2022 – Half Year Review Part 2

After publishing my 2022 Half Year Review, I was contacted by a reader asking whether I could provide further insight into my trade decisions. Although I responded positively, I decided that I needed to include a more detailed caveat around releasing the information.

Firstly, the information in this article is in no way guaranteed for timeliness or accuracy. It is NOT provided as an inducement to buy or sell specific equities or to encourage specific changes to a portfolio. Any financial decisions made by readers should be made on the basis of independent financial advice – not the contents of this article (or any others on my site).

I should also emphasise that the decisions I make for my portfolio are suited to my own specific circumstances, and should not be relied on or copied by others. If I open a position in a company, readers have no way of knowing when I do so or how much I pay, or even of I truly do open the position. The potential benefits to me writing the article are unknown to you but I try to be transparent about my motives for writing the site, and those motives do not include encouraging others to buy and sell specific equities.

Finally, I am making no commitment to follow up on my publication or coverage of these companies – my publication schedule is my own and although I try to keep to at least monthly articles, I write this blog mainly for enjoyment!

Buying Innovation and Developing Trends

My portfolio development strategy is based around the regular purchase of companies which I feel \’strengthen\’ my portfolio. These companies are in sectors which I feel have strategic importance supporting societal and economic trends – which is basically a fancy way of saying I think they\’re in growing rather than declining areas of the economy. I try to buy these companies at a reasonable discount to their \’fair value\’ (and I\’m not going to get into a habit of releasing fair value calculations for holdings, so please don\’t ask).

Darktrace is a world leading provider of enterprise-grade Artificial Intelligence with a range of cyber security and autonomous response applications.

Multiple studies have shown cyber security is an increasingly urgent priority for both the public and private sectors and I bought Darktrace (DARK) at around a quarter of its all-time high market capitalisation. Whether this provides a moat of safety or is an indication of a wildly overvalued money pit remains to be seen.

Much like Darktrace, NCC Group is an international cyber security consultancy with clients across both the public and private sectors. They provide a range of services that protect systems and data but unlike Darktrace have a strong track record of profitability. The company hit a hugely elevated 335p in 2021 but then began to reverse as markets tightened, eventually falling into a range that I felt provided a moat of safety when buying into a long-term performer in a sector I see becoming increasingly important over time.

Poolbeg Pharma is a clinical stage infectious disease pharmaceutical company which is attempting to capitalise on the wake of the COVID-19 pandemic by targeting the infectious disease market, which they estimate to be worth $250bn by 2025.

I first came across the company at a charity dinner presentation in 2020 and wasn\’t initially particularly interested but following a number of positive updates in 2022 decided to open a small position. The company has partnered with an AI/machine-learning business to trawl through medical data and identify opportunities to pitch for commercial partnership opportunities with larger, cash-rich firms.

Whether or not the team manage to gain tangible commercial success remains to be seen; for all their lofty ambitions the company is an absolute tiddler and may well end up going the same way as another biotech firm I considered but decided against investing in – 4D Pharma ( which ran out of money chasing pipe dream ideas).

S4 Capital is a business I first heard about a few years ago when I listened to an interview with their founder, Sir Martin Sorrell (previously of WPP fame). Sir Martin gave a hugely compelling pitch in support of his \’digital-led\’ marketing agency model, which he felt would quickly outpace legacy dinosaurs like WPP.

At the time, S4 was hugely loss-making and had pretty much no track record beyond Sir Martin. I remember liking the pitch but not the valuation – within months the share price had rocketed and looked absolutely eye-watering.

Later the price declined and I decided I wanted to take, again, a very small stake in what I perceive to be a company with the potential to grow into a marketing powerhouse. Sir Martin has a strong track record and digital is growing fast. Despite this, I\’m currently sat nursing heavy losses on my original position after a number of delays to publishing their audited accounts and an unexpected profit warning which have seen shares decline by an eye-watering 80%+ from their peak.

Solving the Housing Crisis

Housing has been in increasingly short supply in the UK for several decades with the last twenty years seeing prices leap up, often by double digits in a single year. As such, investing in companies that seek to provide housing seem like a logical investment over the long-term. The caveat to this, like a lot of sectors, comes in the form of rising interest rates. Since the sky-high rates of the 1980s, the world has broadly seen a bear market for interest rates, with the UK experiencing sub-one percent rates for over ten years. These low rates have consistently reduced borrowing costs, enabling house prices to rise exponentially as mortgage repayments have dropped. As rates begin to pick up, the house building sector is going to face some new headwinds – add in rising inflation in the form of energy, transport and employment costs and the sector might well be \’cheap\’ for a reason.

Michelmersh Brick Holdings is a leading supplier of premium bricks and terra cotta products and gives my portfolio exposure to a leading materials supplier that plays a crucial part in tackling the on-going housing crisis here in the UK. As a homeowner and amateur architectural enthusiast, I have a significant preference for red brick buildings over concrete, glass, and steel.

Vistry is a housebuilding business operates across 13 business units, each with a regional office, which are developing around 200 sites across England. Their \’Vistry Partnerships\’ unit is a market leader in the high-growth partnerships sector with a hard-earned reputation for delivery, quality, and sector knowledge across all housing tenures. The company has fantastic free cashflow, declining debt and a strong partnership business.

Catching Falling Knives

Every month, I spend a few hours looking at the top holdings of fund managers I respect; researching their top holdings and considering which, if any, I might like to hold. Hargreaves Lansdown fell into this category as a leading UK investment platform which enables 1.6m private investors to access public markets. The company has an excellent track record of growth, having consistently grown their revenues and earnings per share by nearly 11% a year since 2015. The business is hugely cash generative with a return on capital employed of well over 50% and dividend growth of nearly 10% over the same period.

Sales

My general approach to sales is slightly different to my approach to purchases. Although some investors swear by a hard \’take profits and cut losses\’ approach, I find taking a more nuanced approach suits me better and so I have two general angles I approach sales from.

Firstly, I don\’t hold all positions in equal weighting in my portfolio, instead using a weighted approach that sees ten positions weighted at around half my portfolio (my \’top ten\’), a \’core\’ of holdings weighted at around 35-40%, and a \’tail\’ of positions (usually around 8-10) worth between 10-15%.

My sales approach initially looks at the \’tail\’ which are usually underperforming businesses that have declined relative to the rest of my portfolio and which make prime targets for sales.

Augmentum Fintech seeks to invest in a range of innovative financial technology providers that have the potential to enhance and transform the financial landscape. The most \’obvious\’ recent innovation that springs to many investor\’s minds will be the Blockchain; a decentralised ledger for recording and verifying financial transactions, but Fintech companies include technology providers that improve payment processing, reduce fraud and enable greater access to financial markets. Despite this, by their nature, these companies are often early-stage, low-revenue, pre-profit type businesses and in a rising interest rate environment I wasn\’t particularly keen on holding the position in the medium-term, feeling that there were better opportunities elsewhere.

Aquila Energy Efficiency Trust was a great example of my own hubris where I bought a fund at IPO and it spectacularly failed to perform. Within six months of purchase, the company had released no meaningful updates and made worryingly slow progress on its deployment of funds. After around twelve months, I made the decision to cut my losses as the company had lost two directors, announced a review of their deployment strategy and declined to provide any meaningful insight into how they were planning to create value for shareholders as the price drifted lower and lower.

In hindsight, I should have steered well clear of this – I have plenty of income-based positions in my portfolio and if I wanted to gain extra environmental exposure there are dozens of listed companies with a verifiable track record that would have fit the bill.

SDCL Energy Efficiency Income Trust and Supermarket REIT were two other income-focused investments I made in 2021 which were better performing on a returns basis but which didn\’t really fulfil a specific niche I needed a fill. I picked up a small position in SDCL during a placing which I wasn\’t keen on topping up as I couldn\’t get the company at what I felt was a reasonable valuation to NAV and Supermarket REIT was a short-term profit-taking investment I made by buying at a discount to NAV and later selling at a premium. Both of these funds are highly valued by investors, regularly sitting at significant premiums to NAV which I felt exposed me to the risk of sentiment change.

Pan African Finance is a mid-tier gold-mining company based in Africa which I felt had some potential to grow into a better valuation. I picked up a small tranche of shares at 18p and sold around a year later at around 22p, missing out on a small amount of capital gains. The price has since fallen back to around my purchase price – I may well buy back in the future – but for the time being was happy to take a small gain.

Begbies Traynor is a small UK-based insolvency and property advisory business which I bought several years ago on a dip where I felt investors had oversold the business. Begbies has a strong track record of dividend payments but during my time holding the company has become less and less compelling on a fundamental basis leading to my gradually selling down my position to free up capital for other positions.

Where next for the portfolio?

From the top to bottom, my portfolio fell around 12% in the first half of the year. After I wrote the first half of this review, markets had a small rally and my portfolio is now down around 5%. On some counts, I thrilled but as there have been no meaningful changes in the macroeconomic environment, I feel like the recent rally is something of a red herring and am generally in defensive mode and looking to lock in profits whilst I have them. Although this doesn\’t mean I\’m planning on a wholesale liquidation of my portfolio, I\’m much less amenable to the argument that I should \”buy now because the market is totally oversold!\”.

One new strategy I\’ve been working on is my approach to international diversification to counteract the single-company risk and volatility of individual stock pick positions, as well as my significant overweighting to UK shares. I came to this strategy after running a five-year benchmark comparison of my own performance against two trackers – the Vanguard Global All Cap Index Fund and the Vanguard FTSE UK All Share – which broadly represent alternatives that I might invest in if I chose to give up managing my own funds.

Although my strategy comfortably outperforms the FTSE UK All Share, I have significantly more difficult keeping up with the Global All Cap. To remedy this, my initial aim is to grow my international exposure to around 20% of my portfolio value through a gradual rebalancing and hopefully improve my performance by doing so. My preference for doing this at the moment is very much to buy low-cost trackers and funds – the S&P500 is a global stalwart, and I am also gradually increasing my exposure to the Far East and Europe (particularly Switzerland).

Beyond that, caution is the word the day – inflation remains high, salary demands will continue to increase, input costs continue to inflate, supply chains remain stretched and the dreadful situation in the Ukraine seems to have been accepted as \’the cost of doing business\’ by most of the world.

It\’s important to keep a long-term perspective at times like this; my investing horizon is many decades and immediate road-bumps, although not \’good\’ are to be expected. If I can end the year with a small positive return, I would consider that a good result considering that barely a few weeks ago my portfolio was getting smashed to ribbons.

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