Background

There was no stopping the US equity market in August, especially technology stocks. The Nasdaq composite was up 9.6 per cent and the S&P 500 gained 7.0 per cent. They are up 31.2 per cent and 8.3 per cent, respectively, this year, and both ended the month at or close to all-time highs. Highlights included Apple (US:AAPL) becoming a $2 trillion market capitalisation company, only two years after it hit a $1 trillion valuation. Tesla (US:TSLA) continued to defy logic, with the share price up more than 400 per cent this year. The Federal Reserve’s determination to boost growth and stoke inflation led to a sell-off in US Treasuries. With interest rates likely to stay low for longer and with the possibility of further monetary and fiscal stimulus, equities are seen as the only way of achieving a positive real return. 

Overseas equity markets also fared well, with the Nikkei 225 up 5.4 per cent, the German Dax up 5.1 per cent, the CAC 40 and Hang Seng both up 3.4 per cent and the Italian MIB up 2.2 per cent. The FTSE All-Share Total Return Index lagged overseas markets, gaining just 2.4 per cent. This was primarily due to the poor performance of the FTSE 100, which lacks exposure to technology companies and would have been held back by sterling gaining value. Against the US dollar, sterling rose by 2.0 per cent to 1.34, its highest level since early December.  Mid-cap and smaller UK stocks did much better. The FTSE 250 was up 5.1 per cent and the FTSE Aim All-Share up a most impressive 8.9 per cent, pushing it into positive territory in 2020.  

Industrial metals benefited from the abundance of cheap money; nickel gained 11.6 per cent, zinc 8.1 per cent and copper 5.3 per cent.  This might be evidence of a rosier outlook for global growth. The oil price was also healthy, with Brent crude up 5.0 per cent to $45.55 per barrel, the highest since 5th March. 

Overall, the FTSE All-World (USD) Total Return Index was up 6.2 per cent, taking it to a gain of 4.9 per cent this year. For sterling-based investors that was reduced to 4.1 per cent,  and 3.8 per cent for the year as a whole, due to sterling’s strength against the US$.

Performance

There were further gains for both portfolios. The JIC Portfolio was up 3.8 per cent, leaving it up 5.4 per cent in 2020.  The year-to-date return compares with a drop of 18.5 per cent for the FTSE All-Share Total Return Index and a gain of 3.8 per cent for the FTSE All-World (GBP) Total Return Index. Since inception in 2012, the JIC Portfolio is up 250.1 per cent, (15.6 per cent annualised) comparing favourably with an increase of 60.8 (5.6 per cent annualised) for the All-Share and 183.8 per cent (12.8 per cent annualised) for the All-World GBP Index.

The JIC Funds Portfolio was coincidentally up 3.8 per cent in August compared to 3.4 per cent for the All-Share and 4.1 per cent for the All-World. In its first two months, this “do-little” portfolio has gained 6.2 per cent versus 3.1 per cent for the All-World and  a drop of 1.2 per cent for the FTSE All-Share. The star performers in this portfolio over the month were iShares Nasdaq 100 ETF (CNX1) which gained 9.2 per cent, Blackrock Throgmorton Trust (THRG) which rose 8.6 per cent and the VanEck Vectors Video Gaming and eSports ETF (ESPO) which added 8.2 per cent. 

Fifteen of the JIC Portfolios holdings beat the All-Share return of 2.4 per cent and 12 lagged. The winners, however, outperformed by a healthy margin. The best was SDI Group (SDI), up 24.5 per cent on further consideration of its 21st July results. It was closely followed by Sylvania Platinum (SLP) which rose 18.0 per cent, boosted by strength in the platinum price and the recent robust Q4 update. Venture Life (VLG) was up 15.4 per cent and following several earnings upgrades in recent months, still looks attractive. It announced a clinical trial of its Dentyl mouthwash by Cardiff University. The research is being led by Professor David Thomas of Cardiff University.  The 12-week trial on patients in hospital with COVID, is aimed at assessing whether Dentyl could be used to help reduce transmission of the Coronavirus. Clearly, it would be great news if the trial demonstrated that a gargle a day with Dentyl keeps the COVID at bay. I, however, am not expecting the research to be conclusive but nor do I to need to, to maintain a bullish view on Venture Life’s prospects. A positive conclusion to the trial would be the icing on the cake. On current forecasts, the shares are valued at 18.2 times December 2020 earnings forecasts (after 338 per cent earnings growth), falling to 14.8 times December 2021 forecasts on a further 24 per cent growth. That looks good value to me despite this year’s rise in the share price. I think additional upgrades are likely. Half-year results are due later this month.

A recent addition to the portfolio, De La Rue (DLAR), gained 12.0 per cent and the iShares Nasdaq 100 ETF was up 9.2 per cent.

Only one holding fell by more than 10 per cent, Anglo Pacific (APF), which dropped 10.6 per cent as its first half was impacted by lower metallurgical coal prices. That hit the royalty income from the Kestrel mine in Australia. Despite efforts to reduce Anglo’s dependence on Kestrel, it still represents the lion’s share of its revenue. Recent H1 results reflected this difficult COVID affected period. The Board’s confidence in a better second half, and 2021, allowed it to maintain the quarterly dividend at 1.75p per share. As long as that confidence is not misplaced, it should hold the full-year dividend leading to an 8.0 per cent dividend yield.  After Anglo Pacific, the next worse-performing share was Renew Holdings, which was down just 2.9 per cent. 

Activity

After the clear-out of three underperforming stocks on the 31st July, there were six trades – all buys – in August. As foreshadowed in last month’s review, I re-invested the cash raised from the “clear-out” to bring several positions up to my target weight for those stocks. On 3rd August I increased Syncona (SYNC) and Lundin Energy (SWE:LUNES)to target 4.0 per cent at 237p and 1790p per share respectively. Syncona is a long-term commitment for me. I think that over time this investor in start-up life science businesses will create significant shareholder value. Lundin Energy is a very low-cost producer of oil from the Norwegian North Sea. It is seeing a steady increase in revenue as the Johan Sverdrup field ramps up production. It is currently on a dividend yield of 5.4 per cent. It is not a highly geared play on the oil price, but a higher oil price would have a significant positive impact on free cash flow and hence future dividend growth. On the 5th August, I increased Bioventix (BVXP) to 4.0 per cent at 3975p and on the 6th, De La Rue to 4.0 per cent at 140p. The increase in De La Rue followed my decision to cut the Risk rating from High to Medium. That resulted in it being Medium Risk/High Reward, which for me points to a 4.0 per cent position. I felt justified in reducing the Risk rating to medium, given that it had successfully completed a share issue to repair the balance sheet: that and a positive trading update.   

I increased 4basebio (4BSBD) to 4.0 per cent on 12th August at €2.03. This was another stock where I had reduced the risk rating from High to medium. The principal reason for reducing the risk rating was due to it standing at a significant discount to the asset value of €2.20, €2.06 of which was cash. After adding to the position, it announced a plan to spin-off the DNA manufacturing business and float it on the Aim market. It will have a “significant cash position” to enable it to develop and build the business. Its plans for the remaining German listed 4basebio company are unclear. It looks likely that it will be used as an investment vehicle taking positions in life science businesses. I think it is good news that the DNA business, under chief executive Dr Heikki Lanckriet is being floated on Aim. Uncertainty about the rump business, with all its cash, has led the share price to drift back to €1.96. I wait with interest.

On 21 August, I increased Anglo Pacific to 3.8 per cent (using my remaining cash). The dividend yield attracts me. At 8.0 per cent, it does not need much of a share price improvement to achieve a total return of more than 20.0 per cent, which is my cut off for a High reward rating.

During August Moneysupermarket (MONY) went ex-dividend on 3.1p, per Share, Blackrock World Mining Trust (BRWM) on 4.0p per share and PayPoint (PAY) on7.8p.

Dividends

A friend, who is a retired chief executive, used to have a stock answer to shareholders who asked about a dividend. It was, “the day he met them saying that they were about to start paying a dividend, should be the time they sell.” He felt that it would indicate that they had run out of ways to invest their cash flow at a higher rate of return than the market and industry competitors. Incidentally, this company’s share price increased by over forty-fold during his tenure! I’m not sure I entirely agree with him, although I understand the sentiment. It was a powerful message. There is a risk with companies that are generating high returns, that management might make poor decisions with the “excess cash” they are accumulating. Under pressure, they might make value-destroying acquisitions in areas outside their geographical or industry expertise. There are plenty of examples over the years. I am quite happy with stocks such as Bioventix, sticking to their knitting, generating high returns, loads of free cash and paying me higher dividends. The paying of excess money has not held back the share price. It hasn’t done Games Workshop (GAW) any harm either, (Why, oh, why did I sell!)

Whilst on dividends, 2020 has been a disastrous year with many companies cutting, delaying or cancelling payments altogether. In the first eight months of 2019, the JIC Portfolio received £6,434 in dividends. So far this year it has received £4,890, a 24 per cent reduction.  Some of this is due to dividend cuts. It is also due to the introduction of new holdings such as Venture Life Group, SigmaRoc (SRC) and De La Rue which are not paying dividends. In the case of the former two, it makes sense for them to retain cash while they can invest it in growing the business at a high return. In De La Rue’s case, it needs to ensure the recovery in its fortunes is well established before it returns to the dividend list.  It will be interesting to see how the dividend receipts for the 2020 calendar year compare to last year. With some significant payments to come from the likes of Sylvania Platinum, Anglo Pacific and Bioventix, my calculations suggest the shortfall will be minimal.