Tweaks

I've continued my consideration of why I own certain investments. But I've also been thinking through my approach to investing. I've given some thought to each of my investments, making sure I'm clear on why I own each investment, putting them into rough categories of steady compounders, income and growth. Some additional thoughts:

I need to keep things simple. I have a job and a family, and limited time to research investments - despite finding it really enjoyable, I need to find a way to focus my attention on a smaller number of key investments. 

Once invested, I also have limited time to keep track of the portfolio. Some of them are well behaved and can be watched from a distance - others need careful attention.

I also need a lower limit on returns, below which an investment should be jettisoned from the portfolio.

I enjoy dividends, it has been pointed out that I have some runway before I need income from the portfolio, and that I'm probably inhibiting my total returns by focussing on them. Seeing those dividends come in gives me some comfort. They also help to dampen downward volatility as the cash ticks in. And of course they provide funds to redeploy. So whilst total return should be more of a factor than income, there are emotional and psychological reasons for me including decent dividend payers in the portfolio.

Ultimately absolute returns are what matter but performance against a benchmark is interesting. It can also provide a useful yardstick against which to measure risk vs. returns. If I can get the same returns from an index fund as I get for holding a handful of individual companies, then I'm getting a diversified investment, and lower risk for the same return. My benchmark is a comparison with the 600 companies listed on the UK All Shares index - the shorthand version of this is using the Vanguard FTSE UK All Share tracker. 

There's no reason for me to limit my horizon for investing to the UK, I can pick up cheap globally diversified ETFs from Vanguard or Blackrock. These would certainly simplify the portfolio - one fund to rule them all...But...should an investment have the potential to outperform the global tracker, then it should be in the portfolio.

So what would an investment need to do to outperform a global tracker?

A simple set of comparisons taken from Vanguard and Blackrock follows, I want to strip out noise of too many considerations. I've taken pre-pandemic data, which might seem arbitrary, but I'm going to assume that in a year or two, COVID-19 will be just another bug that we live with. And that as a result, life gets back to what we were used to before it turned up. Some things will be different - the change brought about by the virus and our response to it, but most of our lives will revert to something close to before the pandemic. So most businesses will also return to a similar pattern of pre-pandemic behaviours. I've looked at historical data, with the cut off point being January 2020.

2 global trackers show pretty much the same results:

Vanguard: VWRL

Blackrock: IWRD

Vanguard have data for VWRL since 2012, and up until Jan 2020 grew at an annualised rate of around 12%. When I add in dividends it is around 14% (if dividends had been reinvested straight away the magic of compounding would have pushed the numbers up a little more - but it was getting complicated enough...)

IWRD over the same period gave an almost identical result. I guess it should - although it does have higher fees...

IWRD has data back to 2010. If this is used as the starting point then for the 10 year period until 2020 it grew at around 8% growth, and with dividends, around 9% 

The reason for the lower returns is a period when the market went sideways between 2010 and 2012:

So how does this fit in to my investing. Well dividends remain important, there will be a group of investments focussed on income. There will also be a group of investments that are steady compounders. Both of these I intend to keep under minimal supervision, so they need to be well behaved.

If the compounders are going to hold their own against a global ETF, it looks like they need to be generating at least as much return. And this is where the lower bound fits in. I'm going to aim for something in the middle of the two timeframes I looked at above for the two global funds, a convenient 10% as a lower limit. In other words if an investment doesn't look like generating at least a 10% return over the period that it is in the portfolio - it will be asked politely to leave.

That leaves me with compounders and income, as needing minimal time, which means I can concentrate on keeping an eye on the investments that are likely to be more volatile - the smaller companies with more room to grow. But also potentially a larger fall if they upset the market.

I will also be putting some money into a global ETF to provide a completely hands off investment. And this should enable me to have 75% of my investments either passive, or requiring minimal time.

I'm not about to throw out everything in the portfolio. It will be a matter of gradual pruning, rather than lopping off chunks, there are a few businesses in the portfolio that have been clobbered by the pandemic and should be given more time to resurrect themselves. Others have great looking operating numbers, but I question their ability to grow.

New long term investments will need to be both high quality, as distinguished by considerable competitive advantages - so only the moatiest will end up as long terms holds.

Other purchases may become shorter lived holdings...

February 2021 portfolio update

February felt tough, cold weather, lockdown, home schooling... However, light at the end of the COVID-19 tunnel was shining a little more brightly as the UK vaccine programme continued to deliver. On the back of this Boris announced his re-opening plans.

The UK markets, being stuffed full of economically sensitive businesses - banks, construction, oil, mining - all enjoyed themselves for most of the month. Then the bond market started getting lively and equities threw a tantrum. Many US tech stocks got smacked down in the ensuing selling, which seemed to ripple over to these shores. A few of my tech companies had their shares sold off without any accompanying news, so I assume they were caught up in the rush for the exits.

This month the portfolio was beaten up for various reasons: a few updates weren't approved by Mr Market and investors moved out of some defensive bond proxies into equities benefiting from economies reopening and into actual bonds. I sold off one of my smaller holdings, Fulcrum Utilities, after some thought and reinvested that cash in an alternative, a small software company, Blackbird. I've also topped up an old timer, Unilever, whilst it's shares were being sold off.

Portfolio performance
The portfolio was  down -4.3% in February, behind my chosen benchmark (Vanguard FTSE All Share Accumulation) which was up +1.5% over the same period.

Best performers this month:
SAGA +53%

Compass +11%

Tate & Lyle +6%

Worst performers this month:
GlaxoSmithKline -12%

Unilever -12%

Hargreaves Lansdown -12%

February sale: FCRM

I bought a small slice of Fulcrum Utilities back in March 2019, it operates in an area likely to see plenty of growth, in that it installs smart meters and electric vehicle charging points as well as providing other pipes and wires related services. It paid a decent dividend and seemed to be a well run business that stood a good chance of growing. Maybe it still does. 

However, earlier in the year there was an attempt to take the business private. This attempt failed, and resulted in two new appointments to the board, one of which was from the firm trying to delist FCRM. In January the CEO left "with immediate effect", and the new CEO and chairman seem to be reluctant to buy into the firm - they each own less than £10k of shares. Since dividends have been stopped and a loss was reported at the interim results, I don't get a warm fuzzy feeling about holding these any longer. The business is in the sort of sector that should have a strong tailwind, but I'll look for opportunities elsewhere. I sold at a loss of -16%.

February purchase 1: BIRD

I recycled cash from the above sale into Blackbird (BIRD). Not an obvious choice perhaps, since they are just about the opposite of what I usually opt for. Small, £80m market cap, pre-profit business, jam tomorrow? Maybe, but they seem to have some unique technology for production of video content. Of course developing interesting tech, doesn't make it a good business, certainly not a good investment. But it does seem to have got the attention of a few sizeable customers and partners, including TATA, the huge Indian conglomerate. So I thought I would pick up a few shares and see where it leads.

BIRD listed on AIM in 2000, so have been around a while. They were previously known as "Forbidden Technologies" but rebranded in 2019. They have been focussing on News and Sports broadcasting as the speed of their technology suite enables the production and distribution of content really quickly. Many of their recent client wins over the past year or so reflect this, and includes the NHL, Sky News Arabia, Liverpool & Arsenal, and eSports wins with Riot Games, Venn (and a renewal with Gfinity). There are plenty more, the biggest fish landed being TATA. They also had a couple of industry awards thrown in for good measure during the year.

As with many businesses that facilitate remote working and digitisation, Blackbird seem to have been given a boost from social distancing enforced through the pandemic, video production teams have been forced to move away from having a room full of people to edit and produce their content, and this seems to have been beneficial to Blackbird. Interims published in September showed a 49% increase in revenues, and whilst they don't yet make a profit, their cost base is improving, so it is hopefully not far away. Cash in the bank in June was £7.1m, and cash burn £846k, down 31% on the previous year. From their 2019 cash flows, they used £1.9m last year, so they have around 3.8 years of financing if they repeat last years figures - but the initial numbers look more promising with revenues up and costs down...

February purchase 2: ULVR

I topped up Unilever in February. I've owned shares in them for a while now, they have some great brands that sit on the shelf in the supermarket, and in my home: Ben & Jerry's, Dove, Persil to name a few. They are one of the big beasts of the FTSE, the sort of financially strong, dependable companies in which I'm quite happy to invest.

They've had net margins and return on capital both averaging in double digits over the past 10 years, and have been slowly churning their portfolio into higher margin products. During the COVID-19 chaos of last year their business remained pretty robust, with dividends maintained throughout, and even increased following their latest set of results.

The markets were unimpressed with their recent numbers, leading to a drop in the share price. Margins were reported a little lower, but volumes were up - I always like to see a company increasing the amount of product being sold rather then just hiking prices. Cash flow increased over last year, and came in ahead of net profit, net debt was reduced from €23.1bn to €20.9bn...all good stuff in my view. Mr Market didn't like it though, possibly due to concerns over pricing power - price growth was pretty flat, and in their home care ranges it went backwards...are they losing out to cheap home labels? Across geographies, the US was up, Europe was down. So a mixed bag to which the markets gave a thumbs down. So I added a few more shares while the price was lower.