Portfolio review: January 2020

The much hoped-for Santa Rally did indeed materialise, to round off a decent final quarter of a decent 2019. This is especially welcome following a difficult 2018 for equities. I’m fairly happy with my portfolio’s performance of 33.5%, though this has been achieved in the context of strong performances from the market as a whole. The FTSE 100 was up 12.1%, the FTSE 250 up 24%, the S&P 500 up 32% and the Stoxx Europe 600 is up 23%.

The global macroeconomic outlook for 2020 is looking rosier than it did a few months ago. Economic indicators in the larger developed economies are generally looking healthier and a global recession in 2020 now seems pretty unlikely. Monetary policy in both the US and Europe looks set to continue to be dovish with little signs of inflation. There is also the potential for resolution to some of the uncertainty currently affecting international trade, including Brexit and the US trade war with China.

Of course, a rosy macroeconomic outlook does not imply a rosy stock market performance. Often, quite the opposite is true – when everything starts looking too rosy things can only get worse. The stock market is a leading indicator of the wider economy, as investors try to look forward when making investment decisions. To understand how the stock market will perform in 2020, what we might really want to know is how the market outlook will change e.g. what the macroeconomic outlook will look like at the end of 2020 in comparison to now. Will things still look rosy or will new risks have started to appear on the horizon?

It’s very hard to have useful insight in predicting a highly complex system such as the relationship between the global economy and stock market. Simple intuitions are little better than guesswork and often turn out to be naive and incorrect. In the absence of any specific insight, I think it makes sense to be optimistic about the performance of the stock market and remain confidently fully invested. This has tended to be correct the vast majority of the time in the past.


The performance of my portfolio (QSS) is shown against its benchmarks in the table below. My main benchmarks have been the FTSE 100 and a portfolio of the top decile of UK shares according to their Stockranks. Given the continued out-performance of US stock markets, I’ve also decided to also include the S&P 500 as a tougher benchmark (though note I’ve only started to invest in US equities over the past couple of years). As for the last two yearly reviews, I’ve also continued to benchmark my portfolio against a handful of professional fund managers.

The performance figures above are derived from a Stockopedia fantasy portfolio I use to track my actual portfolio’s performance. This is a convenient and transparent way to publicly track my performance. However, it results in some inaccuracy as there can be minor differences in buying and selling prices and dividends are excluded. My actual portfolio’s performance for 2019, including dividends, was somewhat higher than reported above at 34.7%.

I’m pleased with my performance over the past year. However, given how well markets performed as a whole, I am a little disappointed not to have done even better. There is always room for improvement!

Part of the reason for looking at multiple benchmarks is to try to understand the drivers of relative performance.

One point that leaps out is that the US stock market has continued to dramatically outperform its European counterparts. Over 10 years the S&P 500 has returned 187%, while the FTSE 100 has returned only 50%. In my view this illustrates the much higher average quality of US-listed compared to UK-listed businesses, a difference that has not been adequately reflected in relative valuations. I have often read over the years that the UK stock market is cheap relative the US because it trades on a lower valuation multiple. The fact that the difference in valuation multiples has not changed greatly, while the US stock market has roared ahead, suggests that in fact the US market was the one that was relatively cheaper. Notwithstanding the added challenges of higher transaction costs, exchange rate fluctuations and a market where it feels harder to get much of an informational edge, I think it was a good idea to extend my universe to include US shares. Hopefully I will be rewarded if I persevere, though so far my US investments have marginally detracted from my performance rather than helped it.

The other thing to note is the underperformance of Fundsmith and Lindsell Train in the latter part of the year. This is in stark contrast to the top Stockrank stocks which have done very well over the past quarter. This is indicative of a rotation away from quality towards value and is a concern for me. I’ve recently considered whether and how I might adapt to this.

Can I learn anything from my mechanical benchmarks? I set up these benchmark portfolios to isolate the performance generated by different aspects of my strategy, as explained here. My portfolio has performed relatively poorly against these benchmarks over the past year. My ‘buy and hold’ benchmark, which holds all 100 shares on my watchlist, has gained ground and is now only 3.5% behind my actual portfolio. My mechanical momentum benchmarks have extended their lead again and are now 4% – 6.5% higher than my actual portfolio.

It is a little dispiriting to see that my stock picking and trading is thus far adding little value over simply buying and holding all the high quality shares on my watchlist. I can think of a few possible reasons. One is that I have missed out on a few big gainers that have looked too expensive (e.g. Shopify, Nemetschek, Fair Isaac). Another is that my trading of momentum has occasionally resulted in selling out on temporary lows. Finally, my greater weighting in higher conviction positions has not always worked out.

The most significant contributor to my relative underperformance this year seems to be that my conviction in my bigger positions was misplaced. At the start of 2019 I had large positions in Burford Capital and Sopheon, both of which fared very badly over the course of the year. Another of my largest holdings, Bioventix, didn’t go anywhere. Had I held on to the same portfolio I started the year with I would have done considerably worse than I ended up doing – my return would have been only 22.3%. Trading out of these positions based on momentum salvaged my performance to some extent.

Strategy review

My overall strategy is fairly settled and I’m happy with it. I’m now focused on ironing out the wrinkles and improving my judgment and execution.

The failures of some of my high conviction positions this year is a reminder to be humble and not to get carried away with concentration or conviction when I think I know better. Part of this may be down to bad luck. However, I think the more useful lesson is to keep making systematic and disciplined decisions rather than getting carried away by individual stories. I believe my edge is founded more in the disciplined execution of a coherent strategy rather than prowess in picking individual stocks. At least this is certainly where most of my effort has gone!

I continue to be happy with my move away from relying on stop losses to using a system of periodic rotation. This largely seems to have been successful in helping me trade more patiently and avoid unnecessarily selling on volatility at short term lows. I can think of several examples (Games Workshop, SDI, Adobe, RWS to name a few) where my patience and lack of stop loss has been rewarded by strong rebounds in the share price. On the other hand I can’t identify many examples where stop losses would have saved me much. There are a couple of losers I would have sold a bit earlier had I been strictly following stop losses – Burford and Sopheon. However, the benefit would have been limited as my periodic rotation system led me to cut these losses before they got too big anyway.

One point I could improve on is my discipline in following the periodic rotation of only one trade every fortnight more closely. In practice I’ve made a few exceptions to this, where I was impatient to make a particularly compelling trade. As a result I have ended up trading a little more frequently. It helps to have flexibility on this and I don’t think this has cost me much. However, looking back I reckon I’m probably still erring on the side of over rather than under trading.

I’ve recently considered whether there might be situations where I should modify my strategy to raise cash or switch to value investments. One of the outcomes of this thinking has been to better diversify my watchlist across sectors to include a few more high quality cyclicals. Another has been to resurrect the ranking of my watchlist according to valuation and news flow as well as momentum. This approach is not particularly scientific but is a useful tool in helping me make more nuanced assessments rather than relying solely on momentum.

Finally, I have also further clarified my thinking on market timing. Market timing has been pretty easy for me to get right so far in my ‘investing career’, as there haven’t really been any points where it hasn’t made sense to be fully invested. However, at some point there will be a big crash and I have felt uncomfortable in not having a well-defined contingency plan.

I’ve decided the key is not to apply half-measures. Gradual shifts to cash whenever the market starts to look ‘a little ropey’ seems to be a losing strategy, as it’s very difficult to take the opportunity to reinvest the cash at lower prices. Nine times out of ten the market will rebound and even if prices do indeed decline significantly further the situation is likely to seem even more precarious.

Instead my plan is to remain fully invested at all times, except for very rare circumstances when I think the probability that the market will crash (and the probability of being able to buy back at lower prices) is high enough. I am thinking of situations like the dot.com crash and Financial Crisis. There is no guarantee that I would spot these situations in good time but I think it helps to be alive to the possibility. In these circumstances I would liquidate everything and commit to reinvesting at a later point. This could be when the stock market has fallen by a certain amount, or after a certain time period. I might never be confident enough to use this nuclear option but I think its better to have a clearly defined (albeit drastic) contingency plan and remain blissfully fully invested otherwise, rather than trying to time the market on an ongoing basis with ad hoc judgments.

Individual shares

I’ve been using my quarterly performance reviews as a place to log my current thinking on the positions I hold in my portfolio. While this is a little bit of a slog, I think it is worth persisting. It’s a useful prompt to remind myself of the initial investment cases and reappraise this thinking, especially for my larger, higher conviction positions. This helps inform what I should be adding to and what might be next for the chopping block. It’s also useful to have a written record that I can refer back to, particularly get more insight into the reasons for mistakes.

Mastercard (10.2%): Mastercard has occupied the top slot in my portfolio for almost a year now. This is partly a consequence of the fact that some of my other high conviction investments didn’t turn out so well in 2019, though to give Mastercard its due it has managed a very healthy (FX-adjusted) 57% gain for the year at the time of writing. This has been a delightfully boring investment that has continued to consistently beat expectations. It has now reached the milestone of being my most profitable ever investment in absolute terms, at least on paper. The long term growth story looks as intact as ever.

Games Workshop (9.7%): Games Workshop is my other high-conviction investment. It has had a great last quarter, following a characteristically terse but excellent trading update back in November. There seems plenty of scope for it to continue to beat expectations over the next year. The valuation still looks cheap to me. I’ve continued to slowly add to my position over time but have now stopped to let it run as the position is near 10% of the portfolio.

JD Sports (6.3%): JD Sports was one of the quiet stars of 2019, with a 158% return at time of writing (though I didn’t realise all of this myself, having only initially bought back in March). JD Sports has always traded on a relatively modest valuation as the market seems continually skeptical that its blistering track record can continue. The share price is up almost 30-fold over the last 10 years. JD Sports has continued to execute well on its ambitious expansion plans and there still seems plenty of growth in the tank. I’m wary of having too much conviction in a business that is essentially a retail distributor, though there is probably room for me to add more to my position if trading continues to go well.

SDI (6%): Looking back at my last quarterly review, it seems SDI was ‘near the top of the list of potential sell candidates’ due to its weakening momentum. Well I am glad I didn’t sell as SDI has had a spectacular final quarter. This is an example of where I think I have benefited from being more patient rather than relying on stop losses. I have been adding to my position as momentum resumed and the valuation still looked very cheap. It still looks reasonably valued but I’m not minded to add further to my position at the moment, as I have less certainty about its quality and long term prospects compared to some of my other investments.

Adobe (5.8%): Adobe has had a decent quarter with its last results and outlook beating expectations. The share price has regained its highs and my position is back in decent profit. Adobe is undoubtedly a high quality business and for me is a high conviction investment that I’d be happy to continue adding to.

Judges Scientific (5.3%): after a spectacular 2019 (up over 160% at time of writing), my investment in Judges Scientific is now more profitable in absolute terms than any of my previous realised investments (as for Mastercard). The strength of Judges’ relative share price performance has been a bit of a surprise, given its fundamental performance has not been quite so spectacular. That said, it still doesn’t seem obviously overvalued to me. I’ve taken some profits over the last few months but I’m happy to hold on to the rest of my position. I probably won’t be adding for now.

Boohoo (5%): Boohoo is a long term favourite that I’ve bought back into fairly recently. Its fundamental performance has been remarkably consistent, though its share price has stagnated a bit over the last couple of years (perhaps getting ahead of itself previously). I am very bullish on Boohoo at the moment. The valuation looks reasonable and trading seems to be going very well – I am hoping for some big earnings beats in 2020. I have been adding to my position over the last few months and will continue to do so.

Bioventix (4.2%): Bioventix had a relatively disappointing 2019 with the share price gains evaporating in the second half of the year. It was one of my largest positions at the beginning of the year and I’m glad I decided to trim it when the momentum started to turn. Despite the underwhelming share price performance, the underlying business has continued to trade well. As I anticipated, growth of its largest revenue stream from Vitamin D antibodies has continued to grow, in fact accelerating, despite persistent warnings that it was likely to plateau in the near term. Revenue from its antibodies for high-sensitivity Troponin tests has also started to pick up. I still have high conviction in the long term quality of Bioventix and the share price currently seems like a bargain. I will be taking opportunities to add to my position here.

Atoss Software (3.8%): along with Esker and Fabasoft, Atoss is part of a trio of investments I have made into European enterprise software businesses. These have all been doing well, both fundamentally and in terms of share price appreciation, though the strengthening Pound has been a bit of a headwind in the second half of the year. The valuation isn’t obviously that cheap, so while the momentum is excellent, I’m minded to continue to hold rather than adding to my position at this point.

Esker (3.7%): Esker is a very similar story to Atoss. In Esker’s case, one reason for optimism over its medium term prospects is its conservative revenue recognition. It has a substantial proportion of committed contract sales in its pipeline that will be hitting its top line over the next three years, hopefully leading to an acceleration in its growth rate. Given this I think the valuation looks fairly undemanding. I’m tempted to add further to my position but may wait to see what future trading updates bring.

Salesforce (3.7%): Salesforce has had decent results, yet the share price has stagnated for over a year now. I’m confident in the quality of the business and that the valuation is not excessive, so am prepared to be patient and continue holding as long as the share price isn’t declining.

Churchill China (3.4%): Churchill China provides a useful point of diversification against many of the more technology-oriented businesses in the rest of my portfolio. It’s a little bit capital intensive for my taste but the track record of steady growth is not to be sniffed at. There hasn’t been a trading update since my last portfolio review in October but the share price has staged a mini breakout and looks set to make further progress. I’ve added to my position a bit over the last quarter but am in two minds about whether to add more as the shares are quite illiquid.

AB Dynamics (3.3%): After a decent first half to the year, AB Dynamics’ share price came off a bit over the second half. I’m not sure exactly why this is the case. The results have been excellent, though it’s quite possible that fears of an impending decline in the growth rate coupled with a high valuation multiple have caused some investors to take profits. There have also been some significant recent director sales. In my last quarterly review I said I was in two minds as to whether I should be adding on the dip or taking my profits and running. I decided to compromise and sell half my position. Following the last results at the end of November, I’m minded to start adding again. AB Dynamics looks to be building an increasing competitive advantage, yet is still a relatively small business selling into high growth markets. The valuation seems attractive following the recent consolidation, given the quality and growth potential on offer.

Stryker (3.3%): Stryker’s last results were very good but the share price has been held back since it made an take-over offer for Wright Medical. This plus an exchange rate headwind has meant my investment has made little progress so far. The market seems to have been put off by the high valuation implied by the bid. The share price has started to recover over the past couple of weeks. As things stand, Stryker is my lowest ranked position according to the scoring on my spreadsheet and so is a candidate for rotation should its momentum weaken further or a better-looking opportunity arise. That said, I have high conviction in Stryker’s long term prospects and am not very keen to sell unless the alternative really seems worth it.

Arcontech (2.8%): there hasn’t been any news flow for Arcontech since I first bought and none is expected until its interim results in February. Momentum has been strong and the share price is near its highs. I’ve added a little to my position since my last portfolio review.

IG Group (2.7%): IG Group’s trading update at the beginning of December was decent but nothing to write home about. Momentum is still strong and I think the odds for resumed growth and further recovery in the share price seem very good. I’m happy to hold for now but this isn’t near the top of the list of positions to add to.

Tristel (2.5%): Tristel’s last trading update was decent and the price has broken out to new highs. Tristel’s quest to gain US regulatory approval is still ongoing but I think it makes sense to be patient. The valuation seems quite high but expansion into the US could be transformative for Tristel’s growth or make it an attractive takeover candidate. I’m fairly keen to add further to my position.

Gamma Communications (2.5%): I bought back into Gamma after making the mistake (in hindsight) of selling it earlier in the year. Gamma is seemingly quite boring and defensive but is benefiting from a strong secular growth trend in the adoption of cloud communication technology. I’d happily add further to this one.

Liontrust Asset Management (2.4%): Liontrust is a very recent purchase and also only made it onto my watchlist very recently, being a product of my decision to diversify the watchlist into some cheaper businesses. Liontrust has benefited from the General Election outcome and looks well placed to make further progress. It’s near the top of the list of candidates to add to further.

Dart Group (2.2%): Dart Group is also a recent purchase. Since I bought it has continued its recent meteoric rise (up over 90% over the last quarter). To be honest this investment into an airline does feel like a bit of a punt as I find its future prospects and valuation quite hard to judge so I’m not really looking to add to my position.

Fabasoft (2.2%), Accenture (2.2%), RELX (2.1%), Ansys (1.9%), Best of the Best (1.9%): I won’t update on all of these smaller positions as they are generally newer with little to update in since my initial purchase. I’m happy with all of them at the moment and don’t have strong views on which are the best ones to add to.