Portfolio review: October 2019

My portfolio has given up a bit of ground over the last quarter, which has felt like a bit of an uphill battle. The stock market still seems to be in limbo, though the narrative of impending recession has been strengthening.

Predicting the macroeconomic situation and how it might affect the stock market is a source of constant bafflement for me. What the market seems to be most sensitive to is expectations about what central banks are likely to do with interest rates. The catalyst for the sharp correction at the end of last year was the belief that the Fed was intending to progressively raise interest rates. The stock market recovered equally sharply at the beginning of this year when the Fed recanted. The high quality compounders that I like to invest in are particularly sensitive to interest rate expectations.

The complexity is that the Fed sets interest rates based on its expectations about how the economy will perform and the resulting inflationary pressures that may arise. This means that worsening economic prospects can be both bad news for the stock market (as corporate profits may fall) and good news, if it means the Fed is more likely to lower interest rates in response.

At the moment it feels like conditions are just right, with economic growth slowing down sufficiently to ensure interest rates are kept low but not enough to raise major concerns about corporate profits. This could all play out well for stocks for some time yet, though it does feel rather precariously balanced, especially with stock market valuations being relatively high. All in all, there’s plenty to worry about, as there is a lot of the time, but nothing that seems sufficiently severe or certain to deter me from my default setting of blissfully ignorant, fully-invested optimism. Of course, my analysis is a massive simplification of the underlying reality and may well turn out to be missing something of critical importance. We’ll just have to wait and see…


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.

October 19

The last quarter hasn’t been great, with my portfolio slightly underperforming the FTSE. My ‘buy and hold’ and ‘mechanical’ benchmark portfolios have had a poor quarter as well. I set up these benchmark portfolios 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.  This suggests the underperformance is more to do with my focus on quality growth businesses rather than the execution of my trading. Nevertheless, it’s hard to overlook that a few of my recent decisions to override more mechanical momentum following haven’t panned out. Notably, I would have decided to sell my position in Burford sooner had I behaved more mechanically. It seems I am slowly converging towards a fully mechanical strategy and at this point I’m tempted to skip ahead to simply copying the trades in my benchmark portfolio.


Recently I have become more preoccupied with contingency planning. I feel I need to have a clearer plan for when the market conditions start to look bleak. Should I stick to my strategy come what may, or are there times when I should switch things up or go to cash? My thinking on this is not settled and it feels like a weakness. Without a clear plan it’s hard to have discipline and without discipline it’s all too easy for things to go horribly wrong.

I have thought of a couple of options for how to adapt my strategy to market conditions. One is to target valuations instead of momentum when making purchases i.e. select shares from my watchlist that look the cheapest rather than those with the best momentum. The other is to switch to cash.

At this point I’ve only identified one situation where it is likely better to target valuations rather than momentum – when the market has crashed. Sticking with the more boring defensive stocks that have fallen the least in a market panic would also miss you out on a lot of the rally when the market bounces. Other than that I’m generally more inclined to put much more emphasis on momentum.

I think it’s harder to judge the right time to switch to cash. Ideally you want to sell near the market peak, though obviously this is much easier said than done. Because markets spend the vast majority of time going up over the longer term I’m only really minded to raise cash in rare circumstances when it seems obvious there’s going to be a substantially better buying opportunity later on. I think this would only happen if valuations reached extreme levels or if a severe recession seemed imminent.

Individual shares

Here is an update on the progress my current investments. The main aim is to consolidate my thinking about which positions I’m more likely to add to and which are closer to being sold.

Mastercard (10.8%): Mastercard continues to make steady progress. Last quarter’s results predictably beat expectations again and the outlook is good. The share price has been consolidating during the difficult market we’ve had over the last quarter but has held up relatively well. This is my largest position for a reason. While it’s already large enough not to warrant adding to further, I have no intention of selling any time soon.

Bioventix (8.6%): There hasn’t been any news over the last quarter and the share price has come off a bit over the last week or so. While Bioventix is definitely still a long term favourite, its upcoming final results have a bit of a ‘make-or-break’ feel to them, as investors eagerly await news of progress with the Siemens high-sensitivity troponin test. There is some short term risk here, but I’m optimistic that any disappointment with troponin uptake so far would be short-lived and seen as a buying opportunity. I also suspect that investor expectations of slowing growth in Vitamin D revenues are likely to be overly cautious.

Games Workshop (7.3%): the share price has been consolidating over the past quarter and has recovered well from a temporary dip over the summer. I’ve been adding to my position as the combination of high quality, low valuation and strong business momentum is very appealing. This is one of my highest conviction investments at the moment and I’m keen to add to my position further. The recent news that Marvel is going to make a comic based on Warhammer is encouraging and highlights some of the potential value in Games Workshop’s unique IP.

JD Sports (5.8%): JD Sports is one of the few shares in my portfolio that had a very strong quarter, with some excellent interim results and a correspondingly strong share price performance. The valuation still seems very reasonable and there plenty of opportunities for further growth. I’ve been adding to my position and am happy to continue doing so.

Judges Scientific (5.3%): Judges is the other stand out performer over the last quarter. It has unsurprisingly benefited from a big exchange rate tailwind this year and has been executing sales well, reducing the size of its order book. While I’m a big fan of the business and think it’s still looking cheap, I am a bit surprised it has done so well relative to my other investments. Indeed I trimmed my holding following its July trading update, where it said that its good first half was partially due to it consuming some of its order book. I’m not really looking to add to my position at this point but am happy to hold.

Adobe (5.3%): Adobe has fallen back a bit over the last quarter, not helped by a somewhat cautious near-term outlook in its last quarterly results and by the broader turn in sentiment against software stocks. Adobe has been a bit of a frustrating investment with little overall progress since I first bought more than a year ago, despite some decent results. Long term it still looks a very solid proposition so I’m happy to be patient for now.

AB Dynamics (5.2%): after an excellent first half of this year, the share price has come off a bit over the last quarter. The weakening momentum means this is nearer the top of the list of possible candidates to sell. The business still seems to be firing on all cylinders, with a recent ‘ahead of expectations’ trading update. However, I am somewhat concerned that trading will slow down at some point in the not too distant future. The falling share price suggests other investors may share this fear and a wave of small scale director selling over the last month despite the current excellent trading performance could be a warning sign. I’m in two minds as to whether I should be adding to my position here or taking profits and moving on. For a smaller less liquid investment like this, I think it makes sense to tolerate some short term share price volatility while the trading performance and prospects seem so promising, but I will continue to monitor it closely.

London Stock Exchange (4.5%): LSE is a new investment but it’s rapidly grown into one of my larger ones. I was lucky enough to buy in just before the proposed Refinitiv acquisition was announced. Shortly after that the Hong Kong stock exchange made an offer to buy LSE. However, the latter deal never seemed likely to get anywhere and has since fallen through. These events have provided a boost to the share price but have left the valuation looking a bit expensive to warrant adding more for now.

Stryker (4.0%): Stryker’s last results were decent though unremarkable. I’ve added to my position as it provides some defensive ballast to my portfolio, which seems like a good idea at the current point in time.

Broadridge (3.6%): Broadridge’s last results were OK, though it has fallen back a little along with everything else. I’m not looking to add at the moment though am very comfortable with my holding.

Boohoo (3.5%): Boohoo is a new addition over the last quarter. It’s looking very promising at the moment, with continued excellent trading and the price recently breaking out to new highs. Long term the prospects look excellent. Boohoo seems to have a solid competitive advantage and enormous scope for further growth. I’m keen to add to my position here.

Salesforce (3.4%): the last results were excellent but the Salesforce share price continues to consolidate. I’ve added to my position a bit and am happy to wait patiently for the price to get going.

SDI (3.4%): SDI is also going through a period of consolidation. Trading still seems to be progressing well and the valuation is very reasonable so I’m prepared to be patient here for now, though the weakening momentum has pushed this near the top of the list of sell candidates.

RWS (3.4%): there has been no news at RWS since my last quarterly review. The share price has held up relatively well, bouncing back strongly over the last couple of weeks after initially getting caught up in the rest of the market turmoil.

Atoss Software (3.1%): Atoss has been consolidating after its run up in price over the first half of the year. The half year results were decent and the price seems to have stabilised after falling over the summer so I’m happy to keep holding for now.

Churchill China (2.9%): Churchill China is another recent purchase. The business is performing very strongly, though the share price has flatlined at its highs for some time. This is likely because a no-deal Brexit could have a disruptive effect on Churchill’s business. This is a concern. However, in the context of the rest of my portfolio, most of which is more likely to be positively affected by  a no-deal Brexit through the impact on the exchange rate, Churchill provides some useful diversification.

Diageo (2.5%): Diageo issued some rare words of caution about the possible impact of ‘significant changes to global trade policy’ in its recent trading statement. Progress in the share price, which had been going very well, was brought to a temporary end following this announcement. I don’t think there is much cause for concern and am tempted to add to my holding, this being a more defensive investment with underlying trading going well.

Esker (2.4%), RELX (2.3%), Accenture (2.3%), Arcontech (2%), Intuit (2%), Ansys (1.9%), Cintas (1.9%), PayPal (1.8%): the remaining smaller positions in my portfolio are relatively newer with little to update on thus far. I’m happy to keep holding and adding to most of them with the exception of PayPal, where momentum is looking a bit weak and the last trading update was a little disappointing. PayPal is probably going to be my next sale as things stand currently.














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