Private Investor’s Diary: Four new companies for my portfolio

February proved to be a profitable month for equities, particularly in Japan. The Nikkei 225 index surpassed its previous high set in 1989. It was up by 7.9 per cent in February, and has risen by 20 per cent since the beginning of this year. The Nikkei 225 is an unusual index, as it is weighted based on the price of its constituents, meaning that a small company with a large share price has a higher weight than a large company with a smaller share price. On the other hand, the Topix index is a more traditional market capitalisation-weighted index and is a better indicator of the market’s health. It saw a 4.9 per cent increase in February and has risen by 14.4 per cent this year, but is still 7 per cent below its all-time high achieved in 1989.

Another anomaly is the main German index, the Dax. It is a total return index, so includes dividends. If the FTSE 100 was a total return index, its relative performance would look much better. I wish there was uniformity across markets and a move to using total return indices. After all, you wouldn’t exclude interest payments when calculating the return of a bond holding.

The performance of US and continental European markets followed closely behind Japan, with many indices hitting new highs. In the US, the Nasdaq composite was up 6.1 per cent in the month (8. per cent in the year to date (YTD)) and the S&P 500 was up 5.3 per cent (7.8 per cent YTD). There was a welcome broadening out in the market, with the Russell 2000 up 5.6 per cent. On the continent, the Italian MIB gained 6.3 per cent (7.3 per cent YTD), the Dax 4.6 per cent (5.8 per cent YTD) and the CAC 3.5 per cent (5.6 per cent YTD). All three indices hit all-time highs at the end of the month. We are getting used to the UK bringing up the rear; the FTSE All-Share was up just 0.2 per cent, while the FTSE 250 was down 1.3 per cent, FTSE Small Cap down 1.7 per cent and Aim down 2.3 per cent.

I see that in February, according to funds network Calastone, UK-focused funds saw another £600mn of outflows, a similar amount to January. As Simon French of Panmure Gordon points out, UK pension funds need to increase their exposure. Of the major markets, the UK is the only one where pension funds underweight their own market. UK pension funds have a 2.7 per cent exposure to domestic equities, against the global equity index weighting of 4.7 per cent. In the US, it is 63.5 per cent against a 43.2 per cent global index weighting; in Japan, a market similar in size to the UK, it is 49.4 per cent versus 4.4 per cent. Canada is 11.1 per cent versus 3.2 per cent, and Australia is 37.7 per cent versus 1.3 per cent.

Can you imagine what would happen if UK pension funds decided to add just 1 per cent of their assets to UK equities? The chancellor announced plans for a “British Isa” in his Budget earlier this month, but perhaps he missed a trick. How about passing into law the “Great British Act”. It would require all UK pension funds to at least match the UK equity weight in the global index by 31 December. Everyone would benefit through higher returns on their investments, and through a closing of the valuation gap with other markets, it would reduce the cost of capital and perhaps even increase investment in the UK economy – all at no cost to taxpayers.

The introduction of bitcoin exchange traded funds (ETFs) has put a rocket under bitcoin. It was up 44 per cent in February, making 63 per cent YTD. In mid-March it exceeded November 2022’s all-time high, hitting $73,000 (£57,000). Commodities were generally subdued, with platinum down 5.6 per cent, rhodium down 5.2 per cent, zinc down 4.7 per cent, aluminium down 2.5 per cent and copper down 1.7 per cent. Nickel bucked the trend, gaining 9.9 per cent and may be a harbinger of what’s to come with other commodities. The nickel price is benefiting from mine closures due to low prices. There are indications that the same is happening in platinum, with Anglo-American (AAL), Impala (ZA:IMP) and Sibanye Stillwater (SSW) laying off workers in South Africa. Brent crude edged up 1.6 per cent to $82 a barrel.

Bond markets saw a further sell-off as investors took on board that interest rates in the US would not come as soon and as quickly as expected. The same goes for continental Europe. Due to the impending drop in the energy price cap, it is feasible that the UK will have the lowest inflation of the major Western economies in April. Is it possible that the UK will be the first to cut rates?

Performance

The JIC Portfolio was down 2.2 per cent compared with a gain of 0.2 per cent for the FTSE All-Share (TR) Index. Since its inception in January 2012, the JIC Portfolio has gained 282.6 per cent, equivalent to an annualised return of 11.7 per cent. By contrast, the FTSE All-Share (Total Return) Index is up 125.5 per cent, with an annualised gain of 6.9 per cent. Over five years to 29 February 2024, the JIC Portfolio was up 42.2 per cent versus 27.7 per cent for the All-Share (TR) Index.

Although much reduced, my commodity exposure continued to hurt my performance. Serica Energy (SQZ) was down 18 per cent, Sylvania Platinum (SLP) down 12.3 per cent, Glencore (GLEN) down 10.8 per cent, Harbour Energy (HBR) down 9.5 per cent and BlackRock World Mining (BRWM) down 9.3 per cent. Further falls in commodity prices were unhelpful. I have found myself in a hole with my commodity exposure, from which I have slowly extricated myself. Possibly, given some straws in the wind, I have done enough. Copper stocks continue to fall, and, as mentioned above, there are signs that supply is being reduced in many commodities. The Global X Copper Miners ETF (COPX) that I hold in the Funds Portfolio is up 4.4 per cent over three months, which suggests that, for copper, at least, investors are feeling more optimistic about the outlook.

At the other end of the table, there were good performances following updates from two positions I added to the portfolio a year ago. Bloomsbury Publishing (BMY) gained 16 per cent after a year-end update (February year-end) and saw forecasts rise by 30 per cent. Sarah J Mass’s “romantasy” novels are proving very popular. Me Group (MEGP) gained 26.6 per cent following results for the year ended 31 October 2023. Revenue was in line with expectations, and profits were a little ahead. Little was added to the year-end trading update issued on 30 November, but the market suddenly appreciated the value on offer for some reason. Even after the move up in the share price, it is still only valued at 11.6 times the October 2024 forecast, with a forecast dividend yield of 4.6 per cent.

Bioventix (BVXP) gained 12 per cent, I think because of excitement over the potential for a simple blood test for early-onset Alzheimer’s.

The Funds Portfolio was up 1.5 per cent compared with a rise of 4.9 per cent for the US-dominated FTSE All-World (GBP, TR) Index. Since its inception in June 2020, this portfolio is up 29 per cent versus 52.6 per cent for the All-World.

The Funds Portfolio benefited from the addition in January of Polar Capital Technology Trust (PCT), up 7.6 per cent, JPMorgan Global Growth & Income Investment Trust (JGGI), up 5.8 per cent, and JPMorgan American Investment Trust (JAM), up 5.5 per cent. Polar Capital Global Healthcare Trust (PCGH) was up 6.9 per cent, and Fundsmith was up 4.4 per cent. The main drag on performance was BlackRock World Mining, down 9.3 per cent, the UK-focused Schroder UK Mid-Cap (SCP), down 3.5 per cent, and Strategic Equity Capital (SEC), down 3.5 per cent.

Portfolio activity

It was another busy month for both portfolios as I continued to redistribute some of my exposure to commodities to other areas. In the JIC Portfolio, I reduced Harbour Energy to 4 per cent on 2 February at 271p and Glencore to 2.5 per cent (5 February at 408p and 9 February at 393p). I sold Ecora Resources (ECOR) completely on 14 February at 80.3p. I raised extra cash by reducing Shoe Zone (SHOE) and Bloomsbury to 5 per cent (at 250p and 475p, respectively) and Polar Capital Holdings (POLR) and Next Energy Solar Fund (NESF) to 4 per cent (at 454p and 80.8p respectively).

In February, I added four new positions to the JIC Portfolio. Luceco (LUCE) was added on 2 February at 140p. The UK-based manufacturer and distributor of wiring accessories, light emitting diode (LED) lighting and portable power products looked attractive on a 2024 price/earnings (PE) ratio of 11.9 times and a prospective yield of 3.4 per cent. Its latest update was positive, leading to upgrades to the earnings forecast. In the past, it traded on a much higher PE ratio and price to free cash flow. Results will be published later this month.

Also on 2 February, I added Hvivo (HVO) at 29.25p. Hvivo provides the facilities for testing infectious and respiratory disease vaccines and therapeutics using human-challenge clinical trials. It provides end-to-end early clinical development services to its client base, which includes global biopharma companies. It moved into profit in the 12 months to June 2023. The 2023 calendar year will be its first profitable financial year. An update in January was positive and, like Luceco, earnings forecasts were upgraded for both 2023 and 2024. With relatively fixed overheads, new business is highly profitable, and new business guidance for 2024 and 2025 was positive. 90 per cent of 2024 revenue guidance was already contracted and had good visibility into 2025. The next news report should be the results in mid-April.

The third stock to be added on 2 February was Wilmington (WIL), at 332p. UK-based Wilmington provides data, information, education and training services in global governance, risk, compliance (GRC), health, safety and environmental markets. Like the other two positions bought that day, upgrades to earnings forecasts have been seen following positive updates. On consensus forecasts, it is valued at 14.7 times June 2024 earnings per share, a prospective yield of 3.3 per cent and 10.2 times free cash flow. Interim results published on 19 February were solid, with sound cash flow generation and an 11 per cent increase in the dividend. The next news should be a trading update in early July.

The fourth new position, added on 15 February at 1,234p, was Gamma Communications (GAMA). It appeared on my quality/growth/value screen. With operating margins in the mid-teens and a return on equity of 16.8 per cent, it generates plenty of free cash flow. It has successfully used its cash to reward shareholders and invest in bolt-on acquisitions. With the share price having gone sideways for a couple of years, it is valued at 16.9 times December 2023 earnings, forecast to fall to 15.1 times December 2024. In the past, it has traded well above 20 times its earnings. Why buy now? Newsflow has been good, the valuation is attractive, and the share price has broken out of a two-year sideways channel. The next update from Gamma is results on 25 March.

Other trades

Having reduced Sylvania Platinum in January at 63p, I added back to the position on 6 February at 52p. I think buying Sylvania at the current valuation will prove rewarding. It is a low-cost producer, still generating cash at prevailing low platinum group metal (PGM) prices and is on a ridiculously cheap valuation given the strength of the balance sheet. With net cash representing over half the market capitalisation, it continues to pay a generous dividend and has started to buy back another 2 per cent of its shares. Once PGM prices begin to recover, the shares should fly. I also bought some Serica Energy on 5 February at 179p.

In the Funds Portfolio, I also reduced my exposure to commodities by selling BlackRock Energy & Resources Income (BERI) at 106p on 26 February. I used the cash raised from the sale to increase my Japanese exposure. On 26 February, Nippon Active Value Fund (NAVF) went up to 10 per cent of the portfolio at 168p. Japanese valuations continue to look attractive, and there is momentum in corporate Japan towards a new-found focus on improving shareholder value.

Other news

Jet2 (JET2)’s trading update pointed to a positive start to the year, with a robust winter holiday season and forward booking for the summer ahead of last year. It raised and narrowed its guidance for the current year ending March 2024. Glencore results disappointed the market. Not so much the results but the lower dividend forecast for 2024, as it focuses on reducing debt following its purchase of Elk Valley Resources. It looks good value, but, as with the other mining companies, it will need commodity prices to improve to generate some enthusiasm for the stock.

Hargreaves Lansdown’s (HL.) interim results were OK, but the market is concerned that returns will fall as it makes less money on its customers’ cash holdings. That, at least, is the concern of the eight funds that are shorting 7 per cent of the outstanding shares. Going against these clever ‘shorters’ of companies is always risky, but I can’t help feeling that its valuation reflects the bad news. The share price has fallen nearly 70 per cent from a lofty £24 in 2019. It is now valued at 11.7 times June 2024 forecast earnings and at a yield of 6.1 per cent. In the past, it was valued at 30 times earnings. The new chief executive looks to have the requisite experience to address Hargreaves’ ‘problems’, and it was good to see chunky director buying at these low levels.

Dividend update

So far this year, dividend income of £8,785 has been declared and should be received mainly by mid-May.

Outlook

The US economy continues to grow at an enviable pace. The Federal Reserve continues to dampen talks of interest rate cuts. On 20 March, it held interest rates but indicated that there would be three cuts before the year-end. I am increasingly of the opinion that the US Treasury Secretary, Janet Yellen, and the chairman of the Federal Reserve, Jerome Powell, are doing everything in their power to keep the plates spinning until the November presidential election. We know Yellen doesn’t want Trump and I suspect neither does Powell.

In the meantime, investors continue to add to stocks involved in the rollout of artificial intelligence (AI). Nvidia (US:NVDA) is up over 82 per cent this year, and smaller company Super Micro Computer (US:SMCI) is up 300 per cent.

Listening to the excellent ‘The All-In’ podcast with four giants of the tech world, I was interested in their recent discussion about the emergence of real-time benefits of AI. This year, we are starting to see companies reap the rewards. Klarna, the ‘buy now, pay later’ company, was the example used. AI assistants are now doing the work of 700 full-time agents with better results. It is more accurate at resolving issues, leading to a 25 per cent drop in repeat inquiries, and customers resolve their errands in less than two minutes compared with 11 minutes previously. It is available in 23 markets in 35 different languages. Most important, it is expected to add $40m to Klarna’s profits in 2024. The improvement in productivity in the coming decade from AI may only just be starting to be appreciated. The message to me is: don’t be short of technology. I am glad I bought Polar Capital Technology.