Portfolio review: July 2019

It was inevitable that equity markets would lose some steam after the spectacular bounce in the first quarter. The second quarter has been more volatile as the conflicting narratives of impending recession and indefinitely continuing low interest rates play out, though overall the markets have continued to make progress. After a fantastic April, my portfolio has been slowly and steadily inching forward over the last couple of months.

The macro situation is little changed from my last portfolio review. Equity valuations seem high and most western economies are slowing down, but this slowdown may be temporary and interest rates look set to remain low for the foreseeable future. Sentiment seems reassuringly negative despite the markets making new highs. These continue to seem like ideal conditions for my quality strategy to do well. Low interest rates and recessionary risks favour growth and defensiveness. The risk of inflation and rising interest rates, the natural bane of my strategy, seems remote for now. A point will come when the valuations of high quality businesses are judged to have got out of hand, but it’s very hard to tell when this will be. I’m pretty confident that sticking to quality and riding out volatility rather than attempting to time the market will work out better in the end.

That said, higher valuations do mean it’s getting more risky out there. Some high quality businesses, particularly those with more pedestrian growth prospects, no longer seem cheap, creating the potential for steep falls if they fail to meet expectations. On top of this, the number of profit warnings across the wider market has increased significantly this year, though mostly in cyclical sectors such as retail. One of the benefits of my focus on quality and indeed on momentum is that it substantially reduces the risk of profit warnings. Thankfully, I’ve been relatively unscathed by profit warnings for the past few years (touch wood), though a few businesses in my watchlist have been hit recently, notably Somero and Craneware. As a result, I’m feeling quite safety conscious at the moment and aim to ruthlessly rotate out of any positions where there is any equivocation about current trading and the possibility of a profit warning seems higher.

Performance

The performance of my portfolio (QSS) is shown against its benchmarks in the table below (all the figures below exclude dividends). My benchmarks are the FTSE 100 and a portfolio of the top decile of UK shares according to their Stockranks. The figures below do not include dividends.

July 2019

My performance stats are looking pretty healthy at the moment, well ahead of my benchmarks over all time periods. I note that the Stockranks haven’t been performing so well recently, after several years of trouncing the FTSE.

My portfolio has fallen further behind the mechanical momentum benchmarks over the last three months. These benchmark portfolios seem to be on fire at the moment. I set them up to isolate the performance generated by different aspects of my strategy, as explained here. I then simplified the mechanical strategy to only focus on momentum. The strategy and investments made by the mechanical benchmarks are very similar to my actual portfolio, the key difference being that I allow myself a little bit of discretion around exactly what to buy and sell. Discretion I have apparently used to shoot myself in the foot recently. The main culprits are my decisions to hold on to certain holdings with poor momentum which have continued to stagnate (principally Burford) and my decisions to actively avoid certain high momentum stocks where the valuations looked too demanding. I’ve missed some big runs as a result (e.g. over the last 6 months Shopify is up 127%,  Veeva 87%, Nemetschek 74%, Aveva 69%, Sartorius 57%, Halma 50%). I really like the look of all of these businesses and considered buying them recently but ultimately avoided them on valuation grounds. The mechanical benchmarks had no such qualms and benefited as a result. This is food for thought…

Strategy

There have been no major changes to my strategy recently. I’m pleased that my trading has settled into a measured rhythm, with a lot of the decision-making nicely automated and relatively less scope for errors in judgment.

The fly in the ointment seems to be that the judgment I do exercise could be detracting rather than adding to my performance. At least  this is what the outperformance of my mechanical benchmarks seems to suggest. While it’s always a bit galling to get feedback that one’s judgment doesn’t seem to be adding value, I do get some satisfaction from seeing the purely mechanical incarnation of my strategy do well. Perhaps the key is to have as little human involvement in the timing of buy and sell decisions as possible? I’m starting to think so but really it’s still far too early to read anything into my experiment with mechanical benchmarks just yet. They could be greater affected in the next correction and my decisions to avoid some of the more highly valued stocks could yet be vindicated.

Individual shares

In my last quarterly review I decided to go through my portfolio reviewing the recent news flow and immediate prospects for my current holdings. I found this to be a useful exercise in consolidating my current thinking so have decided to make it a regular feature. As last time, I’ve given an indication of the positions that I might add to when funds become available. So here goes:

Mastercard (10.3%): Mastercard has grown to be my largest position, making steady progress as it predictably beat expectations last quarter. A great quality business with excellent momentum and a reasonable valuation means I’m more than happy to continue to hold this as my largest position.

Burford Capital (9.7%): Burford has continued to be the problem child of the portfolio. The price has continued to stagnate over the past quarter as the spectre of Woodford’s large holding looms over. I’ve been adding despite the poor momentum. I’m hoping its half-year results at the end of this month will beat expectations. While there’s always room for unpleasant surprises when returns have the potential to be lumpy, I’m fairly confident that Burford will beat expectations, especially after the news that it sold off a further 10% of its Petersen investment for $100m, resulting in a major valuation uplift to the remainder it still holds. This should give first half profits a sizeable boost.

Bioventix (9.4%): Bioventix has treaded water for the last quarter. It is another one of my large positions due to face a ‘make or break’ moment over the next month or so, when it also reports its half year results. There is greater uncertainty than normal this time as we await news of how successful the launch of troponin has been so far, as well as whether growth in its core Vitamin D product sales is indeed plateauing. I’m reasonably optimistic that expectations are overly conservative and will be exceeded. This position is probably already big enough so I don’t intend to add more.

Judges Scientific (6.1%): there hasn’t been any recent news but Judges’ share price has nevertheless been rising steadily over the past few months. With a reasonable valuation and an exchange rate tailwind this year, I’d be happy to add to my position here.

Microsoft (5.5%): Microsoft has also been rising steadily. It continues to appear a rock solid investment so it’s unfortunate that I’m likely to be forced to sell fairly soon.

AB Dynamics (4.8%): AB Dynamics has continued its spectacular run, with some excellent half year results and a decent looking acquisition of rFpro, a business that develops similar but in some ways complementary vehicle testing solutions. AB Dynamics has grown into one of my bigger holdings. I’m considering adding more despite the high valuation, as it is building a strong position in a high growth market and there still seems to be quite a bit of explosive growth left in the tank.

Paycom (4.5%): Paycom has also been on a strong run recently, beating expectations in its recent quarter. Momentum is strong and I like the business a lot but I’m not minded to add to this position at the moment as the valuation has got pretty punchy.

Gamma Communications (4.3%): there hasn’t been any news since my last quarterly review and the share price has risen modestly. I’m comfortable continuing to hold Gamma and waiting to see how the next trading update goes, due in a couple of weeks.

Games Workshop (4.1%): the recent trading update in early June suggested Games Workshop finished the year well ahead of expectations. The share price has been on a tear over the last quarter. I’ve become more convinced by Games Workshop’s long term growth story and am keen to add more to my position here while momentum is good and the price still fairly reasonable.

Kering (3.9%): Kering has suffered a bit of volatility over the last quarter, though has recently rebounded. Kering’s heavy exposure to China has meant that the trade war has weighed on sentiment as have signs that the explosive growth at Gucci is slowing down. But it still seems cheap as chips even with slowing growth. I scaled back my position here a bit as momentum weakened and don’t intend to add imminently, though that may change with the next trading update later this month.

Adobe (3.5%): Adobe beat expectations in its last quarterly update and the price is now breaking out to new highs. It has grown at a tremendous rate for a business that large over the last few years. It still looks set to grow at quite a clip for a while yet and the valuation is not too high. I’m keen to add to my position here.

RWS (3.3%): RWS has performed well over the last quarter. Its half year results in June were good with decent organic growth and further signs that its large acquisition of Moravia is now bedding in well. The valuation is reasonable and momentum is strong so I could add here but I’m a bit less sure about RWS than some of my other holdings. This might be one where I would benefit from a deeper look under the bonnet.

Broadridge (3.0%): Broadridge was close to the exit at the time of my last review due to its weak momentum. Thankfully, it didn’t quite get sold as it has bounced back strongly over the past quarter and beat expectations at its last results. I have relatively high conviction in the quality of the business and with the return in momentum and a reasonable valuation it’s one I’d be keen to add to.

Atoss Software (2.8%): Atoss share price has been on quite a run this year (up 72% over the last 6 months). Its last quarterly results were good but I don’t really understand why it has done quite so well. It’s looking quite expensive now so I’m not looking to add to my position at the moment.

Diageo (2.5%): Diageo is trading consistently well and has been rising steadily since the beginning of the year. It still seems reasonably valued and I’d be happy to add to my position, but it’s not top of the list.

SDI (2.5%): SDI’s latest trading update suggested that its full year results are going to be ahead of expectations. The price has come off a bit over the past couple of months after its strong rise in the first quarter and the valuation is cheap. I’m still keen on adding to my position here.

Sopheon (2.5%): Sopheon has continued to tread water over the last quarter and as a result it’s one of the nearest to the exit. It stated that it was confident in meeting expectations at its last trading update and generally sounded pretty bullish. I think the timing of the realisation of the larger opportunities in its pipeline does create some uncertainty as to whether it will beat or miss expectations this year. More importantly, the long term prospects look solid and the valuation seems cheap. Part of me wants to hold on till its results at the end of August but we’ll have to see how it goes.

DotDigital (2.3%): DotDigital is a fairly recent purchase and I don’t have much new to say on it. I am still positive about it and should be a trading update soon which will guide whether I want to add to my position.

JD Sports (2.1%): JD Sports suggested it was likely to beat market expectations for the full year in its trading update last week, given in the AGM Statement. The share price hasn’t really reacted much to this, which is perhaps unsurprising as JD Sports seems to be consistently underestimated by investors given its incredible track record. The valuation seems very cheap all things considered. I’m very keen to add to my position here. I’m genuinely fascinated by how this business has done so well in a highly competitive sector in recent years. This is another candidate for a deep dive.

Match (2.1%): Match is another recent purchase. I’ve had a bit of buyer’s remorse with this purchase as the valuation does seem quite steep given I have some uncertainty about Match’s competitive advantage in this industry where barriers to entry may not be that high. I’m happy to hold on to it while momentum is good but I don’t intend to add to my position for the time being.

Intuit (2.0%): Unfortunately, I have experienced buyer’s remorse for Intuit as well. However, in this case this is due to hearing a podcast that described an investigation into some of Intuit’s behaviour in steering customers away from the free offering of Turbotax it is required to offer as part of its agreement with the US government. I need to do a bit more digging to clarify my thoughts about this but my immediate reaction is that this may not be the sort of business I want in my portfolio.

PayPal (1.9%): I’ve bought back into PayPal recently and will update on this purchase in post on recent trades fairly soon.

Stryker (1.8%): Stryker has made solid progress over the last quarter, beating expectations in its last quarterly results. I like that Stryker provides some solid defensive ballast to the portfolio. I’m keen to add to my position while momentum is strong and the valuation reasonable.

Salesforce (1.6%): Salesforce’s share price has been consolidating over the past quarter, despite some very decent results. In part this may be due to its major acquisition of Tableau, for a price some may argue was excessive (though note the payment was made in Salesforce stock which the same people might also argue was priced excessively). It’s hard for me to judge, but it seems like a sensible strategic acquisition to me, given there is so much to play for in this market. I have quite a bit of conviction in Salesforce long term so I’m tempted to add to my current meagre position when I get a chance.

 

2 thoughts on “Portfolio review: July 2019

  1. I notice that you’re breaking your own rules with burford by adding / not trimming despite weak momentum…just flagging that this is one where you may look back and wonder if emotion got in the way ? Just a thought…

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    • Thanks for the comment KP

      That’s a good point – it has definitely been at the top of my mind recently. To be clear I’m not exactly ‘breaking rules’ as I don’t use stop losses and I have given myself discretion as to exactly what to buy and sell when I make a trade (once every two weeks). This is primarily guided by momentum but I’ve left myself room to hold on to stocks where I have enough conviction in the quality and current trading. I have quite a bit of conviction in Burford so have decided to hold on. This hasn’t paid off so far – time will tell whether this it turns out to be a good decision!

      However, as I mention in the post, I am wondering whether my strategy should be entirely mechanical / rules-based, precisely to avoid emotions creeping in and making mistakes. The jury is still out on that but I’m allowing myself some discretion to make this sort of decision for now.

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