Boon's Fund Recap – June to August 2023 - just about hangin' in there!

2023 YTD Performance +0.5% vs -0.4% benchmark

2022 Performance +12.0% vs -3.4%

2021 Performance +21.6% vs +14.6%

See all the previous BBB Monthly Recaps here.

Preamble from a UK Staycation

I started out with the ambition to publish commentary on the Boon Fund monthly; however, given increased time commitments, this latest update is covering 3 months – June till Aug. That is likely going to be the frequency going forwards, every 2-3 months.

I found some time to write in the last few days on a staycation road-trip around the UK – Peak District, Snowdonia, and Pembrokeshire. It was encouraging to see tourism alive and well. Restaurants were packed, beer gardens were full, and tourist sites thronged with visitors. However, hotel room rates signalled that not everything was fully booked out, and indeed the properties we visited, they were not at full capacity every night during this peak period.

As I paid £40 for two courses at gastropubs next to fields of cows, I worry about inflation, whether my capital will be eroded, and if I’m able to generate inflation-plus returns. At +0.5% gain YTD, I am definitely not. I am lucky that I am still of working age, and thus my income (hopefully) at least keeps up with inflation, even if the Boon Fund does not. Equity is always seen as an inflation hedge; surely as prices go up, companies make more money, profits rise commensurately, and therefore share prices soon too? But so far over 2022 and 2023, this hasn’t been the case, at least for UK equities.

Performance YTD

After spending most of the first half slightly behind the benchmark (FTSE All-Share), the Boon Fund is now in positive territory (+0.5%) when compared to the benchmark (-0.4%). However, this is scant consolation, as it is behind compared to easy access savings (3-5% annualised so far in 2023). It has also failed to keep up with inflation.

I have made the decision to take out a good chunk of my Stocks & Shares ISA money, and stick it into a 1-year fixed rate ISA savings instead, generating 5% instead. I look at my watchlist, and the current opportunities, and I don’t think I’ll be able to go fully invested in the next few months. So better to earn something on the cash balance, than nothing (as is the case with IG ISA’s).

So far YTD, there has been a Jekyll & Hyde performance to my two portfolios. The ISA has done decently well, up 5.8% for the year. Well ahead of the FTSE All-Share (-0.4%), as well as the AIM 100 (-11%) which is a more accurate benchmark given my ISA’s small cap focus.

My SIPP (-2.4%) has underperformed the FTSE-100 (-0.2%), its chosen benchmark. My SIPP typically holds mid and large caps.

This divergence of performance between my ISA and SIPP is nothing new, and continues the trend I saw in 2021 and 2022 years, as I will go into more detail below.

Performance since Inception of my ISA (top) and SIPP (bottom)

As you can see, my ISA has way outperformed my SIPP, rising +57% compared to +23% for my SIPP since inception. My ISA has mainly invested in small cap shares (<£100m market cap) compared to my SIPP where I put larger market caps.

Learnings from over a decade of share investing

What is to explain my ISA roaring performance success? I have to give a lot of credit to the Small Cap Value Report and the various authors over the years (Paul, Graham, etc). As well as the amazing comments from the Stockopedia community. Many of my ISA investments ideas were seeded in SCVR, whether in the main section or comments section.

I’d also like to credit a decade of “learning and testing”. I started investing around 2010, but in the first decade till 2020, I had only a small amount invested, treating it as play/hobby money. I made plenty of mistakes in that time; numerous shares went into administration or lost >90%. It was only around 2020 that I had the confidence of enough accumulated wisdom and experience to increase the amount of money in my ISA and SIPP.

The other major factor that has contributed to my success was changing my mindset from a casual hobby to a semi-professional hobby. I started tracking my portfolio returns rigorously and scientifically. I started proper watchlists and created “living” research docs for each share in my watchlist. I started rigorously crunching the financial numbers. I made sure to periodically refresh my analysis for shares in my portfolio and watchlists. I kept up to date with RNS releases. I kept tabs on company and economic news via subscriptions to the FT, Bloomberg, Telegraph, and The Times. In short, having a more professional approach to investing, albeit still only roughly 4-6 hours a week spent on it, has greatly contributed to my portfolio performance. I toy with the idea of quitting my day job and being able to invest more time; but at the moment, my capital isn’t big enough to justify the opportunity costs.

I often get asked why I only exclusively focus on UK shares, when the UK markets have been lagging massively behind others globally, like the US. I have three reasons for this:

• one is that I do not want to take FX risk. I have other investments in USD and other currencies already, so am diversified somewhat already in terms of FX.
• The second is that because I marry bottoms-up with macro trends, that would mean having to follow US economic news, which I do not have the time for.
• The third is that I believe the US market is vastly more efficient in pricing than the UK market, given many times more investors are participating. My style of investing is to find mispriced companies. This is best done in an inefficient, illiquid, and overlooked market.

Macro Musings

Inflation – I spent the past year and a half watching the markets convince themselves that inflation would spike and then return to the 2% target quickly. It seems like the markets have flipped and are now convinced that inflation will be here higher for longer. Which means, probably the opposite will happen, and we will see a big decline in inflation in the next 12 months. So I’m locking in most of my cash savings into 1-year or 2-year fixes at 5-6%. I also believe that companies that have pricing power, will flourish in the next 1-2 years, as input costs slow or decline, but pricing held strong to generate increased margins.

UK Housing – I think buy-to-let is going to get more attractive in the next 12 months. Plenty of buy-to-lets flooding the market from amateur landlords selling up as many existing rentals are barely profitable now, with increased mortgage costs and punitive government policies. Rents will keep rising, as brisk wage increases are feeding through now. The perennial shortage of housing stock is not going to get better, as new housing starts decline. The trick is finding cheap(ish) access to capital, as well as running big “institutional” portfolios of housing, rather than being a small-scale amateur landlord paying higher rate income tax. I’m fishing around all the housing REITs, as well as the BTR (Build-to-Rent) players in the market for opportunities. Tricky, as you want to find one that is not over-leveraged, have long term funding in place at low fixed interest rates, and have dry powder to invest in the next 1-2 years at good valuations. PRS Reit (LON:PRSR)  , Legal & General (LON:LGEN) , and Empiric Student Property (LON:ESP) are names I’m tracking that I think might benefit from this opportunity.

Consumer Spending - while the latest stats on wage inflation are encouraging, I am not so sure that this will provide enough tailwinds for consumer spending in the UK. Before COVID, this was already a challenged sector, as the macro trend was spending less on buying physical stuff, more on experiences (eg holidays, activities) and having to save up for the biggie (house deposit). COVID provided a temporary boost for physical goods, but that has largely reversed now. The hospitality sector should benefit from more money in pockets; but the story here is that the UK is still too oversaturated with restaurants, pubs, bars, etc – too much competition, leading to barely any margin to be made. Maybe shares like XP Factory (LON:XPF) will be the bright winner over the next few years? But their format is easy to copy, there is little moat. Travel companies might be the resilient bet, despite its traditional cyclical tag. One of the reasons why I’m invested in On Beach group (LON:OTB) . My bet is that hospitality is where there will be some big winners in the next 1-3 years, but one has to pick very carefully, as many companies will go bust, but the few successful formats that survive will be able to roll-out quickly, cheaply, and profitably.

Travel – speaking of travel, my industry of expertise. Robust summer trading is in the bag, for most industry players. Early autumn (Sep, Oct) outlooks are still strong for most companies, but in my opinion Q4 is where the wheat will start to be separated from the chaff. Still bullish on travel sector, maybe a bit less than back in May though.

Performance Summary

The BBB ISA

The BBB SIPP

Detailed holdings in comments.

Trades done (June to August)

SELL ALL - LPA (LON:LPA) : I sold my stake in LPA, banking a 33% gain over about 8 months. I had initially gone in as I believed that their revenues was poised for huge growth, based on their mushrooming order book, as well as hidden value in their pension scheme that they were hinting at offloading for a profit. However, the former has still yet to materialise, and I’m beginning to wonder if their growing order book is a bit of a mirage. And the latter, they have gone completely radio silent on this, despite it now being a better environment for offloading pension schemes than ever before. So given that the shares had ramped up to 100p+, I decided to sell then; they have now dropped back down, and potentially I might look to re-enter. But still a bit suspicious of the jam-tomorrow promise of revenue growth.

BUY - Camellia (LON:CAM) : I’ve been tracking Camellia with curiosity over the years. They own agricultural operations globally, but also had an insurance division, as well as some cold storage and other weird businesses. Obviously run poorly, bad returns, declining profits, etc. But I do like their recent strategy, as they divest all their non-core businesses and focus on diversified agriculture globally. Still sceptical if management have what it takes to run the operations profitably. But they have a rock-solid balance sheet, with NTAV at my last calculation over 20,000p compared to the current SP of 5000-6000p. I also believe that global inflation in food commodities will keep rising briskly over the next few years; as the combination of population growth and climate change wreak havoc with food production globally. My only bone of contention is that Camellia needs a brand new management to shake up the strategy and accelerate the progress to sustainable, profitable growth. But this does not seem likely as the big shareholders seem content to just passively let this one ramble along. On balance, I think the discount to TNAV will close somewhat over the next 6-12 months as assets are turned into hard cold cash. And hopefully, agriculture operations start generating more profits, thereby causing a re-rating of the shares. Can see this one more than doubling, with very little downside risk.

BUY - Ashmore (LON:ASHM) : Cyclically, I think asset managers are current at their lows of the cycle, having been battered over the past year due to concerns on global growth and rising rates. Ashmore more so than others, as an Emerging Market specialist. Yet, my view is that EM is where economic growth in the next 3-5 years will come from. As DMs struggle under the burden of increased interest rates on credit and inflationary pressures, many EMs will benefit from increased commodity prices, as well as being less reliant on credit (and already having high interest rates). As DM equities go nowhere in the next year or two, I expect more investors will be tempted to chase returns in EMs. It is the classic DM to EM cycle of investment flows that I am targeting, and Ashmore for me at the current price is irresistible. In the meantime, I’m happy to collect a nice dividend.

BUY - PayPoint (LON:PAY) : Having realised a healthy gain on my Appreciate shares when they were bought out by Paypoint, I decided to invest after their share price drifted to what I saw as crazy value at 442p. This is a company that has a dominant position in corner shops across Britain; there is no other tech platform that can do the breadth of services it can, and offer shopkeepers more extra income. With a Network Effect moat like this, they can command high margins, and grow by just adding more and more third party services to their Paypoint platform. Hence the Appreciate purchase – they are now enabling all their 20,000+ corner shopkeepers to sell gift cards, as well as signing them up as sales agents for the Park Christmas Savings program. I see Paypoint easily delivering fat, growing profits in the years to come, easily. Always nice to own a monopoly.

SELL ALL - Chapel Down (OFEX:CDGP) : I’ve sold the last rump of my Chapel Down shares at 35p, meaning to re-enter as the SP drifted downwards. Alas, I missed the boat, and now it has shot up to 45p+, which I consider as an unsustainable share price. Will patiently wait for this to get back down to a bargain price to buy. Growth here is slow and long term, and will be punctured by periods of rough “weather” (metaphorically and literally), so there will be nice lull periods to pick up cheaply from stale bulls.

BUY - HSBC Hang Seng Tech UCITS ETF HKD (LON:HSTC) : I have been watching with interest the public flogging that Chinese tech companies have gone through. Now is the time the tide turns, I think. Investors have lost interest, leading to some ridiculous valuations. China’s growth is now cooling, so the government will have to soon take out the begging bowl instead of the whip to the tech companies, to ask them to drive growth. Because they can’t do it through the housing sector nor the financial sector, so what other big sectors can they ask to help drive that growth? Probably with lower regulations, tax benefits, etc.

SELL ALL - Metro Bank Holdings (LON:MTRO) : I decided to exit my Metro Bank stake, despite it not reaching my target sell price (150p+). I think there are now enough headwinds in the banking sector, so Metro is becoming a more risky bet. Net Interest Margin growth is now under pressure, despite continued BoE rate increases. Insolvencies and financial distress among SMEs are rising, and house prices are declining, two key lending areas for Metro. On a valuation basis they still trade a ridiculous discounts to sector peers. But these valuation gaps can stubbornly persist for years; and if a hurricane is coming, there is scant consolation if it was the prettiest boat in the harbour, if all boats are going to be battered.

Recently looked at companies

Zytronic (LON:ZYT) – buy target of 75p. Big question marks whether their technology is still competitive. They tout a big and growing order book and pipeline, yet its been the same story for a while. However, they have a strong balance sheet and a bargain price compared to the NTAV. But if their products aren’t any good, and they keep making losses, then that NTAV disappears quickly, like it did for Purple Bricks. Hence my low buy target price.

Serco (LON:SRP) - buy target of 135p. I’ve always liked this share, and think they have a strong competitive position. There are very few companies with the size and breadth of functions to bid for certain large and complex contracts. However, I’m not quite sure management have a clear enough growth strategy. So my buy price reflects that scepticism. But I like their long term contracts, which should weather any economic downturns, as well as strong FCF generation and low net debt. Poised to pick up contracts from smaller players getting into financial dificulties, in my opinion.

Inspired (LON:INSE) - this was highly rated a while back, as a play on ESG. It is pleasing to note in their latest update that management haven’t taken their attention away from the other three core divisions, and that all four divisions have been trading well. I like the niche they’re carved themselves, and their cross-sell strategy makes a lot of sense and seems to be working. Energy consulting and ESG consulting should be good growth drivers in the years ahead. The current SP is not pricing this opportunity at all; and so I see potential EPS growth as well as PE multiple expansion as credible opportunities for Inspired.

Checkit (LON:CKT) - What a pity, they had a huge cash pile, but they are burning it like crazy to reach SaaS recurring revenue scale. However, judging by the latest numbers, in my opinion it really doesn’t look like that cash runway will be sufficient. I wait to see more evidence before I will consider investing here.

H & T (LON:HAT) – I sold too early and missed their surge, but the share price has fallen back, even while trading has still progressed with good momentum. I like the counter-cyclical nature of their main pawnbroking business. They should do well as banks tighten unsecured credit and raise interest rates. But growth will be pedestrian; dependent on store openings, and new stores only seem to pay back in 2 years, which seems long to me. Especially when high street landlords are now desperate for tenants? So this will never get a racy PE multiple, so some discipline in entry price is needed for a steady, slow growth and good cashflows. 350p buy target for me.

Mountview Estates P.L.C. (LON:MTVW) - this real estate play has always been at a huge discount to NAV. Not the reported NAV, which is based on cost prices. Consistently, they have sold properties at 2x the balance sheet reported NAV. However, the ownership structure here is too concentrated, and the family involved have no interest in unlocking value in the short term. So really, it should be treated as an income play, like a normal REIT. In which case, for the illiquidity of the shares as well as the strong concentrated shareholder and iron grip on the company, I’d probably want a 8.5% dividend yield, which translates to a 9000p buy target for me. It has never gone that low, but who knows, if the wider housing sector sees a shakeout, and with the illiquidity here, I’ll patiently wait to see if this opportunity arises.