International SIF: Wins, losses + the surprising impact of exchange rates

“Where did all the growth stocks go?” Editor Ben Hobson’s feature last week on growth strategies for subdued markets really resonated with me.

As I’ve commented before, my SIF strategy has really struggled in recent months. At one point, only one UK share passed all of my screening rules. Ben’s piece explains why many of the Guru growth strategies followed by Stockopedia have performed poorly in recent months, becoming unusually concentrated in just a few stocks.

I’m happy to be in such respected company. But there are signs of improvements. My screening results are gradually expanding. Unfortunately there still aren’t any stocks I can consider buying.

Instead, I’ve decided to bring forward this month’s coverage of my International SIF. This is a model portfolio that’s attempting to replicate the success of the UK SIF by investing overseas. So far, results have been poor. But I’m refining the portfolio’s geographical allocation and hoping to see some better results going forward.

This week I’m going to look at stocks due to be sold from the International SIF. I’m also going to revisit previous results to see how exchange rates have affected my returns so far. The figures may surprise you. They did me.

Stocks on the block

My trading rules for the International SIF mean that I buy and sell stocks in alternate months. February was a buying month, so March is a selling month. This means that I must review stocks held for 10 months or more. Four companies meet this criteria:

• Ence Energia Y Celulosa SA (MCE:ENC) - The Spanish pulp mill operator has been a winner for me over the last year. Should I keep holding?

• Tianneng Power International (HKG:819) - This Hong Kong-listed battery maker has been a poor buy. But a StockRank of 98 suggests things could improve.

• Mytilineos Holdings SA (ATH:MYTIL) - A Greek industrial conglomerate with a broad range of interests.

• Keller Group (LON:KLR) - This FTSE 250-listed groundworks specialist seemed like a good buy to me, but has fallen prey to classic sector problems.

Ence Energia Y Celulosa SA (MCE:ENC)

Original coverage 06/03/18

This £1.3bn pulp mill operator appears to have issued a strong set of annual figures recently. According to Thomson Reuters, net profit rose by 41pc to €129.1m in 2018. Sales climbed 12.5pc to €832m, so it looks like the group’s profit margins improved considerably.

At the time of writing, these figures hadn’t been uploaded to Stockopedia’s data feed, which was still showing the TTM figure for the period to 30 June 2018. But the full-year numbers do appear to be in line with consensus forecasts. Happily, 2019 forecasts suggest continued growth:

This snapshot shows an impressive trend of rising profits and increased profitability.

This stock still passes all of my screening tests, so will remain in the International SIF for at least two more months. I’m happy to keep holding.

Verdict: Hold
Price return to date: +9pc

Tianneng Power International (HKG:819)

Original coverage 08/05/18

Shares in this Chinese battery maker fell by about 30pc at the start of September 2018, despite posting half-year figures in August which appeared to show an increase in sales and earnings.

One reason for this may be that the business is being rated for a structural decline. Broker Nomura downgraded Tianneng in September, citing the group’s retreat from the lithium battery business.

The company has historically focused on lead acid batteries, which are the kind traditionally used in cars. But modern electric vehicles and most rechargeable devices use lithium batteries and it seems fair to assume that this is where the best growth opportunities lie.

The stock’s financial summary shows attractive profit growth and high returns on capital:

But the broker consensus trend is poor and the number of brokers covering the stock has fallen to two. This breaches my screening requirement for three estimates, which I use as a hedge against my ignorance of foreign markets.

As a result, Tianneng Power International has been sold from the International SIF for a thumping loss.

Verdict: Sell
Price return: -31pc

Mytilineos Holdings SA (ATH:MYTIL)

Original coverage 08/05/18

This Greek industrial group has interests including aluminium, defence and renewable energy. Figures published in November for the first nine months of 2018 appear to show a 23pc rise in EBITDA, with a 6pc rise in revenue.

Analysts expect modest earnings growth for 2018 and 2019, but no figures have yet been published for FY18.

Understanding the outlook for such a complex foreign group is way beyond my remit here. What I do know is that a poor share price performance over the last year has left Mytilineos Holdings with a negative one-year relative strength score. As a result, it no longer passes all of my screening tests and has been sold.

Verdict: Sell
Price return: -15pc

Keller Group (LON:KLR)

Groundworks specialist Keller has cost me real money, thanks to the 36pc loss it delivered for the UK SIF folio, where I invest some of my own cash.

Unfortunately the result for the International SIF is even worse. I won’t revisit this story here. You can read my original coverage of the firm’s October 2018 profit warning here and my UK SIF sale report here.

In short, the lesson learned is that despite the group’s undoubted technical strengths, it’s not immune to classic construction sector problems.

Last week’s full-year results contained no new surprises and gave the stock a welcome pop. But the shares fail my screening tests on multiple counts. I’m happy to sell.

Verdict: Sell
Price return: -42pc

Here’s how the International SIF looks following this month’s changes. I’m pleased to have cut some of the worst losers and to have a growing body of stocks showing profits. Let’s hope it continues!

How have currency movements affected results?

The quality of reader comments on Stockopedia is superior to anything I’ve come across elsewhere. I’m continually grateful for it, and it’s one of the highlights of writing on these pages.

The final part of this article was prompted by just such a comment from Howard Adams on last month’s International SIF piece. Howard reminded us that currency movements can deliver profits and losses, even if the underlying shares are flat.

He asked how this had affected my results so far. I had to admit that I didn’t know, but luckily I did have the numbers I needed to revisit this.

This table shows all the stocks that have been bought and sold in the International SIF to date. The return from each stock is shown in GBP and in the stock’s native currency. The final column shows the gain or loss resulting from the foreign exchange effect:

*A positive number means an FX gain for UK investors

It seems that exchange rates have mostly moved in my favour, adding an average of 2.3pc to each result. Unfortunately this means that the underlying performance of the stocks I’ve chosen has been even worse than the portfolio’s results suggest.

Over longer periods, I’d expect FX gains and losses to even out. But these figures make it clear that if you get on the wrong end of a big currency trend or devaluation, even a good investment could be derailed.

This is one reason why I prefer to invest in UK stocks. Big companies that trade internationally usually have treasury departments to manage their currency exposure. By investing in their stock, I get the benefit of these efforts. If I invest directly overseas myself, I don’t get this protection.

As always, I’d welcome your thoughts on this. Have you had bad (or good) experiences with overseas investments?