Boon's Fund Recap - Mar & Apr 2022

See all the previous Monthly Recaps here.

Mar & Apr Performance +2.5% vs FTSE All-Share benchmark +0.7%

YTD Performance +3.1% vs FTSE All-Share benchmark -0.54%

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(Part Time) Fund Manager’s Report

The eagle eyed amongst you would have noticed that I skipped March’s report. I apologise for that; my intention was always to publish a monthly report, but a combination of work, family matters, and travel meant I was too busy.

The performance over the two months was like Jekyll and Hyde; March saw a small loss, but April saw a stonking performance that means my overall portfolio is now a respectable +2.5% up over the two months, compared to only +0.7% for the FTSE All-Share. It also means that YTD, a third of the way into the year, I have outperformed the benchmark by 3.6 percentage points.

Pleasingly, it looks like it was a broad outperformance in both my ISA and SIPP in April, rather than any one particular company that has driven the returns. I like this type of performance; it validates my overall strategy, rather than relying on a few lucky winners to rescue the day.

It was a quiet two months for transactions. 1 Buy, 3 Sells, but a surprising 5 ex-div events. I will go into detail on the buys and sells in a section below. But in terms of dividends, I had a total of 1.2% of my portfolio value come in, driven mostly by the huge bumper final and special dividend from Rio Tinto.

So far my Rio Tinto (LON:RIO) shares, held for just over a year now, has disappointed in terms of capital appreciation. I bought at around 5300p and my analysis consistently shows that it should be able to achieve 8000p at some point. Yet it has languished, never going above 6400p. But the dividends have compensated; I have received a total of 10%+ in a year, so I can’t really complain. It does go to show that dividends can really make a difference to investment performance, especially when capital gains are hard to come by. This was despite a bad operational year for the company; COVID related production drops in Australia, cancellation of their Lithium project in Serbia, and continued troubles with their Mongolia copper expansion. However, the first and the latter are now solved, so I expect a good operational year in 2022, and if the iron ore prices hold up, another 10%+ dividend. That would make a 20% return in two years (if the price remains stable); not too shabby?

My cash position is still rather high; 34% in my ISA, and 25% in my SIPP. I still think we haven’t seen the bottom of the markets yet, given that govt bond yields have surged in the second half of April, but equity markets have still not yet fully priced it in. Bond yield probably still have more to increase, given inflationary effects from Ukraine are only starting to show up in the stats, let alone inflationary impacts from China’s Covid Zero battle. On top of that, secondary impacts will keep fuelling inflation. Fertiliser use is down globally, meaning reduced supply of key foods over the next 12 months, driving prices even higher. Wages are starting to pick up, which will feed through in prices of everything.

I am very worried about many risks: UK consumer spending, high tech valuations, iron ore demand in China, and stagflation. Leaving very few sectors and companies where I would consider investing in right now. As we all know, profit downgrades usually come after the horse has bolted; directors hold off bad news till when it becomes inevitable to inform the markets, so I view now as a window of opportunity to get out of any vulnerable shares before a profit warning drop. For that reason, I expect May will bring increasing numbers of profit warnings and therefore the broad indexes are likely to drop further. I don't expect to make many buys in May, only opportunistically if there is panic selling in any of my watchlist shares, and potentially I will be looking to trim my existing holdings further and go more into cash.

Performance Summary

The BBB ISA

The BBB SIPP

Detailed holdings at the bottom of the article.

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Changes to the portfolio in March & April

BUY: Medica (LON:MGP) – I held this share before, but sold last year on concerns of Delta and Omicron waves overwhelming hospitals and thus demand for Medica's services. That was the right call, as their elective services revenue recovery was delayed. However, the outlook now looks more certain. The government is spending more money to allow the NHS to catch up on its backlog of diagnostic testing. Omicron has not overwhelmed hospitals, and the current consensus is that future strains will be less severe, thus posing less of a threat to hospital capacities. In addition, this is a very defensive, anti-cyclical share; whatever happens to the economy in the next year, demand for diagnostic scans will not be affected. I view broker forecasts for FY23 EPS to be conservative, with room for upgrades, and therefore the current 15x valuation is undemanding for the sector. Current price 160p, I bought in at 126p, and I think it can easily get to 200p+ within the next 12 months.

PARTIAL SELL: Rio Tinto (LON:RIO) – I decided to cut my holdings here by around half when the price went to a local high of around 6200p, at the start of the China Covid Zero battle. This proved the right call, as it has now dropped due to weaker iron ore prices. It was a difficult sell for me because I have a strong conviction that it really should trade at 8000p+. However, I am also well aware that it has gone sub-5000p recently, and could go back below if China’s Covid situation doesn’t get under control and construction activity slows down, dampening demand for iron ore. I am now more comfortable with my sizing now given the risks; a small size holding rather than a medium holding.

PARTIAL SELL: £SGLN – During April, my conviction strengthened that inflation will soar and therefore government bond yields, which will negatively impact gold prices. In addition, the first few months of the year has demonstrated that gold isn’t seen by the market as a safe haven any more. I have yet to discover where investors will stampede to for a safe haven; Bitcoin has had a torrid time too. With bonds declining, shares declining, and both gold and bitcoin not appreciating, this is a big head-scratcher. Nevertheless, I see potential further weakness for gold, so I have cut my holdings by roughly half.

SELL: Thg (LON:THG) – I sold after the results came out. They were decent results, and my initial investment hypothesis was validated, that there is a very good chance of a buyout, given the multiple approaches that was confirmed by the company. However, I see almost 100% certainty of trading deterioration and profit warnings to come, and with a dwindling cash pile, an increasing risk for a discounted fundraising. UK consumer discretionary spending is going to collapse, and their core segments (beauty, fitness protein) will be very susceptible to belt-tightening. On top of that, MyProtein will see soaring whey prices this year. Too many headwinds for them to hit their 20-25% revenue growth target for the year. I will monitor to buy back in at a cheaper price, as I still think PE groups will be looking for an opportunistic takeover.

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Looking into May

Consumer discretionary and tech, might potentially become oversold. I will be monitoring this with an eagle eye.

I am tempted to pick up more shares in Itv (LON:ITV) . The market hates it, because on the surface, it announced a grand strategy of investing in it's streaming service seems too late, given the travails of Netflix. However, while record numbers of Britons are cutting streaming subscriptions, they still need to watch TV. And ITV's jewel is its free to air service. On top of that, it might be a front runner to take over Channel 4, and therefore build an even stronger monopoly on TV advertising inventory in the UK. In addition, the UK government has also announced a consultation that all smart TVs and set top boxes in the UK must prominently include the free-to-air channels (ITV, BBC, etc) as pre-installed apps which can only be a positive. The valuation is still very undemanding, and there is somewhat of a defensive quality (TV viewership does not decline during recessions, albeit there will be some pressure to advertising rates).

I am also looking to pick some China Tech, via an ETF. Either £HSTC or £KWBP . I don't think the screws can be tightened any further; and in any case, the macro trends are still there. Chinese GDP per capita is still increasing, and with that will come more digital commerce spend for years to come, especially in the Tier 2 and Tier 3 regions. Even if the big players get their wings cut, it will mean the small and mid-sized companies will have room to grow, and buying an index hopefully will mean getting exposure to both big and small companies.

I have also started looking at some land-backed, asset-backed investment ideas. I am avoiding housing, because I think the rapid rise in interest rates will sap demand. However, agricultural land use appeals to me, as a defensive area. Therefore I have analysed and added £CAM  and Chapel Down (OFEX:CDGP) to my watchlists. I consider neither of them to be well-run companies however, but if the prices drop sufficiently enough, I think they could be a good value play, given their decent balance sheets and backed by large land holdings. If anyone has any other interesting land or agriculture plays, I'd love to hear from you in the comments below!

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Appendix: current holdings

Small (0-5% of portfolio) , Medium (5-10% of portfolio), Large (10%+ of portfolio)