Portfolio Review: October 2021

The last quarter was not a great one with my portfolio dropping by 2.6%. After a decent summer, September was a real shocker with a rotation away from growth shares hitting most of the shares in my portfolio and my watchlist simultaneously. I was also hit by a couple of profit warnings from CMC Markets and Boohoo. Underperformance against my benchmarks will happen from time to time so this isn’t a great cause for concern but it does serve as a warning to check my strategy is still working. I’m feeling cautious about its short to medium term prospects from here so have raised a bit of cash.

Things look quite bleak for the economy right now, with global supply chain problems causing havoc and an energy crisis in Europe and China. These issues, and their possible long term inflationary impacts, have resulted in some stock market volatility recently. So far equity markets have bounced back every time the fear subsides, and have done so again over the past week or so. However, it does feel like a deeper crash could be imminent.

There is quite a bit of uncertainty about where things go from here. On the plus side sentiment doesn’t seem exuberant at the moment. It could get a boost if and when the current supply chain problems show signs of ameliorating. There is the potential for another run when markets start to look through these problems. The downside is that this could take a while and things could get worse before they get better. In meantime there is plenty of scope for earnings disappointments and the doom-laden scenario that aggressively contractionary monetary policy is needed to control persistent inflation. I feel none the wiser about what exactly is going to happen in the near term but I’m not feeling very optimistic. I suspect the growth to value rotation has not yet fully run its course but I also think the risk of market wide crash at some point soon is high.


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.

The last quarter has been disappointing and I’ve underperformed most of my benchmarks. Part of this seems due to rotation from growth to value, as suggested by the similar underperformance by my buy and hold benchmark (which holds all the shares in my portfolio and watchlist) and the relative outperformance of the indices. Interestingly, the Stockranks seem to have had an even worse quarter, which suggests that UK small caps have had a particularly bad time. This probably explains part of my underperformance too. Part of it is of course due to the couple of profit warnings I received. This leaves my YTD performance currently at 13%, about 10% down from the highs it reached a few weeks ago. While disappointing, I’m not too concerned – as we all know performance from quarter to quarter can be volatile. Long term my performance still looks positive and this quarter exceptional.


After many easy years, it might be becoming a difficult time for quality investing, with valuations now high and the uncertainty created by the looming possibility of higher inflation and interest rates. However, there is a risk in getting too swept up in the narrative that the only reason quality stocks have done so well in the last few years is due to low interest rates. This is definitely part of it but as I’ve mentioned before part of it is also because short-sighted investors tend to undervalue high quality businesses most of the time. It’s also important to remember that many ‘value’ businesses are at risk from high inflation and interest rates too. Indeed in a more immediate real-world sense the concerns are most severe for those businesses that lack pricing power, have complex supply chains and high levels of debt. So while I think further rotation to value is quite possible, there is also the possibility of a market wide crash.

By and large I am happy that I’m holding good quality businesses that are not overvalued. But in the short term uncertainty is high and it seems like not a bad idea to keep a portion of my portfolio in cash. There is option value in holding some cash to take advantage of falls should they occur. I also think there is some psychological value of holding cash to make sure I feel more ambivalent about market falls and can stay on the front foot. However, I don’t have a great deal of confidence in my market timing ability so am wary of straying too far from my fully invested default. At the moment I have cash at around 25% which seems about right (but inevitably is a compromise that will probably feel like an error whichever way the market goes). I will reinvest if the market falls. Otherwise I’ll wait for a month or so and may well start adding again in dribs and drabs, depending on what’s happened in the interim.

Whether to follow momentum or not in my share selection is becoming a bit more tricky to judge. Following momentum this year has naturally implied a shift towards somewhat cheaper stocks that are less affected by supply chain issues. This seems pretty sensible and so far I’ve followed this as far as the constraints of my high quality watchlist allow (and a little beyond). Historically the time when momentum has tended to underperform has not been so much before a market crash but afterwards, at which point it has generally been a better idea to exploit mean reversion from the ‘overshooting’ of those shares that fell the most in the panic. However, with several shares rolling over at the moment, it’s definitely tempting to start looking for the biggest dips rather than the relatively less scathed. I have been keeping an eye on some of these opportunities but am biding my time for now.

Individual shares

Picking the right shares out of my watchlist for my portfolio seems more important than ever. In going through my holdings I’m looking to identify the candidates where my current conviction is highest to reinvest my cash balance when the time comes, as well as weaker positions to swap should other opportunities arise.

Somero (7.4%): Somero is in an ’earnings upgrade cycle’ as expectations continue to lag its improving results over the last year or so. It seems likely to me that this still has some way to go, though the uncertain macro situation does make this hard to predict. The valuation still seems very reasonable, even accounting for Somero’s cyclicality, and it provides a diversification benefit for my portfolio. I took some profits on this along with many of my other holdings. At this point I’m happy with the size of position and not looking to add more.

Gamma Communications (6.2%): Gamma suffered a rather bewildering drop after its last results, which had seemed decent. The price has now stabilised a little. This is a fairly high conviction position for me, given the valuation is reasonable and the business has lots of recurring revenues and steady growth. I’d be happy to add more here.

Microsoft (5.1%): Microsoft has been left fairly unscathed by recent turbulence. It has a huge competitive advantage in enterprise software and has recently been announcing price hikes, much to the market’s delight. Despite its already huge scale Microsoft seems to have a lot of untapped potential to continue to grow for a long time. It’s also largely immune to all the current macroeconomic risks. The valuation isn’t especially cheap but I think is merited. This isn’t the most exciting option for reinvesting my cash balance but it’s a relatively decent and safe bet.

SDI (5.0%): SDI issued its final results in July and these showed a very strong performance as many of its operating businesses benefited from the pandemic. There is the possibility that some of this unwinds this year, but so far it seems to have got off to a promising start according to the AGM trading update in September. After a big run up in I have a reasonably high degree of long term conviction in SDI’s ‘buy-and-build’ strategy of niche scientific technology businesses, which has so far been executed very well. With the group still reasonably small, there still seems to be a lot of potential upside. However, along with this there is clearly some risk at least in the short term from fluctuations in the fortunes of the individual businesses. The shares seems particularly illiquid and the share price prone to volatility, so it’s a holding where I think the best time to add would be when it falls during a market sell-off. Otherwise I’m happy to just hold on and see what happens.

S&U (4.7%): S&U is an ‘off piste’ holding for me – not one from my quality watchlist but more of a value play. I added to my S&U holding since my last review and since then its interim results in September were excellent with the management very bullish about future prospects. I’m surprised the share price hasn’t responded more positively. While I’m relatively more uncertain about long term prospects than many of my other holdings and wary of the cyclicality, I do think S&U seems like a pretty good business and certainly a cheap one that is performing well with clear-ish skies on the horizon at the moment. I’m definitely tempted to add more.

Liontrust Asset Management (4.7%): Liontrust’s trading statement this week was decent with good progress in AuM over the last quarter. It has been well-positioned to take advantage of ESG-related inflows and generally has a strong brand and stable of highly-performing funds. Having doubled in price over the past year it had got to the level where I was starting to take some profits. The price has since fallen back in recent weeks. It doesn’t seem especially expensive right now but I am wary that the performance of fund managers can be quite fickle. I’m happy to hold for now but might be tempted to swap this one if a better opportunity arose.

Games Workshop (4.5%): as I flagged previously, I reduced my holding in Games Workshop substantially due to concerns that it might be near a temporary peak in its product cycle, despite retaining my long term conviction in the quality of the business. Since then it has issued a characteristically laconic in-line trading statement that said sales were growing but it was facing some of the same cost pressures as other businesses. The share price has come off a bit since then. I don’t think the temporary supply chain issues are likely to be a major concern for Games Workshop given its margins are so high and this is only a small part of its costs. However, I’m still a bit wary of near term trading prospects. I want to leave myself room to add more if a better opportunity does arise so am holding off doing so for now.

Inmode (3.8%): Inmode is still in its rapid growth phase and has been progressively upgrading its expectations this year. For such a high growth business, it’s unusually already very profitable. I only initially bought in a short while ago but the share price has appreciated rapidly and I’ve been adding to my holding. The share price has been quite volatile but reassuringly has recovered from temporary dips very quickly. I haven’t yet got to know the business sufficiently well for it to be an especially high conviction investment but it does seem to tick a lot of the right boxes. I might add a little more depending on further progress but for now am minded to just let my existing holding run.

Etsy (3.6%): I have a lot of conviction in the long term quality of Etsy as a business. It’s a profitable two-sided platform with a clear niche and plenty of room for further expansion. The main fundamental downside I see is that most buyers tend to use it infrequently – for occasional purchases of gifts for special occasions. I don’t think this undermines the business model but it could weaken the extent to which network effects can really take off. The market was disappointed with the last results which telegraphed a slowdown in growth after the huge pandemic boom. I don’t think the the slowdown is that surprising given revenues more than doubled last year – indeed I find it quite impressive that Etsy is continuing to grow this year at all. The shares have bounced back since their initial fall. Etsy might have an advantage heading into the holiday season this year as it is relatively less affected by supply chain issues. The one concern I have is that the high valuation creates significant downside risk if there is a disappointment. I had cold feet recently because of this and took some profits, cutting my holding in half. I’m happy to run the rest and think this could be a good candidate to add to in a market sell-off.

Calnex (3.3%): Calnex updated this week that it was well ahead of rather pessimistic expectations that its sales and profits were going to fall substantially after a pandemic-related boom last year. Calnex is a relatively recent purchase with many attractive qualities. It has a clear niche in growing market, doesn’t seem too expensive and has favourable near term growth prospects from 5G related demand. The business is clearly on a roll and the share price is near breaking out to highs. I’ve added to my holding and it is tempting to add more. The one thing holding me back is a concern about whether demand for its products could turn out to be quite lumpy or the addressable market not as large as expected. It’s also a little puzzling that its positive trading update was immediately followed by a significant director sale. I normally wouldn’t put much importance on director sales as an indicator of business prospects as they can happen for a number of reasons. However, the timing of this one does seem a little surprising…

Broadridge (2.7%): Broadridge’s investor communications platform looks to have a pretty rock solid competitive advantage and it looks highly likely to be able to deliver steady growth for years to come. It doesn’t seem especially expensive. The share price has been pretty resilient to the recent turbulence and the last results were decent. It lacks the excitement of some of my other investments but this is probably not bad thing. I’d be happy to add more to my holding.

Adobe (2.7%): Adobe’s last results were excellent once again but they precipitated a dip in the share price, suggesting that this was anticipated by the market. The valuation is not especially cheap but then again doesn’t seem to expensive given the quality of the business. I’m unlikely to sell but also not really looking to add until either the price falls further or momentum resumes.

Fortinet (2.7%): Fortinet has had quite the run over the past year and the share price is still looking strong. The last results back in July were excellent and the cyber security market as a whole has been booming. I have sold most of my shares here already over the past few weeks, as the valuation seems demanding. However, I’m a bit surprised that this has held up so well and may well reinvest here if the price breaks out again.

Impax Asset Management (2.5%): Impax has been in the ideal position to take advantage of the ESG investing trend and its AuM continue to increase at a remarkable rate. I don’t have especially high conviction in this investment and the valuation is quite expensive. However, it seems likely that the momentum here will continue for some time, so I’m not ready to ditch my shares quite yet.

Adyen (2.4%): in terms of business quality, Adyen is one of my highest conviction investments. It has a very strong competitive position in a massive and rapidly growing market. Adyen’s growth rate is quite phenomenal for such a large business and it looks set to continue for some time. The challenge is that this makes it very hard to judge exactly how high a valuation is warranted. The shares certainly don’t look cheap superficially. I’d look to invest more if the price fell a lot but otherwise I’m wary of committing to much here.

JD Sports (2.2%): I continue to be impressed with how well JD Sports executes its acquisitive expansion strategy in a highly competitive market. It has done spectacularly well over the years and its current thrust into the US seems to be going well. The last results were excellent with JD benefiting from reopening of stores in many regions. It held up through the pandemic remarkably well, managing to retain most of its sales in its online channels. Naturally there is currently some concern about supply chain costs. Its main supplier, Nike, has already warned the market about production issues in Vietnam. I expect this should only be a short term issue but its enough to make me wary about adding to this position.

MaxCyte (2.2%): Perhaps to keep a sort of karmic balance, MaxCyte has fallen to a similar extent that Inmode has risen (around 30%) since I bought them both together a couple of months ago. There hasn’t been any official news from MaxCyte, but the fall appears largely due to setbacks at a couple of significant partners who rely on MaxCyte’s technology with trials of their treatments. This doesn’t seem like an especially big deal for MaxCyte, who has loads of significant partnerships in the pipeline. However, understandably investors are probably quite nervous until the business case becomes more proven and many were probably keen to take profits after the big run over the past year. MaxCyte does indeed have a compelling story with avid support from several other private investors I follow (several of whom seem to have invested large portions of their portfolio here). It’s interesting enough for my to want to have a small investment, but this sort of early stage investment is not generally what I would go for. I’ve taken advantage of the drop to top up a little and might do a bit more but I wouldn’t want risk more on this until the business was more proven.

The remainder of my portfolio consists of MasterCard; Alpha FX, Activision Blizzard, Intelligent Systems, Keystone Law, IG Group and Diploma. These are all relatively small holdings that I have acquired fairly recently.

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