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.

Price is what you pay

 

It's traditional towards the end of a year, to look back at what has happened over the past 12 months. So I thought I would take a look at some of the portfolio and how they had faired against similar businesses during what has been a chaotic 2020. In particular I wondered whether some of my larger holdings had become or more less expensive over the year.

But then I figured 2020 has been such an exceptional year, that whatever has happened, it's likely to remain an outlier. Unless we are about to see economies shut down, in whole or in part, over the next few years, 2020 is going to remain an oddity. So I did a complete reversal and started picking over a few stats that specifically excluded 2020.

I keep track of the purchase price of any shares bought, and also a range of financial measures, so that I have a rough idea if in future I might be picking up the shares at a bargain price. Of course cheap vs. expensive is quite a complicated notion when it comes to the stock market, as there are any number of ways to describe this. 

I thought I'd use a few metrics that were relatively easy to understand and see how a range of companies had performed over the 5 years prior to COVID-19, December 2014 - December 2019, and included of a few of the portfolio - Unilever, Glaxosmithkline and Computacenter.

The metrics were:

• Share price
• Dividend growth
• Net profit
• Basic earnings per share
• Free cash flow

And a couple of ratios through which to view price:

• Price / Earnings (PE)
• Price / Free Cash Flow (PFCF)

 There's a googlesheet here and a summary table below:

It's a pretty high level and incomplete set of information, but looking at the growth of a range of those measures for the 5 years leading up to COVID-19's arrival is interesting. I think I might build this into my usual review of businesses going forward as it has provoked a few neat questions. Anyway, some thoughts below

Unilever

Share price outpacing profits and led to the PE increasingly rapidly. But, free cash flow has been advancing faster that the share price. So investors are being asked to pay more for Unilever's profits, but less for their cash...

The PE is rising at the same rate as dividends – I wonder if Unilever is cementing it's place as a Bond proxy in a world of low interest rates?

Unilever isn't obviously more expensive that it was a few years ago - profits and cash are not rising at the same rate, so depending what you prefer paying for it can be viewed as more expensive...or cheaper.

Diageo

Share price and profits rising at a fairly consistent pace. Dividends a little slower, but still faster than inflation. But the FCF is the really noticeable thing here, moving at a fair clip.

As a result of the consistent growth, the PE, whilst expanding, has increased slowly (at just above the target of many central bank's rate of inflation).  But the PFCF has declined considerably thanks to the rate at which free cash flow has advanced.

Diageo is been a company I've prevaricated over for a while, it's a big, steady consumer  goods business, which I like. But I've wondered whether people are going to simply be more health conscious and booze less going forward. Maybe it needs a closer look.

Glaxosmithkline

The share price has been rising slowly, just above inflation, dividends flat, but profits and FCF have been rising much more quickly. As a result the above price ratios have both been decreasing at similar rates.

Despite the profit and cash measures looking more attractive, there have been more sellers than buyers. So presumably the above doesn't tell enough of the story. Given the pharmaceutical side of Glaxo, maybe the business is selling old products about to fall off a patent cliff. In other words, investors don't see the business creating a pipeline for growth and hence it is less attractive.

So expensive or cheap? Here the trade of between price and value seems very interesting and would need a deeper look into the reasons why investors were not impressed.

 Astrazeneca

Another Big Pharma business, who's numbers above are almost doing the opposite of Glaxo. The share price has been rising fast, but dividends, and profits were flat. We can also see that FCF was falling fast.

We can see that with the numerators growing and denominators shrinking the PE has expanded, and PFCF has exploded. 

Investors are willing to pay more now that a few years ago to own Astrazeneca. Does it have great growth prospects? Maybe it's been pushing all that profit and cash back into the business and is about to rocket. Maybe it has a pipeline of amazing products that are going to push those profits and that cash skywards? I haven't looked, but even without rummaging under the bonnet it's starting to look pricey to me... 

Computacenter

Here the share price, dividends, profits and FCF are all marvellously consistent. And pointing upwards.

So despite the share price bouncing up, the PE and PFCF have hardly moved. Everything is moving in unison.

I invested in Computacenter because they were a long standing supplier for my employer, and always did a good job. Nothing flash, just got the job done. Much like these numbers. My guess is that the market views them as fairly priced, which is why the share price has moved in tandem with the underlying performance of the business.

 EMIS

The share price for EMIS is growing just above it's growth of FCF, but profits are flat.

For the dividend hunters, things might look tempting as this is increasing at 10%+ per year. It could  potentially continue for a while if it continues to generate cash. But the rate of increase of the dividend is double the growth of their cash, so sooner or later it's going to catch up.

Given the flat profits, and increasing price it is now more expensive that it was. Maybe it's those dividend hunters who are willing to pay up to own a consistent dividend? It's difficult to get excited though when a business can't grow it's profits, perhaps given that EMIS is a supplier to the NHS it simply has limited pricing power.

Conclusion

No real conclusion, but an interesting diversion, which provoked a couple of questions of my larger holdings. And gave me some comfort that they remain worth hanging on to. I've looked into Diageo before, and will again. EMIS had some favourable characteristics that drew me to it, but I'm not convinced. Astrazeneca - now this one does look pricey. It may have decent growth prospects, it needs to...I'm priced out of that one. For now, happy investing.

November 2020 portfolio update

To the moon...ahem...markets predictably shot up in November as, not one, but three vaccines came charging over the horizon. Although the Astrazeneca version had a few doubts over it's data. And Pfizer's needs to be kept at super-duper (#science) cold temperatures. Still there was a palpable relief that there is some light at the end of the tunnel.

Lockdown2 is proving as tedious as expected. God knows what the rules are...however, Blighty appears to be fairing better than the US. The Trump experiment to ignore the virus until it goes away seems to have backfired somewhat as the numbers of infections and deaths coming out of the US are awful. I expect the xmas relaxation in the UK will be followed by lockdown3 in a couple of months...

Speaking of the orange buffoon, he lost. Hurrah. They can now wheel in Biden and try to fix some of the damage done by Trumpy. The predictions of market chaos were exaggerated as usual, the markets didn't seem to care as virus news, and the potential vaccines to protect us from it grabbed the headlines.

And Brexit, apparently it's still going on...

The portfolio had a good month, as the stocks most beaten up over this year had a sharp bounce the markets jumped. I've avoided many of these, whilst I missed out on some of the big falls earlier in the year, I also missed out on some of this month's recovery. Higher valuations and fast moving markets held me back a little this month, so the only change was a top up to an old timer.

Portfolio performance
The portfolio was up 4.5% in November, behind my chosen benchmark (Vanguard FTSE All Share Accumulation) which was up 12.2% over the same period.

Best performers this month:
SAGA +78%

Craneware +40%

Dignity +39%

Worst performers this month:
AB Dynamics -14%

National Grid -8%

Reckitt Benckiser -5%

November share purchase: TATE

Tate & Lyle (TATE) are probably best known for their sugar and syrup that you'll see when you stroll through the baking aisle at the supermarket. Which is ironic since they no longer have a sugar refining business. Their genesis was indeed the merger of two sugar refiners owned by a Mr Tate and a Mr Lyle, but the sugar business was sold along with the rights to use the brand over 10 years ago. Today they are an ingredients business - for food, drinks and for a range of industrial products.

They've been in the portfolio for a while, never shooting the lights out, but have been a steady dividend payer. I was impressed that during the height of the pandemic they were able and willing to continue to issue guidance and maintained their dividend, and according to their half year report have managed to reduce their nebt debt since March. Recent announcements include the purchase of a majority stake in a starch business based in Thailand, and buying the remaining stake of a sweetner business it had a small part of, which had facilities in China. Clearly the intention is to try to increase their footprint in Asia, which sounds rather sensible.

It isn't a business that I think has a particular competitive advantage since it essentially offers commoditised, bulk products that could be purchased elsewhere, although established relationships with food and beverage producers would be difficult to disrupt. And shifting to alternative ingredients is something a large food/ drink producer is unlikely to do at a whim. They are however a pretty defensive business, and unlikely to see much change in demand from economic cycles, and they seem to be well run. So I'm happy to pick up a few more of their shares.

IPOs vs the virus

Some internet wandering led me to stumble on the following chart from PWC that left me a little dumbfounded, and prompted a stroll through some IPO facts and figures.

Who in their right minds would try to get their business listed on a stock exchange in the middle of a pandemic, and potentially in the teeth of a terrible recession? It turns out that 477 businesses did just that in Q3 this year, raising $116bn in the process.

According to EY “Q3 2020 was the most active third quarter in last 20 years by proceeds and the second highest third quarter by deal numbers”.

So where is this extravaganza of new listings? 23 of them turned up in London (details here at the LSE). The fun was mostly being had in the US. They were flying off the shelves at such a rate that the numbers are increasing by the day it seems. As of 24th November, 2020, according to stockanalysis.com: "There have been 401 IPOs on the US stock market this year, as of November 24, 2020. That is +81.4% more than the same time in 2019, which had 221 IPOs by this date."

Is there a spooky correlation between the number of people dying from respiratory illness and the volume of IPOs during the year? One for Tyler Vigen maybe...

Looking at that busy US IPO activity for 2019, (as at November 2020) 59% of the IPOs are higher than their initial listing price, 40% are lower. The top 10 are below:

IPO Date	Name	IPO Price	Current	Return
Apr 18, 2019	Zoom Video Communications	$36.00	$430.28	1095%
Jun 13, 2019	Fiverr International	$21.00	$200.00	852%
Oct 10, 2019	BioNTech SE	$15.00	$106.50	610%
Nov 21, 2019	SiTime	$13.00	$85.20	555%
Jun 28, 2019	Karuna Therapeutics	$16.00	$100.00	525%
Jun 6, 2019	GSX Techedu	$10.50	$63.90	509%
Mar 7, 2019	ShockWave Medical	$17.00	$98.64	480%
Apr 17, 2019	Turning Point Therapeutics	$18.00	$104.37	480%
May 2, 2019	Beyond Meat	$25.00	$140.96	464%
Dec 5, 2019	LMP Automotive Holdings	$5.00	$27.71	454%

The bottom 10 from 2019:

IPO Date	Name	IPO Price	Current	Return
Nov 8, 2019	ECMOHO Limited	$10.00	$1.43	-86%
Aug 15, 2019	9F Inc.	$9.50	$1.29	-86%
Feb 12, 2019	Anchiano Therapeutics	$11.50	$1.41	-88%
Nov 13, 2019	YayYo	$4.00	$0.4500	-89%
Feb 15, 2019	Stealth BioTherapeutics	$12.00	$1.30	-89%
Jul 31, 2019	Borr Drilling	$9.30	$0.800	-91%
Jan 4, 2019	China SXT Pharmaceuticals	$4.00	$0.290	-93%
Apr 5, 2019	Guardion Health Sciences	$4.00	$0.247	-94%
May 10, 2019	Sonim Technologies	$11.00	$0.585	-95%
Aug 1, 2019	Sundial Growers	$13.00	$0.241	-98%

2020 has been just as exciting. 61% of the new listing from this year are in the green, whilst 36% have lost money.

2020 top 10 IPOs:

IPO Date	Name	IPO Price	Current	Return
Aug 14, 2020	CureVac	$16.00	$85.06	432%
Aug 27, 2020	XPeng	$15.00	$72.17	381%
Apr 8, 2020	Keros Therapeutics	$16.00	$76.21	376%
Jul 17, 2020	ALX Oncology Holdings	$19.00	$82.28	333%
Feb 6, 2020	Schrodinger	$17.00	$67.65	298%
Jul 30, 2020	Li Auto	$11.50	$43.64	279%
Jul 17, 2020	Berkeley Lights	$22.00	$83.36	279%
May 22, 2020	Inari Medical	$19.00	$68.00	258%
Jun 5, 2020	Dada Nexus	$16.00	$52.03	225%
Aug 13, 2020	KE Holdings	$20.00	$62.97	215%

And the bottom 10:

IPO Date	Name	IPO Price	Current	Return
Feb 6, 2020	Casper Sleep	$12.00	$6.04	-50%
Jan 17, 2020	Velocity Financial	$13.00	$6.25	-52%
Sep 30, 2020	Boqii Holding	$10.00	$4.78	-52%
Feb 13, 2020	Muscle Maker	$5.00	$2.30	-54%
Feb 24, 2020	Zhongchao	$4.00	$1.82	-55%
Jan 30, 2020	AnPac Bio-Medical Science	$12.00	$3.49	-71%
Jan 17, 2020	Phoenix Tree Holdings	$13.50	$3.76	-72%
Jun 19, 2020	Progenity	$15.00	$3.64	-76%
Jan 17, 2020	Lizhi Inc.	$11.00	$2.48	-77%
Jun 30, 2020	Aditx Therapeutics	$9.00	$1.91	-79%

Exciting stuff, a bit racy for me.

The requirements for a new listing vary slightly from one exchange to another, as do the regulatory requirements. The LSE have a nice write up here and nicely summarised below. 

It all sounds like a nice wheeze to get some cash, perhaps the founders have the chance to offload some of their own investment tied up in the company. But a more sobering element is the cost. PWC again have a nice tool to allow a view of the potential costs.

As an example, a tech firm with revenues less than $100m wanting to list at a valuation in the range of $100m to $250m would end up having to hand over between $8m to $24m according to PWC. 

Some of these IPOs are SPACs - Special Purpose Acquisition Companies. There is a detailed and comprehensive write up from Harvard if these excite you. SPACs are companies with no commercial operations that are designed and built just to raise capital via an IPO. It then buys an existing business. They are known as "blank cheque" companies and have been around for decades, but the recent boom in IPOs have brought these to the public attention through some high profile listings.

I think IPOs are not for me, although one or two of the US businesses do look interesting. I prefer my investments to be a little less volatile.