Portfolio review: July 2021

2021 has been an OK year so far investing-wise. My portfolio is currently near its highs and has clocked in at a 16.7% return at the half way point. This is above most of my benchmarks and more or less in line with my long term CAGR. However, after the excitement of last year and given how well the UK market has been doing in general, progress has felt a little pedestrian. Overall I’m happy, though keen to identify any weaknesses in my strategy or whether I could be doing anything differently.

The economic recovery post pandemic seems to be happening more quickly than anticipated and has precipitated a rotation from growth shares to value shares. This has been a fairly major shift, though not entirely unexpected. After many excellent years for quality we were due some underperformance. The rotation seems like it might have run its course now. It’s hard to tell for sure as it’s linked to the overall macroeconomic narrative, which seems to be constantly changing. After a rapid rise earlier in the year, Treasury yields have been falling over the last quarter, suggesting that inflationary concerns may have subsided for now. But I don’t think you can read too much into these changes – this is clearly something the market struggles to predict. There is still a large spread in equity valuations between ‘growth’ and ‘value’ by historical standards. I think this is probably warranted but investing in high quality growth doesn’t seem as sure a bet as it has been, at least for the medium term.

Performance

The performance of my portfolio (QSS) is shown against its benchmarks in the table below. My main benchmarks have been the FTSE 100, the S&P 500 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.

I’ve beaten most of my benchmarks over the last quarter. The one exception is the UK high Stockrank benchmark, which have continued its excellent performance over the past year. This is due to its focus on small, cheap UK stocks which have had a very good run of late. The FTSE small cap index is also up around 20% and quite a few private investors I follow who go for the cheaper UK small caps seem to be doing quite a bit better than this with returns so far in 30s or above.

The rotation from growth to value seems to explain much of relative performance I’ve observed across other investors, my various benchmarks and within the shares on my watchlist. It’s often quite surprising to me how much relative performance is driven by high level thematic strategy choices rather than stock picking prowess (with a few exceptions)…

This time I’ve also been able to include the performance of my buy and hold benchmark portfolio – composed of all the shares on my watchlist (thanks to Stockopedia for adding a proper performance tracking feature removing the need for a lot of number-crunching on my part). Comparing my performance against this benchmark allows me to isolate the impact of my trading decisions over and above my general approach of only investing in a shortlist of high quality businesses. I had fallen some way behind this benchmark last year due to my error in raising cash near the lows of the crash. I’m pleased to have gained back a bit of ground on it over the past few months, again I think largely due to me avoiding many of the more highly rated growth shares on my watchlist.

Strategy review

The main question that is being raised by this review is around my overall strategy of focusing on high quality growth stocks. Investing styles do come and go out of favour. It seems important to be alive to this. There is a difficult balance between being mentally flexible and willing to shift approach when necessary and keeping a good sense of long term perspective and not over-reacting to the noise.

I have set out my stall to invest only in quality stocks and I’m still happy that this is a solid long term approach. This is what my intuition and the evidence suggests should work best. However, there are periods where it will underperform and I think it is possible to mitigate this to some extent without throwing the baby out with the bath water. I’m settling on the idea that making more subtle changes to the overall balance of my portfolio through how much emphasis I put on relative valuations versus momentum is the approach that works best for me. More dramatic shifts could be more effective but also seem more difficult to implement psychologically. They seem more likely to destabilise the overall strategy and lead to errors. At the moment, with a shifting macro narrative and relatively high valuation spread, a relatively higher weighting towards cheaper (but still reasonably high quality) stocks seems prudent.

I’m broadly happy with the implementation of my strategy. I think that I have a pretty well defined process for my trading decisions that seems to work. I’ve improved the diversification of my portfolio but could probably refine this further. I still need to work on my discipline to not trade too much but am optimistic this will come with time as I become more experienced and hopefully manage to avoid repeating mistakes.

Individual shares

What to add to and what might be a candidate for the chopping block?

Games Workshop (9.2%): the last trading update indicated that results for the year are likely to come in ahead of expectations. The share price has now largely recovered from its dip earlier in the year. I’m optimistic about progress from here and think the valuation still looks pretty reasonable. I’m happy to have Games Workshop as my largest position. I might add a little to this but am nearing my self-imposed limit of not investing more when a share reaches 10% of the portfolio.

Somero (9.1%): Somero released an ahead of expectations trading update back in May, raising its forecasts for 2021 four months into the year. It raised them again this week. I think further upgrades seem likely as trading momentum continues in the US and extends to other regions as Covid restriction ease. The valuation doesn’t seem expensive for a high quality, albeit cyclical business. I value the diversity Somero brings to my portfolio and this seems like a promising opportunity in the short term.

Boohoo (8.0%): Boohoo’s share price has been in the doldrums since the beginning of the year, which has been giving me some pause for thought, though notably rival ASOS is following a similar trajectory so investor concerns don’t seem to be company specific. Boohoo’s last trading update was good though not great – one of the few recent updates where Boohoo hasn’t upgraded its guidance. Growth in the US continues at a promising rate. However, Boohoo has flagged that cost headwinds this year due to the pandemic’s effect on its supply chain may mute profits. There has also been talk of a UK online sales tax to help repair government finances from businesses that have done well out of the pandemic. I’m not overly concerned by these issues given how fast Boohoo is growing. I still think it seems far too cheap but it may be worth me doing a deeper dive here to check my conviction is not misplaced.

Liontrust Asset Management (7.0%): I had high expectations for Liontrust at the time of my last review, at which point the share price was just breaking out to new highs. It has met them, with a solid run over the last quarter and some excellent results a couple of weeks ago. There was some rather more downbeat news this week as Liontrust was forced to abandon its IPO of an ESG-themed investment trust after failing to attract enough institutional support. This seems to be more of an indictment of the popularity of investment trusts as a vehicle than Liontrust in general (or the ESG theme) and while a bit surprised, I’m not reading too much into it. The valuation has risen quite a bit since I initially bought my shares and I’m inherently quite cautious about asset management businesses given how quickly fortunes can change. My holding seems large enough as it is. However, there don’t yet seem to be any signs that momentum in the underlying business is slowing so I’m not minded to start taking any profits quite yet.

Gamma Communications (6.5%): Gamma benefits from operating in a defensive and not especially competitive market with strong secular growth as more businesses adopt cloud communications services. This makes it a reliable, though not especially exciting, investment. It has been making decent progress as usual and demand for its services has benefited from the shift to greater home working over the pandemic. It announced that results were likely to be at the ‘higher end of the range of market forecasts’ in its AGM update in May. Gamma doesn’t seem too expensive and I’d be happy to add more to my investment here.

SDI (6.4%): SDI upgraded profit expectations again for 2021 in its end of year trading update back in May. The share price has continued to perform well after an extended run starting last summer. I still think that this seems like a promising investment with a lot of potential upside over the long term. However, I’ve taken some profits over the past month or so as the valuation has risen a lot. I’m happy to let the rest run for now.

Canada Goose (5.6%): Canada Goose’s last results back in May showed a very strong recovery in its revenues to well above pre-pandemic levels, driven especially by China. The shares surprisingly didn’t react very well to these results and it wasn’t clear exactly why – most likely because the outlook wasn’t as optimistic as expected I guess. In any event the share price now appears to be starting to recover after a temporary dip. Luxury fashion brands in general seem to be benefiting at the moment from the strength of the recovery. I think this looks like it has quite a bit further to run and am optimistic about Canada Goose’s prospects over the next few years. The valuation looks cheap given this. I have been adding to my holding here and May well continue.

Bioventix (4.0%): there’s not been any news since my last review. The shares have continued to stagnate. I’m feeling ambivalent about Bioventix. Part of me is worried that there is a high chance that the results over the next year or so are going to be disappointing, while the other part thinks that this is might be a good opportunity to be adding to a favoured long term investment at a decent valuation. It’s quite near the chopping block but I don’t have especially attractive alternatives on my radar to swap this for at the moment and am prepared to be patient. I think a sensible compromise may be to reduce my holding a little.

Fortinet (4.0%): Fortinet’s first quarter results in April were excellent and the share price has continued its steady progress. My initial purchase seems to have been timed especially well in this case and my holding has doubled in value in just a few months. The cyber security sector looks to be booming at the moment and Fortinet has been doing especially well, having been relatively undervalued compared to its peers. The share price performance has surpassed my expectations and has left Fortinet on a rather more heady valuation. I’m not looking to sell my shares while momentum in the business is so strong (and wish I had added more earlier) but I’m not in a hurry to add more now.

Microsoft (3.9%): there’s not much new to report on for Microsoft. It’s obviously very high quality with a seemingly impenetrable competitive advantage and still looks to have a lot of growth ahead of it. The valuation still seems reasonable. The last results were good. I’ve been steadily adding to my holding over time and intend to continue.

CMC Markets (3.8%): CMC’s results, issues at the beginning of June, read very well. Last year was obviously fantastic, with trading activity amplified by the Covid-related volatility and interest in financial markets. A lot of this benefit is one-off in nature and CMC has stated that trading activity has moderated somewhat so far this year. The share price has lost momentum over the past month or so. The temporary Covid boost has created some noise which makes assessing CMC’s long term trajectory and valuation more difficult, but the current valuation does appear to imply pretty pessimistic expectations that I don’t think are warranted. I’m not really looking to sell here but would wait for momentum to return (or the price to get significantly cheaper) before contemplating adding more.

Adobe (3.5%): Adobe has traded strongly through the pandemic and its last results were excellent. The share price recently broke out to new highs after a long period of consolidation. I’m happy to hold while momentum is good but it doesn’t seem especially cheap so it’s not at the top of the list of candidates to add more to.

Etsy (3.1%): I bought back into Etsy again recently after clearing it out along with several other higher rated shares earlier in the year. On this occasion my timing seems to have been pretty good, so far at least, as the share price has rebounded again swiftly. Etsy is growing fast, is already highly profitable and doesn’t seem all that expensive. As for many other Covid beneficiaries there is a question as to how much of this benefit was a one-off and what the long term growth rate is likely to be. I’m confident in Etsy’s long term prospects and keen to add further to my holding.

Activision Blizzard (2.6%): Activision’s last results in May were very good with very strong growth year on year and raised full year guidance. This hasn’t done a great deal for the share price which has been consolidating for the past few months. Activision is another Covid beneficiary where there are questions about how permanent the uptick in growth will be. I’m optimistic about this and am particularly bullish about the long term prospects for video games. Activision is not the most exciting investment in the sector but betting on the continued success of its established franchises seems like a good idea. The valuation seems too cheap to me all things considered and I’m keen to add to my holding here.

Burford Capital (2.3%): Burford can be quite a frustrating investment at times. Investor confidence has not yet recovered since the Muddy Waters short attack, despite none of the points really seeming to stick. There still seems to be skepticism about whether Burford’s accounting can be trusted, which I guess is understandable given the novelty of its business model. There hasn’t been any news since the full year results for 2020, released back in March. These seemed strong to me and showed profits similar to the previous year, though without the benefit of the large YPF case, and a very substantial increase in cash realisations. The share price did rocket up for a couple of weeks afterwards but have since been continually declining, with what looks like it must be a large seller slowly getting out. My position is more or less back where it started. Litigation activity slowed down last year due to the pandemic but this should be picking up again and Burford seems confident that Covid will ultimately create demand for its services. I’m tempted to add more, though having been bitten once by sentiment turning here I’m shy about making this too large a position.

S&U (2.3%): S&U, a motor finance business, is a recent purchase from back in March when I was preoccupied with ensuring I had better diversification away from the growth businesses on my watchlist. S&U is more of a ‘recovery play’, though while its trading was negatively affected by Covid it was growing at a decent rate beforehand. It seems to be making rapid progress with its recovery and the last results in May were ahead of expectations. The share price made some progress and consolidating near its all time highs. While I’m not so sure about its long term prospects, it’s providing some useful diversification for my portfolio and still seems good value. I may well add more to my holding.

Broadridge (2.3%): Broadridge is a solid, rather boring, investment that I’m comfortable just holding for the long term. It seems to have a rock solid competitive advantage but doesn’t grow especially quickly. I see it as a useful bit of defensive ballast for the portfolio. The last results were ahead of expectations and the share price has recently broken out to new highs. The valuation still seems reasonable so it could be a good time to add.

Mastercard (2.2%): MasterCard has been a favourite of mine for some time. I sold my previous position in it last year when it seemed that it would be likely to be quite negatively impacted for some time by the pandemic’s effect on travel and hence cross-border transactions, which are especially profitable for MasterCard. My view on this hasn’t changed that much but I think the business is high quality enough that it is going to keep on growing fairly quickly regardless. I decided to buy back in fairly recently and intend to slowly build up my holding over time until it becomes one of my largest again, provided all goes well.

The rest of my portfolio is made up of small recently acquired positions for which there is little to update since I bought: Volvere, AO Smith, Impax Asset Management, Flatex Degiro, Calnex, LSE, JD Sports.

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