Three-quarters of the way through the year and the crash we had is already starting to feel like ancient history, given how rapidly the stock market has rebounded since then. On the other hand every day life is sadly still far from back to normal. My portfolio has continued to make good progress over the last three months and I’m pleased with performance of 24% YTD.

As I explained in this post, my main macroeconomic concern at the moment is that overly loose monetary policy leads to inflation when the economy recovers, forcing central banks to raise interest rates again. This would be bad for equities and especially for growth stocks. This scenario seems likely to occur at some point and could well be the catalyst for the much-anticipated rotation back from growth to value. The more relevant question is when. I’ve been sanguine that it is still some way off. More immediately the economy has suffered a major deflationary shock and needs both time and expansionary policies to recover. The Federal Reserve has clearly signaled that it expects interest rates to remain near zero for at least the next three years. However, I am alive to the risk that this all plays out sooner than expected, either because the economy recovers more quickly than expected or because government policy becomes too expansionary. On top of that there is the added complication that the stock market will attempt to anticipate this in advance. I’m not yet convinced that there are imminent concerns but it’s something I’ll try to keep an eye on.

In the near term there are a couple of other possible catalysts for stock market volatility in the form of the US elections and the finalisation of a Brexit trade deal. I expect the outcomes of both of these events to be positive for the stock market but there is some risk. In the case of the US elections I don’t think either a Trump or Biden win would be seen as particularly negative. This risk is more that the outcome is contested, creating uncertainty and potentially becoming a catalyst for wider unrest. Though recent polling suggests a widening gap in favour of the Democrats, I suspect the reality is much more finely balanced than that. The risk that anything particularly bad happens seems sufficiently unlikely to affect investing decisions, but it’s a less fanciful prospect than it once was. Progress with the Brexit trade deal looks promising and I would be surprised if a positive outcome wasn’t achieved. Either way, I don’t think there is any long term concern from an investing perspective.

While interesting, a macro perspective is very difficult to usefully rely on in making decisions. As ever the overall picture is mixed. On one hand, the high quality and technology parts of the market are valued relatively highly and the risk of inflation is looming somewhere in the distance. On the other, a rising market and favourable monetary backdrop coupled with plenty of reasons for investors to be skeptical could be seen as optimal investing conditions. I would be happily fully invested at this point, though am now needing to raise money to buy a different house after our previous transaction fell through.

Performance

The performance of my portfolio (QSS) is shown against its benchmarks in the table below. My main benchmarks have been the FTSE 100 (total return), the S&P 500 (total return) and a portfolio of the top decile of UK shares according to their Stockranks. I’ve also continued to benchmark my portfolio against a handful of professional fund managers I rate highly.

The last three months have been good with my portfolio outpacing all its benchmarks and adding to its long term outperformance. My newer positions in Pinterest, Etsy, Impax Asset Management and DotDigital have done particularly well, while some of my larger positions like Best of the Best and Bioventix have taken a bit of a breather.

One fly in the ointment is that the performance of my ‘buy and hold’ portfolio, which holds all the shares in my watchlist for the long term, has pulled further away from my actual portfolio. I don’t show the historic performance of the buy and hold portfolio over several time periods in the table above as I’ve been a bit lax in tracking it over time. However, I can compare its current value to my portfolio to see which is winning overall. The buy and hold benchmark is now over 10% ahead of my actual portfolio having been behind to a similar extent about a year ago. Much of this outperformance is due to my cack-handed market timing this year, but not all of it.

Strategy review

Last review, I discussed my market timing mistake and took away the lesson that it’s not something I should be attempting very often (if ever) and certainly not when the market has already fallen a lot. Given the current macro conditions and the likelihood of upcoming inflation, it’s hard not to be concerned about market timing again but I’m resolved to resist the temptation.

A more nuanced approach to this risk that I am more attracted to is to pay more attention to the diversification of my portfolio. I’m generally minded to stick to the high quality shares on my watchlist, but within this there is still quite a bit of diversity of sectors and across high growth, momentum shares, defensive compounders and recovery plays, where otherwise high quality businesses have suffered apparently temporary setbacks. The main risk I see is becoming too concentrated in highly-rated technology stocks. I’ve seen many portfolios of US investors pretty much entirely invested in this sort of business. They’ve been doing spectacularly well, especially this year, and in all likelihood I expect this will continue. Good luck to them. To me it seems excessively risky to be so concentrated in just one ‘theme’, even it’s a good one. I’m happy that at the moment my portfolio has some exposure to this but not too much.

The underperformance of my actual portfolio compared to the buy-and-hold benchmark portfolio raises a serious question about whether regularly rotating my portfolio based on an assessment of relative momentum, newsflow and valuation really adds much value. I’m unsure about the answer.

The underperformance appears to be due in part to a lower exposure to the more highly rated technology businesses that have done so well over the last few months. My actual portfolio seems to have lower ‘beta’ than the buy and hold benchmark – rising by less when the market goes up but also falling by less when it falls. While this has led to my actual portfolio falling behind while the market has been doing so well, it could also be a sign that it is better diversified.

The other more troubling reason could be that my approach to trading is just not that great – ‘tinkering’ that incurs trading costs while adding little value. It’s hard for me to tell as it’s a short time period, so luck and other short term factors play a big role, but I am becoming increasing concerned that the approach needs refinement. In principle I think it is broadly sound but there are a couple of parameters that may need recalibration. The first is whether trading one position every two weeks is too frequent. The second is whether holding 25 shares out of the 100 on my watchlist is too few. The two are related in that together they determine my average holding period – with 25 shares trading once every two weeks implies an average holding period of just under a year. I’m minded to double this to two years but haven’t decided whether it’s better to do this by holding more shares or by trading less frequently (or both). Either way has relative advantages or disadvantages. I’m not changing anything yet until I’ve thought about this more carefully.

Individual shares

There are a couple of trades I haven’t reported on yet. Both trades are for businesses I have held before so I thought I’d save myself the bother of a separate post.

I sold Burford for a 35% profit and replaced it with Fabasoft. In hindsight I’m not sure whether selling Burford was the best idea as the recent results seemed positive, the valuation still looked very cheap and the share price momentum is strong. Burford is also about to list in the US which could boost demand for the share in the short term. However, I found it too much of a struggle to properly get my head round the figures in the last results and in frustration decided it would be prudent to take advantage of the price rise to bank a quick profit.

I also sold Euronext for a small profit and replaced it with Somero. Euronext has been successful in bidding for Borsa Italiana, likely to be offered as a divestment to satisfy competition concerns in LSE’s acquisition of Refinitiv. Borsa Italiana looks like a decent business. However, Euronext seems to be paying quite a high price and is taking on quite a lot of debt to fund this ‘transformative’ acquisition. It should turn out well but it seems a bit risky and the market has not reacted particularly favourably. I think I’m better off switching horses for the time being.

Below is an update on the progress my current investments. The main aims are to keep tabs on momentum, valuation and news flow and to consolidate my thinking about which positions to add to and which to consider replacing. At the moment I’m trying to identify sources of funds for my house purchase – I’m already at 24% cash which covers most of it, but still a bit further to go. Note that once this comes out the weightings of all the positions below will rise by a third or so.

Best of the Best (10.6%): since my last update, BOTB has released another ‘ahead of expectations’ trading update and suggested the process of putting itself up for sale is still ongoing. The share price has been consolidating near its highs. However, I think the more time that elapses the less likely it is that a decent offer for the company will be made. This creates some downside risk in the short term at least. I still like the investment but don’t think holding such an outsize position here is warranted. BOTB is an obvious source for most the remaining funds required for my house purchase. I have been incrementally reducing my holding over the last few weeks and will probably sell quite a bit more to bring this in line with my other larger holdings.

Gamma Communications (6%): Gamma’s share price has quietly been making steady progress in the background since my last update and has crept up to being my second largest position. Gamma’s recent results showed continued consistent growth and optimism about future prospects. I’m happy to keep on holding but may sell a bit as I don’t rate this quite as highly as some of my other large positions.

Mastercard (5.8%): nothing new to report on Mastercard since my last update. Long term this is still my highest conviction position so I’m not planning to sell any.

Bioventix (5.1%): the share price hasn’t really gone anywhere since my last update. Bioventix releases news very rarely and there’s been nothing recently, though its final results should be due on Monday. I’m optimistic and hope the results suggest I should add further to my position rather than selling any.

Boohoo (5.3%): last update Boohoo had just been hit with the scandal that workers at many of the garment factories in Leicester that supply it were being paid below minimum wage. At the time I was in two minds about what to do, torn between distaste at the controversy and the opportunity to buy shares of a tremendously-performing business at a bargain price. In the end I decided to buy a few more shares. This has played out well so far. Boohoo’s last results were very good with excellent progress being made in the US. However, the negative publicity hasn’t been put to bed quite yet. The findings of the independent review didn’t seem too bad. The overall message was that while Boohoo had been negligent of some its corporate responsibilities in the past in the pursuit of rapid growth, it was not guilty of serious malfeasance and now had the opportunity to rectify its past mistakes. However, on the back of this report there was also the news on Friday that Boohoo’s auditor, PWC, is resigning, for reasons that are a bit unclear. The continued controversy is unappealing, but Boohoo now has the opportunity to respond appropriately to these issues. I’m reasonably confident that the current valuation more than justifies the risks and am going to sit on my hands for now.

Games Workshop (4.0%): Games Workshop is on a roll at the moment with another ‘ahead of expectations’ trading update in September. The share price has been motoring away and I’ve been building up my holding on the way up. The valuation has now got pretty high but I think this is warranted and I’ve no intention of reducing my holding any time soon.

Atoss Software (3.8%): Atoss’s results in July were very good. The share price has had another strong quarter and the valuation looks relatively high so this could be a candidate for trimming.

IG Group (3.0%): IG Group had an excellent first quarter, with 62% growth in revenues over last year. This seemed excellent to me and certainly more than what I was expecting. However, the share price has not really responded very positively. This may be because IG has benefited from the volatility caused by the Covid crisis and is unlikely to do as well over the coming year. However, the long term prospects still look good and the valuation seems far too cheap to me. This is one of the few more value-oriented investments I’m currently holding that would benefit from further stock market volatility. It is performing a useful diversification role so I’m not intending to sell any anytime soon.

Tristel (3.0%): there’s not much new to report here since Tristel’s encouraging update in July. Tristel should be a major beneficiary from Covid as demand for its disinfectants has risen, but this has not yet fully materialised due to the disruption to medical appointments this year. I think the business should have a very favourable tailwind over the next year or so as medical activity resumes. The share price has been consolidating over the last few months. I’m looking forward to Tristel’s next results due on Monday and hope they will be a catalyst for continued progress.

Keywords Studios (2.7%): I’m hoping to see the strong demand that Keywords reports to be experiencing start to feed through into its financial results over the coming year, as it adapts its businesses to the Covid-related disruption. The valuation looks quite demanding but I think justified. The share price has performed reasonably well over the past quarter and is consolidating near its highs.

ServiceNow (2.5%): there’s not much to update on for ServiceNow. The question for an established fast-growing winner like ServiceNow is whether its long term future is sufficient to justify its rich valuation. Short term results are largely just noise unless they cast any light on this. The last results were decent but didn’t really tell me anything new. The share price has performed very strongly over the last quarter along with the rest of the enterprise software sector. The valuation seems pretty demanding relative to other businesses on my watchlist so more likely to trim than add more.

DotDigital (2.1%): DotDigital was my newest holding at the time of my last update. It’s up almost 40% since then. There hasn’t been any news since July, when its results seemed unaffected by the Covid crisis. The valuation still seems reasonable so I don’t see much reason to sell any.

Pharmagest (2.1%): Pharmagest wasn’t completely immune to the effects of the Covid crisis and some smaller international parts of its business were affected by a minor slowdown in activity at the height of the crisis. However, in its recent half year reports, Pharmagest issued a very upbeat outlook based on a strong rebound in activity since June. The share price has accordingly made steady progress. The valuation seems relatively high given the somewhat unexciting growth rate, though the business is a very consistent, steady performer in a very defensive market. Overall I think this could be a candidate for trimming if necessary.

Adobe (2.1%): Adobe’s last results were decent and the share price has performed fairly well along the rest of the enterprise software sector. The valuation seems relatively high so this could be a candidate for trimming.

Liontrust Asset Management (2.0%): Liontrust’s recent results were very good. The business has been on a roll for quite a while, with its funds performing well and continued success in attracting fund inflows. The share price has been consolidating for a few months now. The market is very competitive making the risk that this momentum is lost at some point pretty high and the kind of valuation that can be justified considerably lower than some of my other investments. That said, the valuation seems much too cheap to me given the continued growth. I already raised some cash by selling about half my position in August but don’t want to sell any more now.

Monster Beverage (2.0%): there’s not much new to say on Monster since my last update. The last results were good and I’m happy to keep holding. I think I would ideally have a bit more of my portfolio allocated to this sort of consumer defensive business.

London Stock Exchange (1.7%): with the divestment of Borsa Italiana to Euronext, LSE should hopefully be able to complete its acquisition of Refinitiv fairly soon. This looks like a good result for LSE and the long term prospects are exciting. On the downside, the last results were OK but a little unexciting and the valuation is relatively high. My position is probably already too small to be worth trimming but it is nearer the top of the list of candidates for replacement if a sufficiently better opportunity comes along.

Impax Asset Management (1.6%): similar to Liontrust, Impax is on a bit of a roll with very strong recent trading. The share price has done very well since I bought fairly recently. The valuation is fairly high but I think warranted.

SDI (1.6%): SDI’s last trading update was reassuring, confirming a good start to the year and performance in line with expectations. It looks like disruption from Covid may be less than feared. The share price has recovered quite a bit since the March drop but not entirely and the valuation looks compelling.

My remaining investments, Pinterest (1.6%), Etsy (1.5%), Match Group (1.4%), Fabasoft (1.4%), Broadridge (1.3%) and Somero (1.2%) were all bought fairly recently and there is little to update on.