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Funds' Portfolio Review

This year has been a challenging period for the Funds’ Portfolio.

Since 31st December, it is down 2.4 per cent. That compares with +9.7 per cent for the FTSE All-World (GBP, TR) Index, +5.0 per cent for the FTSE All-Share (TR) Index, +3.5 per cent for the FTSE 250 Index and -7.2 per cent for the FTSE Aim All-Share. However, the only one that really matters is the one I’m trying to beat, the FTSE All-World Index.

What has gone wrong this year?

I have had insufficient exposure to the US. The NASDAQ 100 is up 41.6 per cent this year, driven almost entirely by the largest six or so stocks. The top 10 stocks by size in the table below comprise over 67 per cent of the NASDAQ 100. Their average return was +75 per cent. (The remaining 90 stocks, on average, contributed nothing to the index’s return.)

The story is much the same for the S&P 500. It has returned 19.7 per cent so far this year. The largest ten stocks comprise 35 per cent of the index. They were up an average of 68 per cent. Again, the remaining 490 stocks, on average, contributed nothing to the index’s return.

The single biggest mistake was not having exposure to the NASDAQ 100. I have in the past held the iShares NASDAQ 100 ETF (chart below). If I'd had a 10 per cent exposure to this ETF this year, it would have added around 5 per cent to the performance of the Portfolio and more if it had replaced one of the poorer-performing funds in the Portfolio.

Perhaps there is a case for being more of a “chartist” and not ignoring momentum. The valuations of these mega stocks are very high, but if the NASDAQ 100 moves through its previous high recorded in December 2021 (700 on the chart above), one could see it running further, especially if the market starts to get excited about the prospect of interest rate cuts. Something to ponder.

The Portfolio has also suffered from too high an exposure to commodities which was detrimental in the first half of this year. The table below shows the Funds’ Portfolio as of 24th July. It is ranked by the performance of holdings since 31st December 2022.

It’s a pity that the top two performers are recent additions, meaning the Portfolio has not benefited from their performance this year.

While Fundsmith, Temple Bar and Smithson have recorded reasonable results, one can see at the bottom of the table the poor performances of the two commodity holdings, BlackRock World Mining and BlackRock Energy & Resources Income, down 7.2 per cent and 9.6 per cent, respectively. Next Energy Solar has been poor, dragged down by rising gilt yields and BH Macro Ltd, dreadful. More on that later.

The bear market in mid and smaller stocks and constant selling of UK equities has led to the widening discounts to UK investment trusts' NAV. The table above shows Schroder UK Mid-Cap at a 15.6 per cent discount and Next Energy Solar Fund at 16.2 per cent.

The discounts on the other holdings, although a little less than those two extremes, are also wide compared to history.

Schroder UK Mid-Cap Discount to NAV – near the bottom of the five-year range.

…and the same goes for Smithson.

What next?

In the table above, it is encouraging to see improved performance over one month with Temple Bar, the two BlackRock commodity trusts, and Global X Copper Miners ETF up six or seven per cent.

My long-term belief in commodities remains intact. After a good 2022, they suffered in H1 2023 as the markets fretted about slower global growth and recession. There is no escaping from the fact that demand for copper from the move to net zero will be very difficult to meet from current production and planned investment in new mines. At the end of this diary entry, I have attached the last few pages from the chapter on copper in Ed Conway’s recently released book “Material World”, which I highly recommend.

UK Equities are very cheap relative to history and other markets. See chart.

Private equity and trade buyers pick off UK stocks one by one – the latest being Gresham House at a 60 per cent premium. There will be net buying of UK equities at some stage, and the discounts to NAV on my trusts should narrow. If one saw the discount to NAV on Schroder UK Mid cap narrow to 5.0 per cent simultaneously as a rising NAV, that would constitute a very nice double whammy! In the meantime, it yields around 3.6 per cent.

I’m happy with my recent additions to the Fund’s Portfolio, as diarised when I bought them; Fidelity Asian Values, Strategic Equity Capital, Polar Capital Global Healthcare and Nippon Active Value.

BH Macro has moved from a premium to NAV in the mid-teens to a discount of up to 10 per cent – much of the move in the last few months. One explanation I have heard is that Rathbones and Investec Wealth (who are merging) both have large positions in BH Macro and are/will be forced sellers. This position has cost me (or rather Mrs R’s SIPP -sorry) nearly 2 per cent in performance. Only if the money had been in the NASDAQ ETF! It doesn’t seem the right time to sell, but would I buy if I didn’t hold? Probably not.

I have written extensively on NextEnergy Solar Fund. I expect a better H2, given the discount to NAV and some news on disposals of some of its assets. In the meantime, it’s providing a yield of around 8.7 per cent.

Lessons from the JIC Portfolio.

Today, I have introduced Stop Loss Reviews on positions in the Funds’ Portfolio. In future, I will set them at 10 per cent trailing (i.e., 10 per cent below my purchase price, rising as the share price rises). At the very least, it will make me re-examine the premise for holding a position. I’m making more work for myself, but I expect it to improve my performance. It will probably also mean slightly more trades.

The table below shows my initial Stop Loss Review levels (shaded orange).

In Summary

A disappointing 2023 H1 due to lack of exposure to large-cap US, too much exposure to commodities and UK Value. Perhaps I have been too patient with some positions. The introduction of Stop Loss Reviews should identify underperforming positions at an earlier stage and hopefully lead to corrective action.

I look forward to giving Mrs R better news on the performance of her SIPP.

last few pages from one of the chapters on copper in Ed Conway's "Material World" - a must-read!



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