2023 – Annual Review

Having started investing over ten years ago, I can now say with reasonable confidence that success takes hard work.

Grande Sorpresa.

After losing 11% in 2022, I have just managed to squeak out a fantastic 0% return. Yes, that\’s right, after a whole year of hard work, I\’ve managed to go precisely nowhere (compliments can be sent to the Participation Award Office, London). This takes my compound annual growth rate (long-term return) at a pedestrian 7.3% a year since 2015.

2023 in Review

During another difficult year, I had as many losing months as profitable ones, with my best month being December (up 7.9%) and my worst being March (down 5%). I made progress towards internationally diversifying my portfolio, reducing the UK to 75%, building a 10% cash position (including bonds), and growing my international exposure to 15%. My intention is to continue building this international exposure through to 2025, with the aim of pound averaging into weightings of approximately 65% UK, 25% non-UK, and 10% cash (including bonds).

My portfolio strategy has remained fairly consistent this year as I looked for quality companies at a discount to their intrinsic value. Unfortunately for me, my valuation and the markets valuation have diverged quite significantly on some holdings including S4 Capital, Digital 9 Infrastructure Trust, NCC Group, Vodafone, Hargreaves Lansdown, Secure Trust Bank, and abrdn European Logistics Income Fund, all of which are down more than 40% from my original purchase price.

Of these, S4 Capital, Digital 9 Infrastructure Trust, and Vodafone have some very real issues, including debt, slowing growth, and in the case of Digital 9 Infrastructure Trust, catastrophic mismanagement.

In line with my patient capital mindset, I am awaiting the next update from S4 Capital with but feel it is likely to leave the portfolio in 2024. The company’s 2023 full year update is due in March 2024, but I have a feeling I’m going to be reading yet another impenetrable mass of accounting adjustments and excuses for poor performance. Regardless of the decision, the investment has been a cautionary tale in avoiding businesses whose updates are too flowery and whose accounts aren’t easily understandable to a non-finance professional. Others may disagree with me, but after reading a few updates I began to get the increasing feeling that I was hoping and guessing at what was being presented, rather than really understanding it. This became increasingly clear with the accounting, which I belated realised had dozens of complex adjustments.

Accounting Adjustments

Account adjustments are a financial technique used by accountants to “help” a financial statement accurately reflect genuine income and expenses. As a non-accountant, I’ve deliberately put the word “help” in quotation marks to reflect my impression that these sort of alterations materially impact an investor’s ability to judge the financial performance of a business. Although I am certain that any accountants reading this will be able to out-gun me on the mathematics and reasoning for why accounting adjustments exist, my gut feeling is that the more adjustments are present in a set of accounts, then the further away from reality they potentially are.

At the end of the day, cash is invested in a business through debt or equity, spent to produce and sell a good or service, and then replenished through sales (or the issuance of further debt or equity). If more money enters through sales than is spent through production and distribution, the business makes a profit, and if the opposite is true, then it makes a loss.

Now, before the accountants start piling in talking about how it’s much more complicated than that, I am more than aware of the hundreds of pages of accounting rules and complex qualifications followed by chartered accountants. The complexity does not escape me but I am not an accountant. My job, as an investor, is to estimate the future cash flows of a businesses, value them, and attempt to buy them at a discount. The more adjustments an accountant puts on the cash flow statement and balance sheet, the harder that operation becomes for me.

Coming back to S4 Capital, therefore, and it doesn’t take much to see how I am finding things challenging. Flowery language aside, their last interim update ran to 34 pages and contained 34 counts of the word “adjusted”, 15 counts of “adjustment”, and 14 counts of “adjusting”. Anyone feeling adventurous can explore them here.

I suspect part of this is down to Sir Martin Sorrell’s history as an accountant, which no doubt gives him a great head for numbers, but frankly reading the updates gives me a headache – and don’t forget how many of these things I read. After two years of crushingly bad performance as an investment, this company is definitely in the Last Chance Saloon.

Digital 9 Infrastructure Trust, on the other hand, is a totally different kettle of fish. Easy to understand updates but disastrous mismanagement. I am in no desire to sell this at it’s current valuation, which is a significant discount to NAV, but I also have little desire for me. I expect, with patience, that greater value will be unlocked as assets are sold off, but this is now a loss-minimisation exercise rather than anything else.

Vodafone continues to confound me – revenue is gradually declining as assets are sold off but earnings per share have skyrocketed over the last three years from a loss of 7 cents in 2020 to more than 18c in 2023. Likewise, net debt has declined over the same period, from €54m in 2020 to €47m in 2023. Although this is a significant burden on the company, the figures seem to be going the right way, and so although I am not topping up my position, I am happy to continue to hold.

Secure Trust Bank and abrdn (I still hate that rebrand) European Logistics Fund are both facing headwinds of their own – the first related to the on-going stress in the banking sector and the second being related to the significant disruption in the property market after interest rates quadrupled in a year. Personally, I think both still present reasonable value at these prices, and although I don’t particularly want greater exposure to property in my portfolio (having a weighting of approximately 25% as of the time of this article), I am tempted to buy a little more.

The Winners

On the positive side this year, a few longer-term positions have done well, with Vistry being up 48%, Darktrace up 37%, the London Stock Exchange Group up 30%, M&G up 20%, Alumasc up 17% and Atalaya Mining up 15%. Other than Darktrace, all of these investments are also paying healthy dividends, further boosting their contributions to the portfolio for the year.

I noticed the London Stock Exchange Group making the headlines over the Christmas period thanks to comments from Ed Balls, ex-Chancellor, who commented that the group is failing to invest in the market-side of the business and instead getting distracted by the data business it operates. As a private investor, I have little comment on this, but the perception in the media is definitely that the UK is continuing to lose ground to the US in terms of market listing attractiveness. Quite how this could be changed is beyond me – I have never been involved in an IPO and my perception is that one market is much like another. Of course, there will be liquidity and cost considerations but what an exchange is supposed to do about these I am not certain. I cannot believe that the LSE is unduly more expensive than other exchanges such as the NASDAQ but perhaps I am wrong. If any readers have thoughts on this, I would be interested to hear from you.

Changes in the Top Ten

Digital 9 Infrastructure Trust, Impact Healthcare REIT, and Centamin have all left my top ten holdings, to be replaced by Vistry, Legal & General, and Rio Tinto.

Digital 9 Infrastructure Trust

I first purchased Digital 9 Infrastructure Trust in April 2021 at a little over 101p a share. The company was building a diversified portfolio of critical digital infrastructure assets that underpinned global digital communication, connectivity and data transfer.

In late 2022, the Triple Point fund managers who launched the fund stepped down with no warning. At the time, I remember feeling like the baby was being thrown out with the bathwater and decided to average down on my position. Since then, the slide in the company’s shares has been relentless, initiating a strategic review following a “going concern” warning in 2023.

As of the end of 2023, the trust’s shares are down to approximately 30p, reflecting an eye-watering collapse in confidence by the market. The fund manager, Triple Point Group, have begun buying shares, but this investment is going to go down as one of the worst I’ve ever made.

The collapse in value swiftly took DGI9 out of my top ten holdings by the middle of the year, and I’m not confident enough in the fund manager to want more of the trust than I already own. I’ve tentatively marked the value to about 70p in the pound if liquidated – although I expect this to take several years to unwind. My expectation is therefore to sell this off in tranches going forward to attempt to realise maximum value.

Impact Healthcare REIT

I purchased Impact Healthcare REIT in 2021 at 112p a share and have been building a position ever since. The company owns a diversified portfolio of UK healthcare real estate assets, in particular residential and nursing care homes. The fund’s net asset value has held up remarkably well in a rising interest rate environment and has increased its dividend every year since 2017.

In the UK, an aging population will continue to build demand for elderly care in a market. This presents an attractive long-term opportunity for investors, with the Office for National Statistics forecasting that the proportion of the population over 85 years old in the UK is forecast to more than double over the next three decades.

I intend to continue building a position in this fund, although already have a 20% weighting towards property and so need to balance this with additional capital in other sectors of the economy.

Centamin

Finally, we have Centamin, which I also added to my portfolio in 2021 and then topped up fairly rapidly, bringing it into my top ten the same year. Unfortunately, the company has failed to perform as expected since then, with earnings per share declining from 13.5c a share in 2020 to just 6.2c a share in 2022.

Part of this has been caused by the persistent issuance of shares, which have grown from 1.159bn in 2017 to 1.169bn. At the same time, capital expenditures have skyrocketed from 7c in 2017 to 23c a share in 2022.

While I intend to continue holding this, it provided me with a useful reminder to take my time with top-ups. By default, we have confidence in the potential of the company’s we invest in, but top-ups should be reserved for businesses that have demonstrated a positive track record during a period of ownership.

Although I still hold all three of these companies, I have since replaced their positions in my top ten for Vistry (purchased in 2022), Legal & General (purchased in 2021), and Rio Tinto (also purchased in 2021). One of the big mistakes I have made in recent years has been a style shift away from income-focused positions which have performed so well for me in previous years, and towards some smaller, more speculative companies such as S4 Capital. Some investors seem to do well in growth companies but I have had a painful reminder that these are not my strong suite and so I have been gradually moving my portfolio back towards investments in more established businesses.

Improving consistency

One of the most frustrating elements of my performance over the last ten years has been inconsistency. Readers that have looked at my Statistics and Performance page will have noted the huge variance in returns since 2015, ranging between -11% in 2022 and 23% in 2021.

If we remove 2021 and 2022 from the figures, excluding them as outliers thanks to COVID, returns range between 1% and 19% – still a larger than desired variance. Looking at my trading journal, this appears to be caused by poor trade timing. Back in 2015, I was undertaking basic research on companies but once I had made a decision to buy or sell a company, I placed the order more or less immediately, with little consideration for technical analysis.

This usually resulted in me making multiple investments in companies near technical resistance levels, or in downward channels. Thankfully, I appear to have been more disciplined with my sales timing, making relatively fewer disposals than new investments, and capturing more of the gains when I did so.

Thoughts for 2024

Heading into 2024, my main goals are:

  • To increase the percentage weightings of my international holdings.
  • To improve timing discipline of my initial purchases by improving technical analysis (no buying in a downwards channel).
  • To increase the time between initial purchase and top-ups, and to top up on good performance rather than thesis confidence)

My hope is that I can return to the strong performance I generated pre-2022, which saw my average CAGR since 2015 sitting at 11% as opposed to 7.1% as of writing this article. I will give myself a pass on 2022, but 2023’s performance has been tarnished by a lack of attention to detail in some areas, which has done me no favours. One additional change I am making to my approach regards position sizing.

When I first started investing, I would bulk invest capital, depositing large chunks into the market across groups of companies I liked. I later adapted this approach to make a purchase or sale on alternate months, buying an equal weighting of each company as I opened the position. I later increased this weighting to the average position size of the portfolio, ensuring it was positioned as a \’mid-weighted\’ holding, but this approach saw the wheels come off the bus with poorly performing investments suddenly doing more damage than they should have done.

As a result, I am further adapting my approach to open \’starter\’ positions in smaller companies, perhaps at around 0.5% or 1% of the portfolio, and letting them prove their worth before adding additional capital. The last two years have been hugely instructive in the virtue of this approach,  and would have been beneficial in limiting the damage caused by S4 Capital.

To end of a positive note, however, I am still very much enjoying the experience and challenge of investing, as well as writing and now speaking about it on the podcast. I enjoy reading the updates from my companies, researching new ideas, discussing the challenges, and celebrating the wins. A huge part of that enjoyment comes from the source of my results – my own work and thinking. Building and managing a portfolio gives me a constant project with an endless source of new goals and challenges.

Unlike a managed portfolio, where major decisions are made “off-screen” by a team I would likely never speak to, my portfolio is my own work. It rewards my hard work, thrives on my discipline and sharpens my focus. Writing this blog and speaking on the podcast has started dozens of conversations with investors from around the world, sparking new friendships and broadening my skills and understanding of the world. It has, not to overegg the pudding, enriched my life.

Wherever the end of 2023 finds you and your families, I wish you well, and thank you again for your kind support over the last year. May 2024 brings you every success with your investing journey!

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