2022 – Annual Review

Another year draws to a close and 2023 begins. After an incredibly successful 2021, I ended this year with my portfolio down 11% – my first ever loss in a year of rampant inflation, an energy crisis, the start of the Ukrainian war, routing stock markets and the collapse of tech, crypto and growth shares. I’m a little late in publishing this review, having come down with the lurgy just after Christmas. Indeed, it’s been so bad that my Father-in-Law asking if I was auditioning to become new Bob Fleming after I spent ten minutes spluttering and wheezing with a particularly fierce bout of coughing one evening (younger readers are recommended to follow the link ;)). Thankfully, I’ve managed to survive, and eventually got around to getting this article finished!

2022 in Review

As with 2021, I’m pleased to say I’ve kept up the habit of maintaining my trading journal, which shows my worst month was September (down an eye-watering 12.8%) and my best as November (up 6.9%). My trading has moderated this year at 19 trades to last year’s 52, split between 10 buys and 9 sales.

I’ve ended the year with my portfolio roughly balanced between my three tranches – top ten now comprise around 45% of my portfolio (compared to 48% last year), the middle tranche is slightly overweight at 42%, and the bottom the final 13%. The majority of the change has been a fattened ‘middle’ as I have opened a number of new positions in the year, while my top ten holdings have taken a beating and not been topped up to compensate.

Of the nine holdings I sold this year, all bar two were sold at a profit, as I attempted to take money off the table in a year where it felt like every week brought some new economic calamity. The most interesting of these sales for me was in a company called Aquila Energy Efficiency Trust, which I bought at IPO in 2021 as a play on the global environment and sustainability drive but which then failed to make a single announcement for months. The shares dropped almost immediately after IPO, drifting sideways until early 2022 when two Directors suddenly walked out of the door after nine months of almost total radio silence from the company.

The disagreement seemed to reflect a concern I had myself – namely, that despite raising several hundred million during their floatation, the company was struggling to identify assets it wanted to acquire. This presented a serious issue, as the company was holding a majority cash position, presenting a nil-return opportunity in a rising inflation environment. In addition, the investment managers were also charging a management fee on the cash holding meaning investors were paying a premium to both lose money to inflation and own a product which was effectively a cash savings accounts.

Again, I ignored the rule about not investing in IPOs and again, I was proven wrong. Inevitably, these positions tend to decline from their initial list price, have limited (if any) track record, and are generally timed to benefit everyone other than the retail investor. Still, I thought I knew better and yet again came to the conclusion that I don’t!

The other sale I lost money on was Augmentum Fintech which I bought in mid-2021 at 135p a share. The company invests in unlisted, disruptive financial technology businesses in the banking, insurance and wealth, and asset management sectors and was trading at a small discount to NAV when I acquired it. As inflation took off and it became clearer that central banks had lost control of it, I became concerned than small, speculative ‘growth’ stocks were likely to face significant headwinds, so I sold my holding at 125p back in May.

My thesis proved to be correct with the company in the short-term, as the price continued to fall, hitting a low of 87.8p in November, and recently recovering slightly to 112.5p.

For my purchases this year, readers will recall I went on a bit of a ‘growth buying spree’ in the first part of the year, picking up Darktrace and S4 Capital, which are down 42% and 64%­ from my original purchase prices. Although these are much larger businesses than the likes of Augmentum Fintech, the same narrative of loss-making, growth focussed share getting hit in a rising interest rate environment plays true.

I continue to hold these as I have high hopes for their business models but I recognise I am unlikely to see a profit until inflation, and interest rates, begin to moderate.

Towards the back end of the year, I picked up stakes in four new businesses, including Atalaya Mining at 283p, UK Commercial Property REIT at 283p, Iomart at 115p, Alumasc at 149p, and a small top-up of Digital Nine Infrastructure Group at 90p.

I have had a fascination with commodities for many years and see them as an intrinsic hedge against inflation. I’ve written before about my concerns with the Government’s loose approach to fiscal and monetary policy, believing that they would eventually unleash an inflation nightmare. We’ve all heard about the Weimar Republic and seen the pictures from Zimbabwe with people using wheelbarrows of cash to buy food, but somehow, here in the West, believed this could never happen to us.

I think the last two years has probably made people wonder how true that really is. Inflation in most Western countries is now comfortably in double digits (America is reporting 8% but most social media commentary I’m seeing is reporting way over that) and everywhere I go, I hear people talking about price rises in everything from mortgages to food to petrol.

Commodities, I believe, are a good hedge against this inflation. Denominated in fiat currencies, the more inflation erodes the value of the currency, the more of it buyers have to spend to purchase the underlying assets. As such, I have a reasonable exposure to commodities through Rio Tinto, Anglo Asian Mining, Centamin, and now Atalaya Mining, a mining and development company which produces copper concentrates and silver by-product.

Alumasc and Iomart are two smaller companies – the first is a UK-based supplier of sustainable building products, and the second is a cloud computing provider which was founded in 1998. Both looked relatively inexpensive when I purchased them; Alumasc in particular was trading on a low single-digit P/E near it’s 52-week lows.

Moving into 2023, my top ten holdings haven’t changed significantly from last year – the main change being that I have been pound cost averaging a position in an S&P500 tracker and it’s now my sixth largest holding. I wanted to build more international exposure but am not confident in my ability to understand foreign markets as well as the UK. For now, the S&P500 seems like a low-risk way to improve my exposure, in addition to growing positions in Asia through a Baillie Gifford Japan fund and the Henderson Far East Income Fund, a UBS Switzerland Fund, and a Barings European Fund.

My completeness, my top ten now comprises CentralNIC Group, Gore Street Energy Storage, Digital 9 Infrastructure, Impact Healthcare REIT, Urban Logistics REIT, S&P500, Centamin, Chesnara, and of course, good old Warehouse REIT.

Thoughts for 2023

Much like 2022, my big concern for 2023 is still inflation, closely followed by risk of recession. Although some numbers are pointing towards inflation rolling over, it is still stubbornly high. Mortgages rates have doubled, energy costs have sky-rocketed, food prices are astronomical and just about everyone I know is pulling back on discretionary expenditure.

I am hopeful that inflation will pull back this year but I am mentally prepared for it to remain high. It has always annoyed me that economists believe that a low level of inflation is a good thing. I have always disagreed with this on the grounds that eroding purchasing power places needless pressure on households and businesses and I have a horrible feeling that concerns about keeping inflation ‘positive’ are going to give Central Banks conflicting priorities.

Economists the world-over seem to believe that 2% inflation and a weak currency are the holey grail of monetary policy and I believe we in the West are seeing the conclusion of this. When money was pegged to a hard asset, like gold, inflation was pretty-much non-existent. Prices were steady and homes and consumers could build real, sustainable wealth.

If I told you that you could buy a loaf of bread of £1 in 1990 but that the same loaf of bread would cost you £2.27 today, why would you tell me that was a good thing? According to the Bank of England’s own inflation calculator (https://www.bankofengland.co.uk/monetary-policy/inflation/inflation-calculator), that’s where we are today. If you go back in time even further, the figures become truly unbelievable – 1980, and that loaf would cost you £3.94 in today’s money, 1970, over £12, you would need £27 to buy the loaf in 1950, and in 1900 that same loaf would cost you nearly £100 in today’s money.

Academic economists tell us that more pounds in the economy mean more demand, which triggers more production to meet the demand. It also makes borrowing cheaper, as debtors are able to repay their loans with money that is less valuable than the money they borrowed.

This doesn’t sound wonderful to me – it sounds like a society which has an innate hunger, running faster to consume more and more, to borrow more money, spend more on ‘stuff’. I don’t know a single person that would honestly tell me that they want to spend more to get the same goods and services next year than this year, and yet this is exactly what inflation means.

The weak currency idea is another lunacy to me – in a world where the UK is a net importer of many of our basic requirements such as energy, food and clothing, a weak currency means we have to pay more for basic requirements of living. Despite this, the pound sterling has been weakened over time by currency printing, our reduced status on the world stage and the decline of our manufacturing and exporting base, pushing up costs for all of us as we “live on the kindness of strangers”.

Where this is heading, I’m not sure, but I do know that I’m still enjoying investing and still enjoying writing about it, so I think this blog will be going for another year to come! My returns for the year have been disappointing but not uncomfortably so given the circumstances.

I’m still looking to keep a handle on the number of holdings in my portfolio. Unlike my goal of reducing down to 30 holdings, I’ve actually grown the portfolio from 38 to 39, and although it doesn’t feel uncomfortable, I am starting to question whether I suffered from scope creep and lack of discipline with some of my purchases in 2022.

Finally, thank you to all of you that continue to support the blog and engage with me on Twitter. It’s a real privilege and a joy to have a regular readership and puts a big smile on my face whenever someone comments and engages with one of my articles.

I wish you all a happy and healthy 2023!


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