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Private Investor’s Diary: Time to cut back on commodities

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Following the super end to 2023, in January came the hangover. Equity and bond markets started on the wrong foot before recovering towards the month’s end. Sentiment wasn’t helped by slight upticks in inflation on both sides of the Atlantic.

After the progress in 2023, markets took the news badly. Before rallying towards the end of the month, bonds sold off. At its worst, the US 10-year Treasury yield rose from 3.8 per cent at year-end to 4.2 per cent. It was a similar story in the UK, with the 10-year gilt yield rising from 3.4 to 4.1 per cent. Central bank governors dampened expectations on the timing of interest rate cuts. The Federal Reserve especially sees little need to cut rates while the robust economy and the labour market remain hot. Unemployment is below 4.0 per cent for 24 months – the longest run in over 50 years. This month’s news that US inflation fell less than expected in January did not help, although in the UK there was a pleasant surprise – the latest inflation numbers were below expectations.

Equities got off to a poor start in 2024. Delayed interest rate cuts, higher bond yields and disappointing growth in China weighed on sentiment. US markets rallied in the last week, led by 2023’s winners. Except for Apple (US:AAPL), down 4.2 per cent, and Tesla (US:TSLA), down 24.6 per cent, the Magnificent Seven powered on. Nvidia (US:NVDA) gained 24.3 per cent (and that was before its bullish results drove the shares even higher this month) and Meta (US:META) gained 10.2 per cent. The net result was that the S&P 500 was up 1.6 per cent and Nasdaq up 1.0 per cent. Continental European markets managed to creep into positive territory, with the DAX up 0.9 per cent and the CAC 40 up 1.6 per cent.

Sadly, the UK brought up the rear, with the FTSE All-Share down 1.3 per cent. The two significant outliers over the month were Japan, with the Nikkei 225 up 8.4 per cent and the Hang Seng down 9.2 per cent due to China’s growth concerns.

China’s malaise hit commodities. Except for copper, which gained 0.5 per cent, industrial metals continued to be subdued. Platinum was down 7.4 per cent, rhodium down 5.4 per cent, zinc down 4.3 per cent, aluminium down 4.2 per cent, and nickel down 1.6 per cent.

Bitcoin was up just 1.1 per cent despite the approval of bitcoin ETFs in the US. Gold was down 0.4 per cent at $2,053 per oz.

 

Portfolio performance

A disappointing start to 2024. The JIC Portfolio was down 4.0 per cent compared with a drop of 1.3 per cent for the FTSE All-Share (TR) Index. Since its inception in January 2012, the JIC Portfolio has gained 291.3 per cent, equivalent to an annualised return of 12.0 per cent. By contrast, the FTSE All-Share (Total Return) Index is up 125.1 per cent, with an annualised gain of 6.9 per cent. Over five years to 31 January 2024, the JIC Portfolio was up 50.3 per cent versus 30.4 per cent for the All-Share (TR) Index.

My commodity exposure did the damage. Sylvania Platinum (SLP) was down 23.8 per cent, Glencore (GLEN) 10.9 per cent, Ecora Resources (ECOR) 9.9 per cent, Harbour Energy (HBR) 9.7 per cent, Serica Energy (SQZ) 7.8 per cent and BlackRock World Mining (BRWM) 7.5 per cent. Commodity prices, poor Chinese growth and expectations of slower rate cuts did not help. Despite significantly lower exposure to commodities than a year ago, they still did their damage to the portfolio. At the other end of the table, the best performance came for Paypoint (PAY), up 5.6 per cent, Premier Foods (PFD), up 5.0 per cent, and Hargreaves Lansdown (HL.), up 4.3 per cent. Paypoint published a solid Q3 update on 24 January, as did Premier Foods the day before. 

The funds portfolio performed better – down 1.7 per cent compared with a 0.7 per cent gain for the FTSE All-World (GBP, TR) Index. Since this portfolio’s inception in June 2020, it is up 27.0 per cent versus 45.4 per cent for the All-World.

As with the JIC Portfolio, the funds portfolio suffered due to its commodity exposure. As well as the 7.5 per cent fall in BlackRock World Mining, BlackRock Energy & Resources Income (BERI) was down 4.9 per cent and GlobalX Copper Miners ETF (COPX) was off 3.5 per cent. The best-performing holdings were Polar Capital Global Healthcare (PCGH), up 4.8 per cent, and Fundsmith Equity (GB00B41YBW71), up 2.7 per cent.

 

Activity

It was a busy month for both portfolios as I redistributed some of my exposure to commodities to other areas. In the JIC Portfolio, I reduced BlackRock World Mining to 5.0 per cent on 22 January at 522p and Sylvania platinum to 2.5 per cent on 24 January at 63.1p. In both cases, I booked a profit – £1,791 and £2,511, respectively. The two new positions were Jet2, added on 15 January at 1,291p, and 4imprint on 23rd at 5183p.

4imprint (FOUR) appeared on my quality/valuation screen. It has a long record of consistent profitable growth and high returns on capital and equity. Given those high returns, free cash flow is robust. The latest update was positive, leading to further earnings upgrades, and its valuation of 17.0 times forecast earnings per share looks attractive. It has traded on a price/earnings (PE) ratio in the mid-20s in the recent past. It has proved to be a quality compounder, which will hopefully continue. Jet2 is a quality act at an attractive valuation. It has grown from humble beginnings to be the UK’s third-largest airline by passenger numbers and the leading provider of package holidays. November’s update was relatively upbeat, but we must wait to see how the January summer holiday booking period went. On current forecasts, it is valued at 7.6 times March 2024 earnings. 

I sold my position in RS Group (RS1) on 15 January at 758p for a slight loss.

In the funds portfolio, I also reduced my exposure to commodities by reducing BlackRock World Mining and BlackRock Energy & Resources Income to 5.0 per cent each. Taking Temple Bar Investment Trust (TMPL) down to 5.0 per cent also reduced commodity exposure somewhat. I gave up on BH Macro (BHMG) – I know that it performs well at times when there is a dislocation in the market. However, it goes sideways at best for much of the time. I aim to build the value of the funds portfolio over the medium to long term and think there are better funds to achieve that than BH Macro. I realised a substantial loss on the sale, amounting to just under 2.0 per cent of the value of the portfolio. I also sold the Next Energy Solar Fund (NESF). My main goal was to increase my exposure to the US from a low level and reduce the big underweighting compared with the FTSE All-World (GBP, TR) Index – the benchmark I aim to beat.

Further to my addition of JPMorgan US Smaller Companies (JUSC) in December, I added JPMorgan Global Growth & Income Trust (JGGI), JPMorgan American Trust (JAM) and Polar Capital Technology Trust. This resulted in my US exposure increasing to 46 per cent at the end of January, from 38 per cent. It also meant that my exposure to the Magnificent Seven nearly doubled to 8.5 per cent. This is still short of their combined weighting in the All-World of 17 per cent.

The funds portfolio continues to have significant exposure to mid- and smaller companies in the UK through Schroder UK Mid-Cap (SCP) and Strategic Equity Capital (SEC) and elsewhere through JPMorgan US Smaller Companies, The European Smaller Companies Trust (ESCT) and Smithson. Japanese exposure is principally through the Nippon Active Value Fund (NAVF), which has increased by 15 per cent since I added it last May.

 

Lessons from 2023

The Merriam-Webster definition of a pragmatic person is: “By approaching problems and challenges with a practical and results-driven mindset, making sound and rational decisions, and being flexible and adaptable, pragmatic individuals can achieve greater success and fulfilment in their personal and professional lives.”

Last month, I listed some of the lessons from 2023. This month, I am looking back at the new positions I added last year, which I still hold. Me Group (MEGP), Shoe Zone (SHOE) and IG Design (IGR) were all added in January 2023. I increased all three positions at later dates. I added Bloomsbury Publishing (BMY) in February, IG Group (IGG) in May, and Hargreaves Lansdown in June. Last, I bought PayPoint and Premier Foods in November. As of 16 February, all except IG Design, down 14.0 per cent, are in positive territory. The best are Bloomsbury and Shoe Zone, up 29 per cent and 16 per cent, respectively. They are followed by Me Group, up 15 per cent, Premier Foods, up 8.0 per cent, IG Group, up 3.0 per cent, and Paypoint, up 1.0 per cent. There were no stellar performers, but the performance was not bad against a problematic backdrop for UK mid and smaller stocks. It’s nice to remind myself that I can find winners and that the real damage was caused by much too high exposure to commodity stocks.

I also bought and sold four positions: RS Group (RS1) and Unilever (ULVR) for small losses and Howden Joinery (HWDN) and Brooks Macdonald (BRK) for small profits.

In last month’s review, I concluded that I had been guilty of focusing too much on macro factors and not enough on bottom-up stockpicking. I said I intend to shift the balance towards bottom-up stockpicking – a process I started in 2023. The two new positions in January – Jet2 and 4Imprint – and four more added this month are part of that process. Pragmatism is the order of the day!

Dividend update

So far this year, a dividend income of £5,400 has been declared and should be received by early April. Given the redistribution of the JIC Portfolio away from higher-yielding commodity stocks, I may struggle to improve on last year’s total dividend income of £35,809. Things will become more apparent in the coming weeks, but my current projection is £34,800 – still a 5.9 per cent yield on the current portfolio value; money that stays in the portfolio and is re-invested.

 

Outlook

The US is in the enviable position of achieving strong growth and employment – why would the Federal Reserve cut rates? If it is not broken, why fix it? The UK is likely to see inflation drop to 2.0 per cent in April, given the fall in gas prices and, thus, the energy price cap. Two members of the Monetary Policy Committee voted to raise interest rates at the January meeting – it will be difficult to argue against a cut once inflation hits 2.0 per cent.

It was a tricky start to the year, but it was just a setback in the recovery in mid-and-small-cap stocks that commenced in October. I still favour UK mid and small caps, but given the strength of the US economy and accommodative global financial liquidity, I would not bet against the US having another good year. Michael Howell of Crossborder Capital, who monitors these things, said in the Financial Times recently, “We do not expect the latest liquidity upswing to peak before late 2025, which should give succour to investors. All the money that is anywhere must be deployed somewhere.” Hopefully, liquidity will be the rising tide that floats all boats.

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