SIF folio half-year review: gradually deploying cash

After an uncertain start to the year, I’m happy to report that my rules-based SIF folio has managed to move ahead of the wider market in recent weeks. As a quick reminder, I recently published a more in-depth explainer of this strategy here.

At the end of the first half of the year, SIF was up by 3.8%, compared to a gain of just 0.5% for its FTSE All-Share index benchmark:

As I commented at the end of the first quarter, the portfolio’s heavy cash weighting has smoothed out the volatility we’ve seen so far this year. This is a feature of the way the portfolio works, not a deliberate strategy on my part. My stock purchases depend on a feed of new ideas from my SIF buying screen, and from time to time this dries up.

However, I’ve grown to appreciate the benefits of holding cash – even though it does sometimes lead to periods of severe FOMO when markets are rising.

Portfolio review

After a long dry spell, I’ve been able to add some interesting new shares to SIF (and my own holdings) during the second quarter. I’ll talk about them in a moment, but first, let’s take a closer look at the current state of the portfolio and its longer-term performance.

Here’s a snapshot of the current portfolio:

(SIF positions as at 1 July 2023)

The portfolio’s oldest holding, ME International (LON:MEGP) is also its most profitable, having double-bagged since I added the shares in March 2022. This stock continues to pass all of my screening tests and still doesn’t look too expensive to me. MEGP remains in the portfolio on a rolling-one-month review basis.

At the other end of the scale, recent addition Inchcape (LON:INCH) (which I discussed here) has not yet convinced the market of its positive momentum, despite issuing an in-line quarterly trading statement in April. I await the half-year results with interest.

Happily, none of my shares suffered profit warnings or triggered my 25% stop-loss rule during the second quarter, so sales have been limited to stocks that have reached my nine-month review data and no longer pass my screening tests. I’ve listed these below.

Portfolio performance: since its inception in April 2016, SIF has delivered a return of 73%, or almost 8% annualised (excluding dividends). This compares to about 18% for the FTSE All-Share index.

SIF trades in Q2 2023

To avoid repetition, you can find details of my first-quarter trades in my Q1 review.

During the second quarter, I added four new shares to SIF and sold one. This left the portfolio holding 11 shares at the end of the half year. This also supported a welcome reduction in the portfolio’s cash weighting, which fell from 65% at the end of Q1 to 50% at the half-year mark:

(1 July 2023)

As always, the trades I’m discussing here are virtual trades made in a Stockopedia model portfolio. However, I mirror them (in smaller size) in my own personal holdings.

Stocks sold

Trading rules: all shares are held for a default holding period of nine months, I test each stock against the rules in my SIF sell screen.

Slightly confusingly, if a share passes all of these tests, it can remain in the portfolio for a further month.

I only sold one share from SIF during the second quarter.

Natwest (LON:NWG) - this trade started off promisingly, as markets priced in a bonanza from rising interest rates.

But as rates continued to rise, it gradually became apparent that banks’ net interest margins would not expand much further. At the same time, concerns grew about high street banks’ exposure to the wider economy in a possible recession.

NatWest’s trading during this period was quite satisfactory and did not contain any nasty surprises. Indeed, broker consensus forecasts have risen since I bought the shares last August:

However, with hindsight the StockRanks were telling the story and provided an early warning that the near-term outlook might be limited:

I would remain comfortable holding NatWest shares. I think the banking sector probably offers value. But NatWest’s falling share price meant that it breached my momentum rules in June, so was sold at the end of its nine-month holding period.

Bought: 22 August 2022 at 262p

Sold: 27 June 2023 at 232p

Total return (including dividends): -6.9%

New stocks

Trading rules: As a quick reminder, the shares I buy are selected from my main SIF buying screen.

I added the following new stocks to SIF during the second quarter.

Galliford Try Holdings (LON:GFRD) - I would be lying if I said I was enthusiastic about adding this building contractor to SIF. In general I avoid low-margin contracting businesses. History shows them to be somewhat accident prone.

However, this is an occasion when following the SIF rules has – so far – paid off.

In fairness, Galliford Try’s focus on infrastructure and regulated markets seems reassuring and should reduce cyclical risk. The group’s performance also appears to have improved after a difficult period.

The company now reports average month-end net cash and its £3.5bn order book suggests that the majority of revenue for the next two years is secured.

March’s half-year results indicated that results for the year to 30 June should be at the top end of expectations. This view was reiterated in Tuesday’s trading update.

An additional bonus is that the recent settlement of a long-running contract dispute is expected to result in a £26m cash payment to the firm. About half of this will be returned to shareholders in October through a 12p per share special dividend. That gives a one-off additional yield of 6%, in addition to the ordinary dividend yield of 4%.

The StockRanks remain fairly positive and I look forward to updated guidance in the annual results.

I added Galliford Try to SIF on 14 April 2023 at 178p.

Kitwave (LON:KITW) - I added this wholesaler to SIF in May, following an upbeat trading update which was modestly ahead of expectations.

I subsequently reviewed Kitwave in a Stock Pitch in June, so I will focus my comments here on the company’s interim results, which were released after my piece was published.

Paul covered these numbers in more depth in the SCVR, but in short, the company reported a 23% increase in half-year revenue and a 48% rise in adjusted pre-tax profit. This impressive-sounding increase includes gains from acquisitions. I was slightly disappointed that the firm’s reporting didn’t split out the proportions of organic and acquisitive growth.

Even so, I continue to think this is a well-run and attractive business. Return on capital employed was 21% last year and cash generation is good. Debt levels look comfortable to me despite acquisition spending, although I wouldn’t want borrowing to rise much further.

The shares are currently trading 10 times forecast earnings, with a 3.8% yield. I think the outlook remains positive, as do the StockRanks:

I added Kitwave to SIF on 2 May 2023 at 268p.

Property Franchise (LON:TPFG) - this estate agency group is continuing to report stable revenues, bolstered by its growing lettings business and the favourable economics of its franchise model.

While I’d argue that a modest slowdown in housing is priced into the current valuation, a severe and protracted slump is probably not fully in the price. So there’s some cyclical downside risk here.

Even so, I think that the current valuation of 10x forecast earnings isn’t too demanding for a high margin, high cash flow business with fairly minimal liabilities. There’s also an attractive 5% dividend yield that looks safe to me, and could help support the valuation.

I added The Property Franchise Group to SIF on 30 May 2023 at 308p.

Bloomsbury Publishing (LON:BMY) - this publishing business recently reported record sales and profits for the year ended 28 February. It’s best known as the original publisher of the Harry Potter series. The schoolboy wizard remains an important contributor to earnings, but children’s author Sarah J. Mass is also now a big money spinner, I think.

I have some reservations about the level of author concentration in the core children’s fiction business. I’m also discouraged by the marginal profitability of the adult consumer segment, which generated less than £1m of profit on £58m of sales last year.

However, the continued growth of the non-consumer business (academic and professional titles) seems to offer a route to sustainable growth, assuming that the group’s regular acquisitions continue to provide sustainable earnings growth.

The outlook for the current year is a little more cautious, but remains positive:

Stockopedia’s algorithms currently rate the stock as a High Flyer. This implies that there’s some risk of a sharp de-rating if the business disappoints – a view I share, with the stock at record highs.

Even so, Bloomsbury’s long and reliable track record gives me some confidence in the company’s ability to deliver.

I added Bloomsbury Publishing to SIF on 6 June 2023 at 420p.

I hope you found this quarterly review of the SIF folio interesting and useful. I’ll be back at the start of October with the next quarterly update.

In the meantime, please feel free to drop any thoughts or questions on this long-running experimental portfolio in the comments below.

Disclosure: At the time of publication, Roland owned all the shares listed in the SIF portfolio.