple to get us through this, and possible be raising a glass or two when it's in the rear view mirror.

January share purchase 2: IHR

I also topped up Impact Healthcare REIT in January. This was added to the portfolio in October, IHR provide real estate that is leased to care home providers. A couple of nice RNS releases were issued during January, which were appreciated.

The first indicating that 100% of rent had been collected for 2020, which for anyone holding property investments in their portfolio, is a pretty positive outcome for the year. Although IHR is far removed from the struggles of commercial property right now, it's still good to know that they are getting paid. In the same RNS they announced that their acquisition pipeline was back in motion, and that they had purchased 6 new properties. This increased the rent roll, and further diversified their tenant base.

The second RNS had more good stuff, including confirmation that most (93%) of their properties were receiving vaccines,  NAV had increased (albeit unaudited), dividends are increasing. All of which is pleasing to the ear.