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.

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.

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.