Private Investor’s Diary: The UK market rally has much further to go

May turned out to be another strong month for financial assets. Equities led the way, with the Nasdaq Composite up 6.9 per cent, the S&P 500 up 5.0 per cent, the DAX up 3.2 per cent, the CAC up 1.6 per cent and the Tokyo Stock Exchange Index up 1.1 per cent. There was a welcome broadening of performance across the size of bands in the UK. The FTSE All-Share Total Return Index was up 2.4 per cent, but within that, the FTSE 100 returned 2.1 per cent, the FTSE 250 4.2 per cent, the FTSE Small Cap 6.2 per cent and the FTSE Aim 6.1 per cent. Further corporate activity helped small and mid-caps, with a notable bid for Keywords Studios (KWS) at a 70 per cent premium to the share price the day before the announcement of the bid. At last, one of my positions, Hargreaves Lansdown (HL.), was subject to an approach at 985p.

Commodities performed well, with other industrial metals playing catch-up with the robust performance of copper. Having peaked at a 12-year-high on 20 May, copper gave up some of its gains to end the month up 0.5 per cent. Platinum gained 9.6 per cent, aluminium 2.4 per cent, zinc 2.0 per cent and nickel 1.6 per cent. Copper is set to go higher before the end of the year as the supply struggles to keep up with demand caused by the electrification of energy use around the world. What I have been banging on about for nearly three years is coming to fruition, just as I partially lost my nerve earlier this year. Patience is a virtue when investing.

Bonds also performed well over the month, with the US Treasury 10-year and the UK Gilt 10-year yields dropping slightly. Nervousness remains over the path of interest rates, but confidence is increasing that moderating inflation will allow rate cuts in the second half of 2024. Germany was an exception, where the yield on the 10-year Bund rose to 2.7 per cent, its highest since last November.

Gold continued its bull run, rising 1.8 per cent over the month to $2,348 an oz. It peaked at an all-time high of $2,427 an oz earlier in the month. Bitcoin, meanwhile, ended the month up 11.3 per cent, and at 60 per cent remains the best-performing financial asset this year. Bitcoin ‘halved’ in April. Halving is a unique event in the bitcoin network that occurs approximately every four years. It reduces the rate at which new bitcoin is created and thus lowers the supply rate. Chamath Palihapitiya of the excellent All-In podcast points out that this has historically led to significant price increases over the following 18 months. After the first halving, bitcoin gained 45 times; after the second, 28 times; and after the third, eight times. Given that there have only been three previous halving events, it’s a small sample to predict the future. Nevertheless, bulls like Mr Palihapitiya point to substantial gains over the next year.

Performance

It was another excellent month for the JIC Portfolio. It gained 6.8 per cent, compared with 2.4 per cent for the FTSE All-Share (TR) Index. It is now ahead of the All-Share this year, having gained 9.6 per cent versus the index’s 8.7 per cent. Since its inception in January 2012, the JIC Portfolio has increased in value by 346.7 per cent, equivalent to an annualised return of 12.8 per cent. By contrast, the FTSE All-Share (Total Return) Index is up 147.9 per cent, with an annualised gain of 7.6 per cent. Over five years to 31 May 2024, the JIC Portfolio was up 55.9 per cent compared with 37.3 per cent for the All-Share (TR) Index.

As of April, seven of my positions were up more than 10 per cent. IG Design (IGR), having gained 34.6 per cent in April following a bullish year-end trading update, added a further 28 per cent in May. No additional news, but further appreciation by the market of the excellent job management is doing, returning margins to pre-Covid levels. Despite the rise, the share price still looks good value. At 217p, Canaccord Genuity reckons it is on a March 2025 price/earnings (PE) ratio of 12.0 and, with the resumption of dividends, a yield of 2.3 per cent. Cheap for 50 per cent earnings growth. For what it’s worth, Canaccord raised its target price to 325p. Results for the year ended March 2024 will be released on 25 June, when we will get an update on current trading and perhaps changes, hopefully positive, to current-year expectations.

IG Design was not, however, my best performer. Hargreaves Lansdown was up 29.7 per cent, helped by the revelation that a private equity consortium, backed by the Abu Dhabi Investment Authority, had approached the board with a 985p-per-share offer. The board rebuffed the offer, saying it materially undervalued the company. The market agrees with the current share price of 1,075p. We have yet to hear the end of this, with the Goldman Sachs-advised consortium likely to enhance its offer. I would be disappointed with anything less than £12 per share, but even then, I don’t think that would be overly generous. It will be interesting to see how the founders, Peter Hargreaves (20 per cent holder) and Stephen Lansdown (15 per cent holder), and major institutional investor Lindsell Train (12 per cent holder), react to a higher offer.

ME Group (MEGP) gained 14.4 per cent on no news but on hopes of a positive H1 trading update.

Bloomsbury Publishing (BMY) was up 14.2 per cent. Following the publication of stellar results for the year ended February 2024, the shares dropped 10 per cent due to disappointment that the current year is likely to see a drop in earnings. Sarah J Mass, the author described as a “publishing phenomenon”, is not releasing her next “romantasy” novel until next year. A few days later, Bloomsbury bounced back to end the month at an all-time high. It announced the acquisition of US academic publisher Rowman & Littlefield. This significantly increased its presence in academic publishing in North America and was welcomed by the market.

Harbour Energy (HBR) gained 14.2 per cent. The Q1 production update was okay, but the real reason for the share price gain was a growing appreciation of the benefits of its impending acquisition of Wintershall Dea’s oil & gas assets. Shareholder documents are close to finalisation, and completion is still expected in Q4. The acquisition will significantly reduce its exposure to the unfriendly tax policies aimed at UK North Sea producers. Renew Holdings (RNWH) was up 13.0 per cent to an all-time high, following half-year results, which showed revenue up 17 per cent and pre-tax profits up 15 per cent. It said momentum had continued into the second half, leading to minor upgrades. Last of the 10 per cent risers was Gamma Communications (GAMA), which gained 11 per cent.

The worst-performing stock was Jet2 (JET2) giving back 7.2 per cent. There was no news, and Deutsche Bank’s initiation of coverage with a 2,240p price target had little impact thus far. The share price is currently 1,340p. Serica Energy (SQZ), a thorn in my side over the past year, was down 5.8 per cent. The announcement of the general election would not have helped, shining the spotlight on Labour’s commitment to drive another nail into the prospects of North Sea oil producers. It has pledged to increase the energy profits levy and extend it for longer. There is a risk that I have my head deep in the sand, but I can’t help feeling that the bad news is more than discounted in the current valuation. Later this month it goes ex its final dividend of 14p, giving a yield on that dividend alone of 8.0 per cent.

The Funds’ Portfolio was up 1.8 per cent compared with 2.3 per cent for the FTSE All-World (GBP, TR) Index. Since its inception in June 2020, this portfolio is up 37.2 per cent versus 57.5 per cent for the All-World. Schroder UK Mid Cap (SCT) was the best-performing position, up 7.6 per cent to a two-year high. The European Smaller Companies Trust (ESCT) was also up 7.6 per cent and is just a few per cent off an all-time high. Strategic Equity Capital (SEC) continued its good run, up 7.1 per cent to an all-time high. Nippon Active Value (NAVF) was the worst performing position for the second month in succession, down 2.1 per cent.

Activity

It was a quiet month on the dealing front, with one new stock added to the JIC Portfolio. On 8 May, I added a 2.5 per cent position in Pollen Street Group (POLN) at 680p. Pollen Street is an alternative asset manager focusing on private equity and credit strategies. As an asset manager, it raises capital from third parties and manages the funds. It also co-invests in these funds. It was formerly an investment fund but has changed its corporate structure to a holding company. The holding company is cash-rich. Hence, it has co-invested in the various funds under its management. It is also committed to attractive shareholder returns through buybacks and dividends. It currently yields 7.5 per cent and is committed to growing the dividend progressively in future. It is also undertaking a share buyback of £30mn (equivalent to a further shareholder return of 6.9 per cent). It has committed to returning surplus capital to shareholders through buybacks of between 2 and 5 per cent of outstanding share capital per year.

Growth over the next few years could be substantial. On 31 March, the assets under management stood at £4.4bn. It is targeting £10bn over the next few years. If it achieves that, the fee income should grow faster than costs, contributing to significant profit growth. Through her 18.7 per cent shareholding, founder and chief executive Lindsey McMurray is highly incentivised to drive asset and profit growth – our interests are aligned. I don’t know whether this is the next Intermediate Capital (ICG). Still, 15 years ago, Intermediate Capital had a similar market capitalisation of £430m – now it’s a member of the FTSE 100, valued at £6.7bn. If Pollen Street gets halfway there, I’ll be happy. It’s an interesting one because due to its change in structure, it does not seem to be closely followed. I look forward to the next news from the company, which should be a Q2 update.

To fund the purchase of Pollen Street, I trimmed four positions back to my target weighting, realising a nice profit. I reduced Sylvania Platinum (SLP) to 2.5 per cent at 71.9p, Premier Foods (PFD) to 4 per cent at 167p, Niox (NIOX) to 4 per cent at 71.2p, and IG Group (IGG) to 5 per cent at 777p. On 15 May, I reduced Renew Holdings to 3 per cent at 1056p to raise money to increase L&G Gold Mining ETF (AUCP) to 2.5 per cent at 3062p.

Other news

Trading updates from 4imprint (FOUR), Niox and Gamma Communications were all encouraging, with trading at least up to expectations. Premier Foods’ results showcased the progress made under chairman Colin Day and chief executive Alex Whitehouse. Revenue was up 15.1 per cent, and trading profit up 14 per cent. Net debt was reduced by £38.7mn. With a £33mn annual boost to cash flow due to the cessation of pension deficit payments, starting this April, one can expect further value-enhancing acquisitions. Luceco (LUCE) posted a solid start to 2024 in its Q1 update, pushing the share price to two-year highs. Greggs’ (GRG) update showed 7.4 per cent like-for-like sales growth in the first 19 weeks of the current year.

Dividend update

So far this year, a dividend income of £17,137 has been declared, up from £15,170 a month ago. I have received £11,137, with the remainder due in the next few months.

Seasonal investing

Regular readers will know that I update my ‘seasonal’ investing table every six months. I record the performance of the JIC Portfolio during the winter months from 1 November through to 30 April and the summer months from 1 May to 31 October. Over many years, statistics show that most stock market returns come in winter. Some even advocate selling everything at the end of April and putting the proceeds on deposit before returning at the end of October. It’s tempting, but the hassle involved would be enormous, and although the returns could be better during the summer, they are still positive. Well, that has been my experience with the JIC Portfolio. You also know the time one decides to follow that strategy, it will be the year when the market has a stellar summer. It was good to see a return to a decent six-month performance after four consecutive seasons of negative returns. My average return over the winter months is 9.2 per cent. Here’s hoping the summer months average of 3.7 per cent receives a boost this year.