Overall review

Now I’ve been through all the underlying shares there are a few important points to cover about my overall portfolio. I want to look back at the overall performance and the major past decisions and mistakes from the past year. I also want to look forward and consider whether my portfolio is has the right strategy and is sufficiently well diversified to deal with the upcoming ‘macro’ environment.

Performance

This is the first time I’ve written about this on my blog so I’ll give a little context. Part of me feels that it would make sense to start with a clean slate given I’ve just started the blog but I’m also keen to jot down my thoughts on what happened to see if there is anything I’ve learnt and this is probably more important.

I’ve been investing since 2011 but have only really properly started monitoring my performance for the last two years. Previously it had been difficult as I was constantly accumulating funds. My approach to investing has also become a lot clearer and more systematic in the last couple of years (much thanks to using Stockopedia). My performance relative to the market has also improved.

Over the last year my portfolio has returned 48.5% vs 28% for the FTSE100. Over two years it has returned 68.9% vs 6.3% for the FTSE100. (These figures are based on a fantasy fund set up to follow my actual portfolio and are somewhat conservative – the fund tends to achieve somewhat worse purchase and sale prices to me and does not include dividends).

I also use Stockopedia’s stockranks as a more challenging alternative benchmark as the next best alternative strategy I would use would probably be based on Stockranks. The top 10 percentile of Stockrank shares returned 28.6% over one year and 41.7% over two years.

Obviously I’m very happy with this outperformance and hope it will continue. However, it is too short a period to really get much of a sense of whether it suggests my strategy is working. In particular I note there has been a lot of commentary that returns to ‘quality’ or ‘growth’ have been abnormally high and many expect a reversion to ‘value’ investing. I could just be a short term beneficiary of this trend and about to enter a period of underperformance. I’m not so sure about this but frankly who knows – we’ll have to see!

A big contributor to my performance last year was a radical overhaul of my portfolio post Brexit. I was optimistically overexposed to UK cyclicals before the vote but then post vote immediately sold about 1/4 of my portfolio that was exposed to UK cyclicality or importers (including particularly Wizz Air, MJ Gleeson, Waterman and Character) and reinvested into exporters and businesses earning foreign currency to benefit from the drop in sterling. While some of the cyclicals bounced back post Brexit, the exporters have done even better and I am now in a preferable position of having very little UK cyclical exposure as we embark on the Brexit process. This seemed an obvious thing to do at the time and I am happy it played out well.

Profit warnings

I think it would be useful to document the profit warnings I encounter – both why they occur and how I deal with them to see if there is anything I can learn from them.

I encountered 3 profit warnings last year: Portmeiron, Judges Scientific and IGG. In all cases I sold immediately (I mean literally just before 8.00am sharp on the day of the profit warning I was hammering the sell button in anticipation of the market opening) and in each case this strategy appears to have saved me a considerable sum of money. For example, in the case of IGG I was able to sell for a 12% rather than 40% loss by doing this. This might be more difficult to do quickly were I to have larger holdings in less liquid stocks. However, even accounting for this I am pretty certain that selling asap is generally going to be the best strategy when facing a profit warning and much other research appears to confirm this.

But could I have avoided the profit warnings in the first place? They all felt like surprises at the time but if I look back now were there warning signs?

Starting with IGG: the reason for the profit warning itself (regulatory intervention by the FCA) was not very predictable but this was a known risk. Regulatory intervention can lead to fairly dramatic effects on profits. IGG has led me to consider this risk more carefully – I am fairly relaxed about my exposure to regulatory intervention across my current portfolio but have been put off investing in gambling shares because of this. Another point is momentum: in actual fact I was starting to think about selling IGG even before the profit warning because it had just broken down out of an uptrend. I’m not sure whether I should have been quicker to sell in hindsight.

In the case of Judges Scientific there were warning signs of sorts in that trading for the first few weeks of the year had already been signalled to be poor several weeks in advance of the profit warning. This repeated a pattern from previous years where subsequently trading had improved – not this time. Not sure whether I should have sold in hindsight but I may be a bit more sceptical of these novel trading patterns in the future.

In the case of Portmeiron I didn’t really lose much (about 5% from the high) as I sold immediately at the very first sign of trouble. I don’t think it was predictable beforehand. The share price subsequently fell about 1/3 but has recovered a bit since. I think I did the right thing there…

Macro risks and diversification

I am happy with the overall level of diversification in my portfolio but feel that as it is growing in size and with a greater weighting in more conviction positions that have done well I should diversify a bit further up towards 30 stocks. I’m looking to add particularly to more defensive holdings at this point in time (and in general).

I think macro predictions are a bit of a fool’s errand. That said I think one should have an eye towards major macro or cyclical risks or opportunities and make sure your investing strategy can deal with them.

Last year an opportunity in hindsight was commodity stocks, which were on cheap valuations and have rebounded a lot since. At the time they were not obviously cheap enough to me to warrant buying any given my ignorance about them and their possible downsides. I’m not looking to get involved here unless the opportunity is really obvious.

I’m also not very interested in ‘value’ shares that are cheap & cyclical at current valuations and at this point in the cycle (e.g. property-related, financial, recruitment, motor sales) – it would take a more exceptional fall in valuations to pique my interest. In addition, there seem to be some obvious general macro risks from Brexit, trade barriers emerging and rising interest rates. That said, I don’t think any of this should reduce optimism about decent equity returns in general going forward (since when are there not macro risks?)

Unless we get a larger fall in valuations of cyclical stocks I will stick to my long term strategy of focussing on quality defensive stocks which can earn high compound returns throughout the cycle. I believe the key thing for me to monitor (and keep low) is my overall cyclical exposure. Most shares are at least a bit cyclical so judging this exposure is more art than science. At the moment the shares I think may be quite cyclical add to about 1/5 of the portfolio (BJU 3.7%, LIO 3.9%, OTB 4.9% and SOM 8.2%). A few others, e.g. ELTA 6%, may be a little cyclical too. I’m happy that this proportion appears fairly low but I think it would be prudent for me to continue to try to lower it further when considering which shares to buy or add to.

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