Q3 2020 review, Photo by Derek Thomson on Unsplash

Q3 2020: Just In The Red

It’s difficult to know what to make of this year from an investing viewpoint.

Given the medical, social, and economic turmoil we’ve faced, I should be pretty pleased that my portfolio is pretty much at the same level it was back in January when most of us had to look up the precise definition of ‘coronavirus’.

But seeing how strongly some stocks and funds have performed these past few months, I’m slightly regretting my low underlying weighting to big US tech stocks and my preference for UK small-cap trusts and more cautious global funds.

But you can’t win them all. Beating the market every year would be nice but it’s hardly a realistic aim.

Put another way, after a couple of relatively good years, I was probably overdue some humble pie.

A small course correction

I’ve tweaked my portfolio a little over the summer, ditching the likes of Murray International and Princess Private Equity in favour of a basket of biotech/healthcare trusts and slightly increasing most of my smaller position sizes.

Depending on your point of view, that’s either a savvy piece of momentum investing or a daft bit of performance chasing. Time will tell of course.

Other than that, I’ve pretty much stuck to my original investment plan.

All my dividends have been reinvested, I’ve made use of ISA allowance, and I didn’t get scared when the market plummeted and dash to cash.

The most important part of investing is letting the businesses you’ve purchased just get on and do their thing.

My Q3 numbers

Here’s how my portfolio has fared so this far this year:

Portfolio / BenchmarkQ1-Q3
2020
H1
2020
Since
1 Jan
2018
My portfolio-0.6%-3.8%+22.1%
Vanguard FTSE Global All Cap (fund)+2.9%-0.3%+19.4%
Vanguard LifeStrategy 60 (fund)+1.6%+0.2%+13.4%
Vanguard UK All-Share Index (fund)-19.6%-17.2%-13.6%

I suspect I might have in the black for 2020 earlier in September, but markets have fallen back a little since then. Nevertheless, it was still a positive quarter for global stocks, when measured in sterling.

The UK market continues to be billy-no-mates with financial stocks being particularly weak.

I’m still ahead of world markets since starting to track my portfolio this way nearly three years ago. However, my lead over the simple choice of a global tracker has slipped to just one percentage point a year.

Two to three percentage points a year ahead remains my stretch aim for the long term.

That said, merely matching global markets should be more than sufficient for me to fund my retirement and whatever else life decides to throw my way. So that’s why I don’t feel the need to get too aggressive with my portfolio.

Performance by holding

Here’s the usual breakdown by position.

I bought three new trusts and sold two but, for completeness, I have included numbers for all of them in this table.

HoldingQ1-Q3
2020
H1
2020
International Biotechnology (bought Jul)+30.3%+23.5%
BB Healthcare (bought Jul)+20.8%+16.0%
Smithson+17.7%+13.3%
Worldwide Healthcare (bought Jul)+13.9%+16.0%
Fundsmith Equity+13.6%+7.7%
HG Capital+11.4%-6.8%
Gresham House Energy Storage+9.1%+4.0%
Lindsell Train Global+5.2%+3.4%
Vanguard All-World ETF+4.0%-0.3%
JPMorgan Global Growth & Income+3.9%-1.1%
Princess Private Equity (sold Jul)+2.7%-12.8%
Bluefield Solar Income+1.6%-2.1%
Baronsmead Venture Trust+1.0%-3.4%
HICL Infrastructure+0.7%+3.7%
RIT Capital Partners-11.2%-14.7%
Caledonia-20.1%-14.9%
Murray International (sold Aug)-20.1%-18.7%
BlackRock Smaller Companies-24.3%-24.3%
Henderson Smaller Companies-29.2%-28.7%
Acorn Income-38.0%-33.5%

It’s a repetition of the second quarter for the most part. What was working best after two quarters has continued to head higher. What was struggling has been flat or fallen further.




The two exceptions are HGCapital and Princess Private Equity, where the combination of decent net asset value gains and narrowing discounts have moved them up the table.

Of course, I sold Princess before most of its third-quarter rise, which is a little frustrating but I’ll get over it I’m sure. The stuff I bought in its place has done OK.

Although 2020 has been a year of frantic trading by my standards, my portfolio turnover for the year has been just over 8%. That’s sale proceeds divided by average portfolio value.

In the battle of ‘star fund managers’ in 2020, it’s still Smithson > Fundsmith Equity > Lindsell Train Global. Nick Train has lamented that his style of investing isn’t suited to booms like this. I know how he feels!

I’m starting to wonder about JPMorgan Global Growth & Income. It’s done fine for me but never seems to deviate that much from a global tracker even though its new set of managers have shaken up its holdings a little. One for me to ponder.

Earlier this year, I said 2020 could be an important year for RIT Capital Partners to demonstrate its defensive qualities. Although its share price is down a lot, its net asset value is actually up 1% year-to-date. For me, therefore, it’s still (just about) doing its job.

Baronsmead deserves a hint of praise, too. I slagged it off regularly last year, but it’s held up a lot better than most UK equity trusts in 2020. Its large weighting towards the AIM market, which has done a lot better than London’s main market this year, has no doubt helped.

I was minded to reduce my position here but I might hold off on that for a little longer and see how things pan out.

Dividends still holding up

I’m still of the view that the whole argument of investment trusts continuing to pay dividends because of their revenue reserves is somewhat of a red herring.

In most cases, these revenue reserves don’t represent ring-fenced cash holdings and any dividend effectively represents a part sale of your investments.

Despite that, I have to admit I still like to see dividends rolling into my account and the fact that most of my holdings haven’t had to reduce their payouts is comforting.

As far as most trusts are concerned, I’m still expecting a few years of lower dividend growth than the wider market. That will allow these revenue reserves to be replenished, even though that’s largely a matter of cosmetics.

The wider world of investment trusts

Discounts have widened a little over the last three months, moving from an average of 5.5% to 6.7%.

Average gearing levels have shrunk a little, from 9% to 8%.

Of the 470 investment companies tracked by Trustnet, 145 are in positive territory for 2020. That’s up from 106 as of 30 June.

Baillie Gifford US Growth remains the best mainstream performer and it’s up 87% year to date.

DP Aircraft 1 continues to prop up the table with a loss of 89%.

The average investment trust is up 3.6% over the past 12 months according to the AIC. That compares to a 19.2% loss for the FTSE All-Share index and a 5.7% gain for the FTSE All-World index.

IPOs make a comeback

It normally takes a while after any market downturn for the new issue market to rear its head again.

The last Initial Public Offer (IPO) for an investment trust was Nippon Active Value in February. But now we are several months past the lows hit in March, a number of new trusts are heading our way.




Tellworth British Recovery & Growth is looking to raise £100-150m for its ‘Best Of British’ approach. It’s scheduled to join the market on 13th October with the ticker BRIT.

Run by Paul Marriage and John Warren, it will look to run a concentrated portfolio of around 40 stocks split into ‘British Global Leaders’, ‘British Recovery’, and ‘British Technology’. There’s a Quoted Data note on it here and one from Kepler here.

Schroders looks to be taking a very similar approach with its planned £250m launch of Schroder British Opportunities Trust although I don’t think the timetable for this has been finalised yet. It’s looking to invest in a mix of small- and medium-sized firms, both quoted and unlisted.

One of this trust’s managers, Paul Creed, is also involved with Schroder UK Public Private Trust, formerly the infamous Woodford Patient Capital.

Also looking to raise £250m is Home REIT which is aiming to provide accommodation for the homeless. It should join the market on 12th October and is looking for an initial yield of 5.5%. Quoted Data has a note on this launch as well.

And Triple Point Energy Efficiency is looking to raise £200m when it floats on 19th October. Its initial yield should be 5% and it could offer a similar mix of assets to SDCL Energy Efficiency.

Pick of the bunch?

The new issue I am most interested in is Buffettology Smaller Companies Investment Trust (BUFF) which is looking to raise up to £250m

It’s going to be run by Keith Ashworth-Lord, who has had great success with the Buffettology open-ended fund. Its brief will be to hold 30-50 UK small caps, varying in size from £20m to £500m.

I’ve got three UK small-cap trusts already plus Smithson so I’m not sure about adding something else in this space but I think it’s worth checking out.

The prospectus is now available at the trust’s new website  and the shares should begin trading on 29th October.

The IPO dilemma

We don’t know how much demand there will be for all these new issues and what sort of premium or discount they’ll trade at once they are listed.

Issue costs are typically between 1-2% for most flotations. Although you save a little money on stamp duty and commission, buying at the IPO is the equivalent of buying at a small premium.

As David Stephenson pointed out earlier this week when so many established UK trusts are trading at hefty discounts, paying a small premium for much the same thing may put you at a disadvantage.

However, I’m also struck by the fact that these new issues are focused on UK equities and property — two sectors that are very much unloved right now.

Normally, you’d expect a rash of IPOs following the hot money into something that’s the flavour of the month, like China or tech stocks.

2020 is surprising us in all sorts of ways it would seem!

Lockdown reading (and listening)

If your Twitter feed is anything like mine then for the last couple of months it’s been full of either people posting pictures of their pre-release copies of Morgan Housel’s new book or podcasts featuring him talking about it.

Someone very kindly gifted me an Audible subscription for my birthday and I used that to download a copy of the audiobook version.

Housel’s book is as excellent as everyone has been saying it is, although much of the content will be familiar to anyone who has been following his blog for a while.

I’ve got two more Audible credits but I’m not sure where to use them yet. The third edition of Guy Thomas’s excellent Free Capital is due to be published on 13th October so that’s a likely destination for one credit, assuming there’s an updated audio version.

In this book, Thomas profiles twelve successful UK investors, most of whom are anonymous which allows them to reveal a load of additional interesting information.

Fellow IT-fan diy investor (uk) has released Climate Emergency. I’ve bought a copy of that, too, but I have only just started reading it.

The second edition of the FT’s Guide to Investment Trusts was published a couple of months ago and seems to have been well received. It’s written by John Baron who, as well being an MP, runs his own website with a number of demo portfolios and has a regular column in the Investors Chronicle.

And finally, mark 8th December in your calendar as that’s when the 2021 edition of the Investment Trust Handbook is set to be published.


Disclaimer

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


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7 Replies to “Q3 2020: Just In The Red”

  1. Nice summary IT. Yes, the UK FTSE has been a serial underperformer for several years so I suspect the move into more global trusts will be rewarding.

    I have been thinking about the big picture this year and with Covid-19 (fwiw). My conclusion is that a twin focus of climate change and technology will be the global drivers for the coming decade and beyond and I have been aligning my portfolio with this in mind.

    I was particularly interested to hear the announcement from China’s Xi on climate this week and the goal of neutrality by 2060. Combined with the EU drive for zero emissions by 2050, I suspect this will have a big impact on the global economies and there is now evidence that some of the big fossil fuel players are scrambling to go ‘green’ and regain some credibility.

    Finally, thanks for buying my ‘Climate Emergency’ book! Let me know what you think in due course and any thoughts on ways to improve it for the next edition.

  2. I started reading your blog at the start of this year and it has been a great source for me to crystallise my personal investment management amongst the white noise of information on the internet and the financial media. I acted on much of the information and apart from a big dip with the UK Black Rock and Henderson ( both sold off at 10% losses and switched to SMT to recover) I am up this year a little more than you, so very pleased. Now moving more funds into China after your summary of those ITs.

    It would be good to have a deeper dive into the fuller implications of NAV to share price and it’s importance, particularly as ITs are bought and sold on share price. Premiums and discounts to NAV are easy, but the practical relevance is not so much. And trawling for information I am not sure many others actually do either.

  3. Thanks DIY! Hard to argue with that dual focus – it’s certainly worked superbly this year.

    @Charlie – Glad you’ve found the blog useful and nice timing with SMT. I hope you’re not following me too closely, though, as everyone needs to make their own decisions when buying trusts and funds 🙂

    I’m not sure exactly what you are looking for regarding more info on premiums and discounts. I did a more general piece on this topic last year which might help though: https://www.itinvestor.co.uk/2019/04/should-you-avoid-investment-trusts-with-premiums/

  4. Interesting reading as ever, thank you. I notice that you do not have any Baillie Gifford investments and was curious as to why that was. I have 40% in various BG funds, and another 10% in Polar Capital Tech. Somewhat risky, I know, being so heavy on growth and tech but even though I am only 75% equities I am up 40% over 12 months to date. I have 14 equity funds/ITs, 2 in high yield bonds, and 1 equity (Rio Tinto). Although individually these are almost all high risk investments, my FE risk score across the board is only 89 (FTSE 100 risk being 100). I also have a very low allocation to the UK in funds (5%) but have 9% in Rio Tinto, which I do not really think of as a UK company even if it is listed here. Rio has actually done far better than most funds, e.g. miles better than a global ETF, and I cannot foresee a world that does not need steel and copper.

  5. Hey Nick,

    The lack of BG funds and trusts is definitely something I have been lamenting this year!

    I did own Pacific Horizon back in the 1990s but most of my current holdings were chosen a few/several years ago when the BG trusts didn’t stand out so much. I’ve been adding to UK smaller companies and renewables/infrastructure recently and BG aren’t really in that space although I was considering Edinburgh Worldwide for a while.

    I suspect one or two of their trusts will find their way into my portfolio at some point – but I tend to move rather slowly 🙂

  6. Thanks for the reply. You are definitely more into UK companies than I am! I did have some Mercantile and a FTSE 250 ETF looking for a Brexit bounce and they did okay for a bit but then covid knocked the stuffing out of them so I sold. I did also at one point have some RIT and Caledonia, but got a bit bored of them. Watching from the side-lines, neither really seemed to live up to their defensive sticker in the Q1 crash. Maybe it’s a grass is greener thing, but I fear that the UK is stuck in high tax, high regulation, currency depreciation, and will be there for some time. Better opportunities elsewhere, I think.

  7. Thanks for the great reply and link.
    No, not following too closely, but its a great focused starting point for research amongst all the white noise and marketing out there.

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