2021 Review: Infection, Insurrection, Inflation & Incompetence

Headline Returns: Was Good  ~15%, Got Ugly ~1%, finished at 6.5% - will settle for that

2021 Review: What the **** was that?

Dogma, Diversification & Opportunism

Portfolio construction/Management

Hard Work

Headline Returns

Across all accounts, the modified Dietz return (fancy talk for time weighted) was 6.5% (2020: 14.8%) and roughly 10% behind the FTSE All Share. 

This return was damaged by BOTB (up roughly 15% to end May) and rescued by the end of year rally (was touch and go as to whether I would be positive or negative for the year).

There might be another 25-50bps from stocks that went ex-dividend - you can tell it is a poor year when you need to include a statement about holdings going ex-dividend.

In 2020, LoopUp cost about 1.5-2% of the portfolio and this year BOTB and AVON have cost 4-8% (depending on how you measure it) and slightly above 1% respectively.

Two year total return 18.2% (2 years to 2020: 9.9%).

The defensive Income account (Objective: Generate a growing income stream ~4%), representing 12% of total portfolio value had a total return of 10.7% (2020: -8.7% - Carnival!!) & is well on track to meet the income target (measured by tax year).

The ISA account (Objective: Long term total return), representing 31% of total portfolio value had a total return of 15.6% (2020: 6.4%). This account held BOTB from the early days, all the 2021 additions bar one small & STUPID speculative add took place in the SIPP.

The Lifetime ISA (Objective: Defensive Long term total return), representing 4% of total portfolio value had a total return of 27.1% (2020: 2.2% - I sold Games Workshop at £60 & Rightmove at £5, thinking valuation would be relevant in 2020!)

The SIPP account (Objective: Long term total return), representing 39% of total portfolio value had a total return of -1.1% (Best of the Best & Avon) (2020: 14.9%)

The aggressive account (Objective: Capital Gains), representing 13% of total portfolio value had a total return of -0.5% (2020: 43.1%). This account is down 15.5% since September and I would love to put it down to the market but it had profit warnings from BooHoo & Ixico as well.

To provide some context, I am very very happy if I generate a double digit return in a calendar year - I am a pretty cautious investor - my drawdown in Q1 2020 was half that of the FTSE All share. 

While I hope to increase my ambition going forwards, I use 7.2% as the target return (because I am a big fan of keeping Maths simple & 7.2% makes it easy to apply the rule of 72).

As an aside, April 2022 would be D-Day to see if I have delivered 100% over 10 years, but since January 2020, the portfolio is 167% bigger, of which 100% is cash contributed, impacting the time weighted return. In April/May 2021, I was above 110% maybe even 120%, whereas now I need roughly 7% in Q1.

So 2021: What the **** was that?

I imagine it was a lot of things to a lot of people but for me it was a very challenging year. In fact, I started writing this blog because I found this year much tougher than 2020 (and my wife made me!).

In 2020 the world was going to hell in a handbasket (market fell), it turns out that actually it would not be so bad apart from certain sectors that were decimated (market rallied), CBs & governments had our back and we can blindly buy every dip that ever comes.

I personally came to terms with the fact that I would underperform in 2021 because I did not have exposure to the sectors I thought would outperform (Oil & Gas specifically but also Banks & Miners). 

I appreciate this sounds like hindsight but when GMO were warning us about a bubble & referencing that energy & banks were cheap, I did mention on twitter that given the composition of world indices, it made sense to get exposure via XLE or XLF - Franky Foresight

Similarly, I thought the UK was a healthy index for 2021 - diversified into the old economy cyclical & sensitives and a healthy allocation to high quality defensive companies - in fact ex tech, it provided the barbell exposure that was all the rage in 2020!

That said, I did not want to own the sectors & also I thought it is not appropriate for me to try & beat the market by owning the market.

Similarly, I materially reduced my ETF holdings within the SIPP and the big driver was that Tesla was included in the index funds. 

I think some 50% of the S&P 500 return since April 2021 has been driven by 5 stocks - Tesla, Microsoft, Google, Apple & Nvidia - so actually in the US context I had reasonable representation, especially given how prevalent Nvidia is in some of the thematic ETFs held by my wife (selected by yours truly).

To make such a drastic decision which impacted my portfolio management (more below) because Tesla was 1% of the fund was beyond stupid.

As an aside, for all my criticism of index funds, if you owned the index you would have been in all five of those stocks.

The lessons I take: 

Drop the dogma & being diversified means you have to hold things you don't like.

Errors of Omission, failing to respond to the market

In a similar vein, I have moved away from deep value / contrarian to more of a quality focus. 

I think it is a journey a lot of value investors (far better than I) go through. 

I was often buying companies because they were cheap and being contrarian for the sake of being contrarian.

For me an issue with value investing is the need for a catalyst & vaccine Monday was a catalyst. I personally being all perma-bear in my outlook did not really buy into the fact that vaccine Monday would be the full return to normal that we were promised 12 weeks after March 2020 (and I am not sure I am that wrong on that) and so did not buy into it.

I do remember an exchange on twitter where I said that if cyclical cr4p was cheap, then Monster Tech was trading like a steel mill going out of business - I think the relative performance of IAG vs Microsoft supports my argument.

However, the two that really stand out are Vertu Motors and Greggs - both of which are ex-holdings so I knew them well and were hideously cheap in the context of the asset backing and how much I like the food! 

They were both on the watchlist and for Vertu, I did suggest to a PE buddy if they would be interested in a deal for the entire business - trying to be the catalyst - just so we are clear I had no position in the stock at the time I was having the discussion - I just said the entire sector was oversold and Vertu had a lot of asset backing.

Lloyds & LGEN would be others I can include but I am less annoyed by these because I don't buy banks and I still struggle to be enamored with companies that have taken on inflation linked liabilities during a phase of financial repression.

I could list a number of stocks that were much bigger beneficiaries, but these two come to mind. The strength of the rally on the back of mainly hope left me a little deer in headlights and underexposed to sectors that benefitted.

At the same time, LoopUp did their annual kick in the nuts to shareholders and I added thinking OH it is just a vaccine Monday reversal (directors were selling though!).

Vertu would have only been a rental and I am virtually certain, I would have sold it around the 45-50p mark but Greggs - still hurts - I actually ended up buying Starbucks because of the Greggs hurt (and then sold it because if I want to buy Greggs, I should just buy Greggs - still waiting)

Lessons to take:

Respect the sentiment of the market even if you do not agree with it - it is one of the reasons I am trying to improve my technical analysis skills.

There is absolutely nothing wrong with being opportunistic (or nimble).

When the facts change, change your mind - big moves in shares are often a sign that the facts changed!

Risk on vs Risk Off, Portfolio construction

I appreciate trying to time the market is a big NoNo and rightly so for the majority of people & a great deal of investing activity.

That said, and this is borrowing from Howard Marks - you cannot predict the market but you can assess whether it is time to be aggressive or cautious.

It was my belief that 2020 was a time to be aggressive (thanks to a HM memo - I didn't bottom tick but certainly dialed up the risk from June 2020 onwards) and in 2021, it was time to dial down the risk. 

Hindsight would suggest that 2021 was the year to buy the dips (but only the index dips!)

In my wife's accounts, which are mostly £ cost averaged on a monthly basis, the monthly purchases were turned off & her accounts have been around 30% cash (from 9% at the start of the year) because cash added in 2021 has not been placed - SO VERY WRONG - What was more wrong was not using the cash to add some XLE/XLF in accordance with my tweet! 

In case you are interested her portfolio ended the year up 10.1% (2020: 13.5%).

She isn't interested and suggested I start blogging because she does not want to hear from me - you have her to thank or blame! 

I on the other hand am a superstar stock picker, so I can just go crazy and unfortunately I did. 

A challenge I had (because the portfolio got bigger) was that a lot of very successful holdings were undersized, even though at the time of purchase they were right sized (BOTB started life as a 2% portfolio position) but even after a 3x return, was only 3.3% of the total at the start of 2021.

I felt that 2021 was a time to dial down risk and I wanted to reduce the number of holdings and so I was a net seller in the early part of 2021 (AGFX, MONY, WEY, STRIX, LOOPUP, MAB1, WINE, SMS, CNKS, BOO).

You will need to take my word for it but MAB1, WEY (sold following director sales) & KETL (to a far lesser extent) were very reluctant sales and I did not need to sell them. But they had re-rated substantially and were becoming "popular". Cenkos I thought I would sell at 60p tops vs 52p so just did it.

I did not need to sell these and ended up building up a fair amount of cash.

Having sold the ETFs in late March (all in the SIPP) and then fresh contributions mainly into the SIPP meant there was a lot of cash spare in that account - 40% as at 17th April 2021.

As it turns out, I should have just piled all that cash into Microsoft (already held), Pepsi (again big fan of the food & drinks - Terry Smith bought it in the March dip) or Greggs. Could have just bought a fund. 

In stead the majority went into BVXP, BOTB (both reduced), LSEG (traded successfully), Elco (tiny profit), React and Ixico (both sold for a loss).

React & Ixico were outside of my investment criteria and if they were in it, they would have been in the aggressive capital gains account, but the cash was in the SIPP.

Hubris & the 20 bagger won't do enough for the portfolio and a view that valuation doesn't matter in the highest quality companies led to BOTB & BVXP additions (but not Microsoft!! and it is not like I have any great expertise in sheep monoclonal antibodies).

The other big mistake, which is far less forgivable is the LISA holdings - pretty much all year I had been wanting to add to Bunzl & Relx which were the two stocks held in the LISA, but that account is/was cash constrained. 

There was absolutely no reason these could not have been purchased in the SIPP as well if that is where the cash was available.

Effectively, I compartmentalised each portfolio and only got over this later in the year, which further impacted the "right sizing" of the holdings.

BOTB, BVXP and other holdings were well represented in individual portfolios and I don't think any sub portfolio was over-diversified, but in aggregate there were issues and these issues were not well managed.

In a similar vein, I let the tax tail wag the dog - I try and keep the dividend payers separate to the capital gains - if dividend payers were going to deliver the gains, they should have been held in the capital gains account.

Indeed it was (with hindsight) the very easy environment in 2020 that led me to believe that if I want outsized gains, I need to hold companies like Ixico, React, GetBusy, BooHoo, whereas holding RELX, Bunzl or any of the very defensive REITs in stead would have provided far more handsome returns.

Or US examples I can offer (no withholding tax on dividends received in SIPP) - Target & Blackrock (sold at ~ $160 and $600 in October 2020, now at $230+ and $900+) - if only they had dropped $5-10 below the price I sold at / not gone ex-dividend the same week and things could have been different (including the discomfort with the cash balance). 

Treating the speculative positions as a single holding/aggregate weight was sensible (with hindsight), but it did increase the number of holdings which added to the difficulties.

I understand why people feel never sell is an appropriate strategy especially if you are going to buy the highest quality companies in the market, but when companies are coming up against headwinds, then this should be managed with position size & this is where I think I made a mistake with BVXP (less expensive than BOTB).

I have covered the issues with BOTB separately and certainly hubris played a part but I think this applied here as well. After the failure to upgrade & "somewhat lower engagement", there was no reason for it to be a top holding - I should have been reducing.

Lessons to take:

When there are changes to the portfolio make up / approach, you have to accept the legacy challenges - think of it as a company turnaround - it takes longer than you think and costs more money than you think - big bang approach is very rarely the right course of action at any time.

When embarking on a restructuring program, a failure to plan is as bad as a failure to execute.

I think the after tax return is the only return that matters and therefore should be optimised but tax optimisation should not come at the expense of return optimisation (especially since the tax impact is minimal for me). 

Believing that a 2% tax saving is better than a 2.5% gain is socially irresponsible!

For the love of all that is profitable and sound risk management, be conscious of the never sell mantra (especially with respect to position sizes & illiquid stocks) and get over the price anchoring!!!

In general, there was a lot of tinkering in the year to deal with these challenges (plus the hurt from the BOTB loss) - think the primary beneficiary of the tinkering were my brokers - I must tinker less.

Hard Work or lack thereof, being influenced

Even more unforgivable than the LISA holdings / tax tail wagging the dog was the lack of effort in the early part of the year.

As I explained above, I had too many holdings and was broadly happy with the portfolio and with the performance of Best of the Best in the early part of the year, I was doing well even when I expected to underperform (I was up around 14% at the end of May - ahead of the All Share - should have sold and gone away) - superstar stock picker!

This superstardom led me to not read enough announcements (no room to add), when I saw things that I felt were interesting, I would not add (Greggs, Vertu, Oxford Instruments & Pepsi spring to mind). I have some empathy for this action, but not the failure to do the research properly.

Some of my best investments in 2020 were Bloomsbury, TPFG, Volex - companies I had followed / researched without holding and was able to take advantage of the fat pitch as it were. I should have done the research and reached the conclusions, even if I had no intention to buy. 

In the meantime, there were others who were having even more remarkable years than I was and the impression I get is that they have higher risk (more concentrated / more speculative) portfolios (or they are just far better investors/traders than I am), which led me to make additions in more speculative holdings which ordinarily I would not consider.

 

React, Ixico, GetBusy - less so Arcontech actually one of my fat pitches for 2020 and I managed to sell it for an OK gain well before the market made me - so not so fat as it turns out!

As above, because I treated these as a group, it created problems with number of holdings and time requirements.

I actually snapped out of this complacency, but unfortunately the market brought me back down to earth before I snapped out of it! Avon aside, the picks since August have on the whole done OK.

Lessons to take:

Acquire the knowledge because that knowledge compounds even if that knowledge does not lead to a profitable investment.

Nobody let you become a fund manager so you decided to do it for yourself and part of the investment approach is to demonstrate you could have been a fund manager - there is a very good reason they don't build portfolios with only 10 highly speculative stocks and that is not purely a function of AUM.

As far as the approach, maybe it can be adapted if there is greater risk tolerance or I start to believe I am better than I actually am, but in the meantime You be You & You do You (not something I typically have a problem with).

There is no excuse for a lack of hard work - the integral of luck over a lifetime is zero and I was born pretty lucky - in theory my luck should be a net negative and therefore hard work is the antidote.

Hard work manifests itself in many ways which does not necessarily involve transactions or returns (may even result in losses) but the work still needs to be done.

And Finally

Another word on BOTB and illiquid stocks

One of my biggest failures and most important learnings from 2021 was to appreciate illiquidity.

Works great when it is in your favour but a big reason BOTB was 6x was it was getting high on no supply - shares skyrocketing - maybe business performance or the market missing something - or just that buyers are clamouring for a stock they can't get hold off.

The year was going very well and I let it get to my head and became dogmatic in my approach.

I had a number of challenges with portfolio construction/management and the dogma made it harder to manage those challenges.

I started believing my own hype and started to chase and be more aggressive than is in my nature / investment style.

BOTB obviously hurt but that was a mistake and I am sure there will be several more (hopefully future mistakes will have a smaller impact) and I have some sympathy. 

Less so on the style drift & chasing because of cash balances, especially given the plan when 2021 started was to reduce risk (which in itself was likely a mistake!)

Notwithstanding all of the above:

I am sure many have had difficult years and others have had spectacular years but I think anyone who is fortunate enough to have a portfolio to manage must be grateful for what they have.

I enjoy what I do - the returns are almost secondary - a way of keeping score.

I had a fantastic time visiting family after a long time (jetlag hence pixel time) - there really is a lot more to life than a portfolio and I would do well to remember that.

To all of you who have read this blog, offered support when I whined, share your insights, analysis, efforts and wit every day - Thank You.

I'd rather not tempt fate by saying 2022 can't be as bad as 2021 but it would need to go some right?

I wish you all a very Happy New Year - here's to a prosperous and profitable 2022.

Adieu