Recently we passed the anniversary of the first lockdown. It’s hard to fathom that we have spent more than a year largely in social isolation. I’m glad that restrictions are finally starting to be lifted and hopeful that some semblance of normal life may resume soon. It’s a good feeling to start putting more social plans in the calendar even if the possibility of international travel to see family still seems remote. The past few months have been tough. The prospect of commuting to the office and sitting in ‘real life’ meetings has never seemed so appealing.

My portfolio hasn’t made much headway over the past few weeks but I’m pleased not to have suffered too much of the drawdown that afflicted more racy growth stocks. Overall I’m happy with my return of 8.2% YTD.

Last review I thought we might be in the early stages of a bubble. This now seems less likely after the last couple of months have seen a sustained rotation away from growth shares to value shares. Jam-tomorrow US tech darlings have been suffered sharp drawdowns and quality has underperformed, while the overall indices have actually made steady progress. It feels like a regime shift may have already started, though it could be another false start.

The fundamental driver for this seems to be the anticipation of the return of a more inflationary environment. The valuations of growth shares are historically high and so probably highly susceptible to a severe crash if there is an overall shift in sentiment. This has been the word on the street for months now and I’ve already written about it several times. I’m bearish about the medium prospects for high quality growth stocks and have taken some evasive action to diversify my portfolio.

Trying to find the highest quality long term winners is still my favoured strategy but the most highly rated investments seem likely to have a rocky time ahead in the coming months and years. I think there is a good chance that we are in for some more volatility over the summer. There still seems plenty of room for the rotation from growth to value to go further. At this point I wouldn’t be too unhappy with a sharp sell-off, as it would present an opportunity to shift back in to some of my favoured long term winners that are still highly rated at the moment. However, somehow I doubt things will turn out that simple.

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.

My performance hasn’t been too bad given the rotation to value. It has primarily been driven by a handful of investments: in particular my outsize position in BOTB and a big rerating at SDI. None of my investments have suffered particularly badly but many have been treading water.

I’ve pretty much kept pace with the S&P 500 so far this year, though have lagged this index and the FTSE100 over six months. The ‘quality’ funds I benchmark against, Fundsmith, Lindsell Train and UK Buffettology have all had a tough time recently allowing me to make up a bit of ground on them. The Stockranks seem to have come into their own over the past year, presumably benefiting from the shift to value (though after underperforming for the four years prior). They seem to be a pretty effective low-effort way of identifying ‘value’ investments. I may try to make more use of them in the future.

Over the longer term I’m comfortably outpacing all my benchmarks.

Strategy review

Since my last review I made a fairly significant and sudden shift, selling a number of more highly rated investments in one go. I think it makes sense to try to adapt my strategy in anticipation of possible changes in the overall market conditions but I need to be careful not to allow my style to drift too much. I’m still convinced that maintaining my focus on quality is a good approach, though the risk of overpaying for long term growth is increasing. This implies more of a need to balance quality against valuation, whereas a few years ago I would have said that nearly everything high quality looked far too cheap. Hopefully I’m getting this balance about right.

I had anticipated that this was a possible scenario that might warrant a drastic response. That said, I did end up responding much sooner and more suddenly than I was originally expecting, quite possibly too soon. While I think it was a sensible move and not especially drastic, in hindsight I think it would have been better to make it more gradually. It has resulted in quite a high portfolio turnover so far this year, yet again making a mockery of my aspiration to trade less. I’m not beating myself up too much about this – rules are still worth having even if there is reason to break them from time to time. As long as they cause me to think more carefully and limit my trading to some extent then they are worth it. Breaking them less frequently would probably be better, though I’m still at a fairly early stage of my investing journey where a little experimentation may be no bad thing if it provides useful lessons for later on.

Individual shares

My portfolio now has a cash balance of around 10%. I’m happy to hold on to it for the time being but am always on the lookout for opportunities to add to my existing positions. I’ve reviewed my portfolio constituents below to update my thinking and identify the best candidates for further investment. Given my recent clear-out of more highly rated investments, there isn’t anything very near the chopping block at the moment.

Best of the Best (11.2%): BOTB has had a spectacular start to the year, more than doubling over the first quarter before falling back a bit over the last week or so, after the founders sold a chunk of their majority stake in a placing. We had news in February that the formal sales process was being concluded without a buyer being found. This wasn’t very surprising and the news was accompanied by a very positive update on trading. Consequently the share price reaction was very positive. Apparently there was quite a bit of interest in acquiring BOTB, but I expect that it was difficult to agree on a price given uncertainty over how much growth is left in the tank. It looks like the management might be pretty optimistic. I think the signs are promising that BOTB online online marketing strategy is highly scalable and that there is still a lot more growth ahead. The valuation still looks cheap despite the massive rise over the past year. I’ve already trimmed a few times to keep my holding from getting too large. At this point I’m happy to let my position grow up to my top limit of 15% of my portfolio, despite there being some risks from the uncertainty about future growth and the illiquidity of the shares.

Games Workshop (7.9%): Games Workshop has been falling since the start of the year though has steadied over the past month or so. I can’t see very good reason for this but perhaps investors were hoping for more than its recent ‘meeting expectations’ trading update. I don’t read too much into it as Games Workshop updates are notoriously conservative and laconic. I get the sense that the market has Games Workshop down as a lockdown winner. While it has proved remarkably resilient, this is a little strange given most of its stores are still shut. This super high quality business still seems to be in rude health and has plenty of opportunities for further growth. The valuation looks too cheap all things considered so I’ve been taking advantage of the recent share price weakness to add to my position. It’s probably about the right size for now but I’d be tempted to add more if it gets cheaper or we have some positive news on trading. I’d be reluctant to sell given my confidence in the business – this hasn’t been a good idea previously.

Boohoo (7.2%): Boohoo had an excellent trading update in January. Since then it has also managed to acquire the Debenhams online marketplace and various small Arcadia brands at knockdown prices. None of these seem like game-changers though they should provide plenty of further growth opportunities. Disappointingly, there has been little progress in the share price. This has left Boohoo looking extremely cheap given its sustained impressive growth rates and excellent prospects. The reason is clearly the ongoing negative media coverage it has faced about working conditions at its suppliers. I am fairly confident that Boohoo is taking these concerns seriously and doing what it can to address them. The latest speculation about a possible US customs ban seemed unfounded. Clearly Boohoo has some enemies in high places and this does pose some risk but overall I think the reward to risk seems very appealing. I’ve been adding to my holding and intend to keep doing so.

Somero (6.3%): Somero has made good progress with the share price up 30% since the start of the year. Its last update was positive as Somero benefited from a strong US recovery over the past half. It is expecting only modest growth this year but is very sanguine about the future growth potential from current investments. Somero fills a rare role in my portfolio of being a clearly high quality cyclical on a more modest valuation. I see these as very important attributes for diversifying my portfolio at the moment. I have been adding on the way up and am tempted to add further.

SDI (6.3%): SDI has had a great run so far this year with the share price up around 50%, supported by some excellent trading results. The share price has more than trebled since last year’s lows, though this is partly a result of an obviously excessive fall last year. Clearly illiquidity is a big factor behind the volatility in SDI’s share price. I missed a bit of a trick by not adding more to my position last year. I’m happy with this as a long term investment and in the shorter term think it should benefit from Covid recovery. However, I feel somewhat more uncertain about SDI’s prospects than some of my other investments and so am less confident in adding at this point at a more demanding valuation.

Gamma Communications (6.0%): the share price has made little progress since the start of the year. However the recent results were strong yet again, surpassing expectations. Gamma seems modestly valued for such a reliable steady compounder so I’m tempted to add more.

Liontrust Asset Management (4.5%): there has not been much news since a positive trading update in January. Liontrust has been on a roll for some time and there are no imminent signs of it letting up. While I don’t think asset managers should command especially high multiples, Liontrust does seem cheap. The share price hasn’t made much progress this year but has recently broken out to new highs after a long period of consolidation. With all the stars aligned this seems like a good time to be adding more.

Bioventix (3.9%): Bioventix is a long term favourite and my longest held position, originally purchased just over three years ago. News updates are few and far between, though we did get interim results last week. They were decent – Bioventix has been affected by the pandemic to some extent but perhaps not as badly as feared. The share price has stagnated for almost a couple of years now. It had been one of my largest positions so cutting back last year seems like it was a sensible call. Revenue growth will be held back this year as a major revenue line expires shortly. However, the outlook for next year and beyond is looking promising as covid disruption wears off and Vit D picks up again, Troponin ramps up and promising projects in the pipeline come to fruition. Bioventix hasn’t really been on my radar as a high priority to add to, but thinking about it more carefully I think now might be a good time. I’m hoping that the price sells off a bit more first but may start adding more soon even if it doesn’t.

Fortinet (3.8%): Fortinet is a fairly recent purchase that has got off to an excellent start. It’s up about 30% so far this year following continued strong trading. It has been relatively unaffected by the sell-off in racier US tech, probably due to its somewhat more down to earth valuation. I’m a happy holder but not looking to add here.

CMC Markets (3.7%): CMC has had a decent quarter with the share price recently breaking out to new highs. It looks decently valued and is continuing to benefit from the prolonged spell of market volatility we’ve been going through. It replaced IGG as a ‘volatility hedge’ in my portfolio, though I have since bought back IGG too. While the long term prospects look good, having its fortunes tied to volatility makes the performance of the underlying business somewhat volatile (and effectively cyclical). I’m wary of getting carried away here while the times are good but am somewhat tempted to add a bit more.

Microsoft (3.1%): there’s not a lot to say about Microsoft. It has obvious quality, is not too expensive and currently has strong momentum in the underlying business. The share price has recently broken out to new highs. Microsoft seems a very solid long term investment and I’m always happy to add more here if there are not more obvious better opportunities.

Canada Goose (2.7%): Canada Goose has had a strong quarter after a big earnings beat in its last results. The share price had been on a tear but has come off a bit in the last few weeks. With many of its stores closed it has been more severely impacted by Covid restrictions than many of my other investments. It is a ‘recovery play’ and a useful source of diversification for the rest of my portfolio, but it’s also a high quality brand with good growth potential and a decent rating. I’m looking to add more here.

Monster Beverage (2.6%): I see Monster as another solid long term investment. Its glory days are behind it but clearly has a strong competitive advantage and is highly defensive. I think it should be able to deliver solid returns for years to come. The share price hasn’t done much over the quarter, though momentum seems to be returning as it recovers from a small recent dip. Much like Microsoft, I’m happy to hold this and keep adding whenever there aren’t better opportunities around.

Adobe (2.4%): Adobe is another solid long term but a bit more highly rated than the previous ones. Trading has remained strong throughout the pandemic and growth prospects still look good. The share price has been consolidating for a while, recently recovering from a short term dip. Given its higher valuation this could get dragged down more if there is a crash or further rotation from growth to value. I’m happy to hold but this probably isn’t my highest priority for topping up at the moment.

Broadridge (1.6%): another defensive compounder, Broadridge seems like a solid long term investment. It’s last results were decent and the share price is making steady progress. It’s not too highly valued and I’d be happy to add more.

The rest of my portfolio is made up of a number of recently acquired positions for which there is little yet to update: Focus Home Interactive, Tracsis, Volvere, Burford Capital, IG Group, AO Smith, MasterCard, S&U, London Stock Exchange: