December Week 1: I shot the allocation, but I did not kill the 60:40

60:40 is dead, long live the new 60:40;
Risers (or reversals): #SDI #FNX #DUKE #UPGS #SPSY #TPFG #CLX
Fallers: #ARC

Transactions: #IHC #G4M #GAW #BOTB #BMY; 
Updates from: #DUKE #SUPR #GSK #ARC

Public Service:

House Money

This week a relatively short twitter thread discussing House Money - looking specifically at crypto markets but I understand good poker players price risk (pots odds vs equity) so might be useful to pay attention to lessons from poker re risk management.

I understand a lot of people have made a lot of money applying the never sell / time in the market mantra - I do wonder if there is an element of House Money in that mantra, the effect of which I expect is stronger the further along you are in a bull market. Looks like we are about 30 years into a bull market.

I am reading John Neff on Investing - his career also spanned the first couple of decades of that chart. He was a contrarian, value focused low PE investor but if I was to model on someone who has benefitted from better marketing (at least for me), I think the style is more akin to a value focused Peter Lynch approach.

The other thing that is very apparent - the expected returns available to Windsor were substantially higher than today.

Cursory Macro/Market Observations

So it was a very jittery market with a Risk Off, Growth Off, Cyclical Off, Crypto Off, DocuSignOff.

The long dead 60:40 portfolio came roaring back to life - TLT is up 3% on the week & the month, matching the S&P500 monthly & slightly ahead on the week. I am not a financial advisor so I am not sure whether the 40 is suppose to offer downside protection or income. If it is the latter, 60:40 is dead, if it is the former, long live the new 60:40. 

Not that I want to start a fight between Traders & Investors.

In terms of sectors, looks like the defensive sectors are in vogue - staples/utilities/real estate, while the cyclicals, sensitives (some may say value) & growth getting hit. Speculative growth has been getting crushed a while without getting much media attention & then DocuSign went 40% POOF (and still on a double digit multiple of sales).

I think Docusign was (is) a marker of the "Everything Bubble" & I understand there were similar markers during .com. I wonder if an event such as waking up to the risk of a DocuSign ilk security was a catalyst to general risk off & trigger for a failure of the buy the dip strategy. When did Y2K Monster Tech break and how long after Amazon or Yahoo broke?

Bitcoin may well be a test case for the buy the dip failure - my buddy did send me a text asking me whether I trade cryptos (I did make $32 on my Coinbase) - read into that what you will.

Portfolio Review

From what I see a lot of twitter seemed to have decent weeks reversing some of the previous weeks gyrations & I am glad to be able to share in your success. This week was mainly noise with little news - next week will be more interesting on that front.

As I mentioned last week, I wanted to complete an exercise on the portfolio in terms of risk/reward/sensitivity so there were some actions as a result of that.

Excluding the no action sales (1.3% of portfolio value give or take), I am down to 28 holdings & cash a little above 20%.

To that end, I am able to initiate new positions without needing to sell. Further, given recent activity I now have 6 companies in the consumer defensives space & probably need to do something about that & given my zero weight to materials/energy, either an index or sector fund might help better balance the portfolio & add some macro sensitivity.

 

As far as the portfolio itself, it was pretty quiet week for news but my portfolio still managed to deliver a profit warning courtesy of Arcontech. Being a sub 0.1% position, it had little impact on the portfolio. A lucky escape as it turns out - as per my earlier notes, I retained the rump because I was planning to add and have been close to pulling the trigger on numerous occasions.

Duke released interim results & they were pretty decent in my view. I have reservations about this company for various reasons but at the same time, do like what it offers the portfolio.

Lessons:

I did the portfolio review exercise, effectively ranking my portfolio in terms of various types of risk & the insights were interesting - a poor man's Richard Beddard Decision Engine.

What was particularly interesting is how useful such an exercise is - I am working on portfolio construction/management but I think maybe applying buckets of 1.5% / 2.5% / 3.5%+ could be an approach to adopt around sizing/rebalancing (while also letting the market & the market's efficiency do it's thing). Also, it tells me where I should choose to allocate any excess cash.

The criteria themselves are not perfect & I would need to add components to the criteria score.

Also, the extent of manual override (GSK scores very highly, Tate less so) but this is thinking more on a 6-12 month basis, whereas if I extend the horizon, applied weights to the risk (my own competence or comfort) and personal outlook on how those ratings will evolve (effectively some context to the quantitative), the results I expect would be quite different.

Would welcome any thoughts/ideas/feedback - I am loathe to make it more complex & sincerely hope that CoVid sensitivity is not a permanent factor (but Omicron narrative was the prompt).

I will incorporate this assessment as part of my activities (frequency to be determined).

These are the criteria & each is given a score of 1, 2 or 3 - 3 being good. 

Less sensitivity results in a higher score.

This might result in a more concentrated portfolio and an element of backing my selections as opposed to letting things happen, which is risky but if I am doing this, I am backing myself. There must be an optimal amount of backing yourself but half in half out isn't it.

Transactions

Sell Gear4Music

• Risk/Reward as a result of the exercise & lack of faith in the replacement cycle for the instruments (and the same maybe the case for the AV.com acquisition.
• The valuation was not compensating for the risk & the quality metrics are overstated due to the exceptional year.
• Looking back at the history & the events of 2019 (before I held) scared the bejesus out of me.
• Subsequent to my sale they reiterated their guidance - I will continue to monitor - no reason a coffee can needs to be a locked jar!

Sell Inspiration Healthcare

• No specific reason but I had a rump left & decided to get rid of it as opposed to retain it.
• It didn't rank very highly in the portfolio assessment exercise I did in the context of the sector or the portfolio.

Reduce Games Workshop

• A very reluctant sale but I have to pay attention to the results of my portfolio assessment exercise and based on that, a few holdings needed to move above this on allocation. 
• The quickest way to achieve this was to reduce this. I probably need to add to some, but can do that with available cash.
• Further, at the time of purchase was a poor period for the portfolio & I referenced my YTD being driven by Games Workshop. That was silly so I am reversing it.
• Technically, it is looking horrible & my understanding is gaps tend to be in the same direction as the trend. 
• If the business is continuing as I expect/understand (which I will find out about in the interim results, not the imminent trading update) and their is further share price weakness, I would like to be able to add & the previous position size would have prevented me from doing so.

Add BOTB

• A case of either hold it or not as opposed to being half in half out & investing cash freed up from Gear4Music (same sector/pandemic beneficiary) but I am still a bit iffy with this one.
• Sometimes I feel holding this is actually asking for difficulty re investor psychology & I am not sure that is something that needs to be made any more difficult.

Add Bloomsbury Publishing

• Re-investing Gear4Music proceeds - personally I think this company is going to do very well short term & represents quality at a reasonable price long term and hope it does not get taken out.
• As much as I like the company, it is now teetering around 5% which means there is little room for more, including more as a result of (hopefully) capital appreciation.

Add Urban Logistics

• Took a few shares in the placing & didn't get the full allocation but whatever.
• The add is from a planned sale of Primary Health Properties yet (scores very well, Microsoft is ridiculous if I exclude valuation give it same weight as everything else) but PHP will be sold soon enough I expect.

Portfolio Risers > 5%

SDI up 12%, FNX up 11.5%, UPGS up 9.48%, SPSY 6.9% & TPFG up 5.26%

• SDI - I expect this was some excitement in the run up to the results. I too think they will be received well but not sure after this run up what happens to price, although the excitement seems to have dwindled somewhat on Monday - bring on Tuesday.
• FNX - Based on the pricing I got the feeling that someone was trying to buy and holding down the price a little - probably making it up - maybe it was a Simon Thompson tip - heyho
• UPGS - Reversing the downside volatility from previous week - I am glad I reduced on volatility grounds - does reinforce my admiration for management teams with large holdings in listed companies.
• SPSY & CLX (and I am sure many others) - benefitting from their falls in the previous week.
• TPFG - Expect there was some positive read across from the Belvoir update which were very good. I think throughout I have been indifferent between the two (probably should have held both). Endowment effects & my belief that TPFG is less talked about keep me preferring TPFG.

Duke Royalty up 9.82%

• There was a short announcement about a follow on investment in their Irish recruitment business executing a buy & build strategy but more interesting were the interim results which were positive on the whole in my view & well received.
• Cash revenues up 78% to £7.8m, cash from Ops 5.2m & free cash flow 4.6m (Top line was the biggest but fair enough given fixed costs)
• Realised two exits & raised 35m (treat retail equally they say & they do) - 23m invested in new deals & 55m available to invest - approx 4m in cash flow from available liquidity
• Been through the pandemic, come out other side & people like the type of capital offering (if I was successful/ambitious and crucially cash generative, I think this is indeed attractive)
• Hopefully some upside from participation element / sales growth at investee companies - expect year to March 2022 ahead of expectations
• New Investments: 10m Euro invested in Fairmed - prescription/OTC/supplements medication in EU (fairly stable business I expect); 7.7m (plus 2.2m follow on) in InTec - IT managed services buy & build strategy (again not a bad place to be - I hold CCC after all) and CreoTech - CAD20m commitment, 8m CAD deployed - Holding company - acquire engineering/procurement/construction businesses.
• Two exits - 16% & 29% IRR - Irish recruitment (sub-scale & alternative in same space) & brokerage business - 5 exits in total - Good that they have made it through cycle, but as cycles go this was pretty benign for lenders.
• Increase in assets broadly in line with cash raised/capital deployed so nothing too funny in the Mark to Market accounting - and to be fair they are very clear about focusing on the cash flow as opposed to FV movements.
• I do question the logic of paying dividends while issuing new shares - certainly keeps the brokers happy & wonder if there is something in the compensation to encourage such an expensive capital management program.
• The director remuneration does jump out - taking over 10% of revenues - but they have done a decent job. Balance sheet seems reasonably safe, although would prefer if they were equity financed.
• Like what it does for portfolio in terms of the exposure it provides & a very decent yield but this is a risky business & should be (and is sized accordingly).
• In particular, when lending businesses try and grow quickly, bad things happen to the borrowers & lenders. 
• Looking at 5.2m Cash from Ops, will be slightly higher in H2 given deployments & available capacity - should be able to give 12-16m for year to 2023, most of which paid out in dividends vs 162m M/Cap.
• HOLD - Value based on cash flow from Ops vs M/Cap - balance sheet is largely meaningless & I expect value will not hold if sh1t hits the fan & won't matter if it doesn't!

Portfolio Fallers > 5%

What a change a week makes - only the one - Arcontech. Fortunately, very little impact on the portfolio & commiserations to my fellow holders.

Arcontech down 25.30%

• A profit warning with one customer reducing their spend & another not renewing their contract from H2 - with a 300k impact on revenue (30% of revenues) with 850k in profit current year & 900k next year - not inexpensive given cash levels.
• One customer has reduced their spend & team size, the other more interestingly (and perhaps importantly) have decided to use a legacy bundled product. 
• They talk a good game about the pipeline & product initiatives but the numbers/client actions don't support that. This company has always talked about a good pipeline but growth is limited with a very concentrated customer base (that and market cap prevented it ever being a meaningful position).
• Given profitability & cash I will retain the rump, meaningless as it is but I am coming of the view that metaphorical pipelines are cheap & more often than not, Goliath kicks David's arse!
• No Action Sale 

Additional Updates & Results

As I say, it was a quiet week for results other than Duke & Arcontech above.

Supermarket Income REIT 

• Purchased a Sainsburys for £76m on a 4% Net Initial Yield - all fairly standard stuff - RPI linked blah. 
• I am not sure how they sustain a 5%+ yield (on book value) if they buy at 4% unless inflation is a real problem (in which case there is a collar) & I think Tesco would be a beneficiary (uncapped) as much as Supermarket Income REIT 
• Hold/Reduce

GlaxoSmithKline

• An antibody drug which is apparently effective against Micron
• Don't know much about pharmacology but I do know about financial reporting classes I took & there weren't any in this announcement.
• Probably can't be a bad thing but how many drugs have been developed that are effective against stuff, at what cost & what returns are they anticipated to generate?
• I was surprised by how this scored in my portfolio assessment - one of the reasons maybe because I don't know much about pharmacology.
• HOLD

And Finally

What a Wonderful World

Continuing the musical theme from last week & some positivity for the upcoming season, especially since Santa might be stuck in quarantine.

Please congratulate yourself if you guess correctly between Louis Armstrong & Sam Cooke.

Adieu