Q3 2019 portfolio review: some £20 notes, Photo by Colin Watts on Unsplash

Q3 2019: One Eye On The Pound

Some memories stick with you. I was working for a few weeks in Zimbabwe in the late 1990s and I still recall the events of one afternoon in particular. We were there with a small local team and I remember the shocked look on their faces as they trudged back into the office after lunch. “What’s the problem?”, we asked.

They had just discovered the Zimbabwean dollar was to be devalued. At a stroke, it went from around 30 Zim dollars to the pound to 60. That’s my salary cut in half, one said.

Devaluations weren’t new to Zimbabwe at that stage — they had been happening about once a year for a little while.

Not long after such events became a monthly occurrence. Then weekly.

By 2008, I think it became daily as hyper-inflation of trillions of per cent took hold. The currency was abandoned the following year.

It’s all very well reading about economic changes like this, but witnessing it first hand is something else entirely. And of course, I just got a small glimpse of the very early stages.

Roll forward to 2019 and I think I’ve spent more time looking at the pound’s exchange rate than ever before. And I’ve thought back to that afternoon some two decades ago.

I’m not suggesting what happened in Zimbabwe is likely to happen in the UK. But we should be very thankful that we’ve enjoyed a (mostly) steady currency in this country for a long time.

Weak pound, strong returns

Of course, in terms of pure numbers, the recent struggles of the pound have helped many UK-based investors.

Over the last five years, global market returns in US-dollar terms have been roughly 40%.

In sterling, they have been double that, largely because the pound has gone from 1.63 to 1.24.

Depending on what happens on 31st October, we could see the pound lurch a lot lower or rebound at speed.

A further delay might leave our exchange rate unchanged for a little while longer, but I’d still expect to see it move sharply one way or another whenever this saga is finalised.

The same old portfolio

My UK portfolio weighting has come down a lot in recent years and it’s now around 25-30%. That means a sizeable exchange rate move could make a hefty dent or give me a big boost.

I don’t really consider macro events when I’m deciding on investments, though. And I’m certainly not planning to second guess what might happen in this instance. In short, my portfolio looks almost identical to three months ago.

I’ve reinvested some dividends into Bluefield Solar Income Fund after it delivered an impressive set of results last month, but that’s it in terms of buying and selling.

Looking forward, I can see myself adding a bit more Bluefield if the premium stays roughly where it is. And I’m still looking to add to my UK small-cap exposure and Smithson, as my position sizes in these are still quite low relative to my other holdings.

After seeing management departures at BlackRock Smaller Companies, JPMorgan Global Growth & Income, and RIT Capital Partners earlier in the year, this quarter has seen a lull in deserters.

Paul Smith, who managed the fixed-income element of Acorn Income Fund, left his post for personal reasons in August. However, this is the minor part of Acorn’s portfolio and not really where the long-term performance should come from, so it’s less of a concern for me.




And I’ve become a little calmer about the management change in the aforementioned JPMorgan Global Growth & Income. A useful note from Edison added some colour, describing how it’s taking less of a value approach and reduced its bet on Europe.

I still haven’t got any closer to deciding on which technology or biotech trusts I might add to my portfolio. I liked the look of both Impax Environmental Markets and TR Property when I reviewed them recently, so that’s another couple in the mix for potential new additions.

I’ve 17 holdings at the moment, so I’m probably only looking for 2 or 3 more at most.

My performance in 2019

Here’s how 2019 is panning out for me.

The LifeStrategy 100 fund is my main benchmark, as its 25% UK weighting is fairly close to my own. But the standard global fund and UK index measures act as handy reference points.

BenchmarkQ1-Q3
2019
Q1-Q2
2019
Since
Jan 2018
My portfolio18.2%15.5%19.1%
Vanguard FTSE Global All Cap Acc (fund)19.8%16.2%14.4%
Vanguard LifeStrategy 100 Acc (fund)18.8%15.5%12.8%
FTSE All-Share Total Return (index)14.4%13.0%3.6%

My return rose from 15.5% at the end of June to 18.2% at the end of September, so that’s a reasonable result for a single quarter. But I’ve lost a little ground against both Lifestrategy 100 and the plain global tracker this year.

I’m still ahead since 1 January 2018, when I started to measure my portfolio properly using the unitisation method.

The UK market continues to struggle, not surprisingly, once more trailing global markets. Some people think there could be a Brexit bounce, but the prevalence of oil, mining, and financials in the FTSE All-Share still puts me off having too much mainstream UK exposure.

And I really should get round to swapping my UK performance measure from an index to a fund like HSBC FTSE All-Share.

Heroes and villans

Here’s a breakdown for the year so far. These are total share price returns, so they include dividends.

Holding9-month
return
HG Capital31.7%
Fundsmith Equity25.8%
Smithson24.8%
Lindsell Train Global24.6%
JPMorgan Global G&I22.3%
Vanguard All-World ETF19.9%
Princess Private Equity17.4%
BlackRock Smaller Companies16.5%
Henderson Smaller Companies15.8%
RIT Capital Partners13.0%
Bluefield Solar Income10.8%
Murray International9.8%
HICL Infrastructure9.4%
Caledonia7.9%
Acorn Income5.9%
Gresham House Energy Storage3.9%
Baronsmead Venture Trust-2.2%

That’s quite a range over just nine months. But that’s reassuring in a way. If all my investments were returning roughly the same amount then that would indicate I was poorly diversified.

And it’s not surprising that more conservative plays like RIT, Caledonia, Murray, and my three infrastructure trusts lag a little when the market rebounds as strongly as it has done so far this year.

Gresham House Energy Storage is still ramping up and investing proceeds from its IPO last year, so its lower returns are to be expected.

Acorn Income has been a little disappointing recently, though. Whereas Henderson and BlackRock have both bounced back strongly in recent weeks, Acorn has not joined in the fun. Its higher gearing means it tends to be a little more unpredictable.

Baronsmead Venture Trust remains my sole negative performer for the year. While I first bought it almost 15 years ago, nearly half my holding was bought within the last 5 years, so I can’t sell out completely without losing some of the tax relief I got on the way in.

I’m forced inclined to give this position a little more time and I have a fine toothcomb at the ready for its next set of results, due in late November.

Baronsmead recently changed its dividend policy from at least 6.5p per share a year to a guideline of 7% of opening net asset value. That means future dividends could be both lower and more volatile. But giving itself more flexibility seems sensible given the greater restrictions VCTs now face.

While it’s certainly not the only VCT that’s had a rough ride recently, it’s near the bottom of the pack. It’s just launched a fundraising for this tax year, which I’m definitely passing on. I’m curious to see what the take-up for this is, as its past fundraisings have been snapped up within a few days.

The wider world of investment trusts

The average discount across all investment trusts widened over the quarter from 3.6% to 4.6%. It started the year at 4.3%, so we’re pretty much back where we started.

Gearing fallen a little further to 8.0% — it was 9.2% when 2019 began. It’s not surprising to see managers get a little more cautious given the gains so far this year.




There has been just one new issue: JPMorgan Global Core Real Assets. I’m not sure who is in charge of naming trusts at JPMorgan, but I assume they get paid by the word.

This is a global infrastructure/property fund, trading under the ticker of JARA. It raised £149m and, as with most infrastructure funds, it’s commanded a premium right out of the gate with a share price of 102.5p and a 99p net asset value.

It’s been a quiet year for investment trust launches overall, with just 6 new issues raising £890m this year. Last year saw 19 and £3.0bn over the full twelve months, so the rate of new issues has definitely slowed.

Fundraising by existing trusts, mostly those that enjoy a premium to net assets, continues to be very strong. To the end of September, £5.4bn had been raised, which is more than the £4.8bn raised during the whole of 2018.

Two funds have announced that they are calling it a day: JPMorgan Global Convertibles Income (only set up in 2013) and Martin Currie Asia Unconstrained (listed in 1985). Both have assets well in excess of £100m, so aren’t insubstantial.

Hansa, the flexible trust which acts as a family office for the Salomon family, did a 5 for 1 share split and redomiciled to Bermuda due to political concerns. I was amazed to see Hansa’s discount is now well over 30%, but its poor performance over the last decade and dual share structure aren’t likely to win it many new fans.

The final straight

Another investing year is drawing to a close but I suspect it will be an eventful three months.

I can’t see any release date yet for the 2020 version of the Investment Trust handbook, but the 2019 version is now £5 for a hardcover version and (still) free as an ebook.

I’ve written at least once about all the holdings in my portfolio here on this blog, and I’ll probably revisit those roughly once a year going forward.

I’m also planning to revisit some of the other trusts I’ve written about in the past 18 months to see how they’ve done since. I suspect I’ll group three or four of these reviews into a single article each time.

There’s a number of trusts in the global and flexible sectors I might take a closer look at over the next several months, too, such as Mid-Wynd, Capital Gearing and so on.

In other words, although my portfolio may remain much the same from quarter to quarter, this blog should be a little more active!


Please note that I may own some of the investments mentioned above and that you can see my current holdings on my portfolio page. Nothing in this article or on this website should be regarded as a buy or sell recommendation as this site is not authorised to give financial advice and I'm just a random person writing a blog in his spare time. Always do your own research and seek financial advice if necessary!


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4 Replies to “Q3 2019: One Eye On The Pound”

  1. @ITInvestor — I share your obsession with the £ over the past three years… with my active investing hat on I tend to get a little obsessional, true, and I’m far more active than you which means investing over the past three years has been like playing four-dimensional chess with politics/sterling ready to thwack you from left and right.

    Nearly 20% returns in any year is not to be sniffed at, as you know. (You sound just a tad complacent/underwhelmed? 🙂 ) Better than me this year… I’ve been dragged down by bets on UK mean reversion (/sterling) and some mixed results trying to be a vulture with Woodford’s horrible cast-offs, which in most cases were best cast off after all! 😉

  2. I think a lot of my pound-gazing has also been an effort to make sense of the twists and turns of Brexit. It’s kind of reassuring to have one number that summarises how things are progressing (up to $1.25 this morning I see) and whether the latest ‘major’ development is actually meaningful. Of course, the market may get it wrong.

    I suppose I am little disappointed to be trailing the market, even if it’s been a terrific year so far in absolute terms. And I guess it feels like most of this year’s gains were stolen from last year, due to the big fall in Q4 2018, so perhaps they feel a little less real.

    But you’re right, I shouldn’t complain. I also made a conscious choice to be conservative with funds like RCP, CLDN, and MYI plus the infrastructure plays. So when the market makes hay, I should expect to trail behind a little.

  3. I don’t think you’ll be disappointed if you look at Capital Gearing (as long as you see it for what it is: i.e. defensive). I think the firm has impeccable integrity, strong alignment, and an impressive, consistent track record. Lots of good quarterly reports to read too.

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