Q2 2022: The Big Bad Bear

Here’s my portfolio review for the first half of 2022.

My performance

As a buy-and-hold investor that’s tilted towards growth, quality, and small-caps, it’s been a tough six months as you might suspect. My portfolio is down about 17% while your bog-standard global index tracker has fallen around 11%.

Portfolio / comparators	H1 2022	FY 2021	Annualised return since Jan 2018
My portfolio	-16.7%	+16.2%	+5.9%
Vanguard FTSE Global All Cap (fund)	-11.1%	+18.9%	+7.4%
Vanguard LifeStrategy 60 (fund)	-10.9%	+9.9%	+3.7%
Vanguard UK All-Share Index (fund)	-4.6%	+18.2%	+2.0%
FTSE All-Share Equity Investment Trust Index	-19.0%	+12.8%	+5.3%

^{Notes: I use the Vanguard global tracker fund as my main benchmark and I have a stretch target of beating it by 2-3% per annum over the long term. The more conservative LifeStrategy 60 fund (a global 60% equity/40% bond portfolio), a UK index tracking fund, and an index of UK investment trusts provide additional reference points. All returns are measured in sterling using a unitised method for my portfolio that adjusts for any new money put in or any withdrawals.}

It’s disappointing to lag global markets of course but given the circumstances behind the fall, the make-up of my portfolio and the fact I haven’t made any significant changes to it, I wouldn’t say it’s a surprise.

Most commentators are calling this a bear market right now on the basis of what’s happened in the US. The S&P fell 21% in the first half on a price-only basis while the NASDAQ 100 dropped 30%. Global markets measured in US dollars notched up a loss of around 20% on a total return basis.

The strength of the US dollar did cushion the blow which is why UK-based global trackers have only lost around 11%. The pound was $1.35 at the start of 2022 while it was $1.21 on 30 June so that’s quite a move. The pound has also slipped against the euro but not nearly so much.

The US 10-year bond yield rose from 1.5% at the start of the year to 3.0% on 30 June, although it reached 3.5% in mid-June. As a result, the 60/40 fund has fallen by roughly the same amount as the global tracker as rising interest rates have hurt bond prices. It’s unusual to see both bond and equity markets hit at the same time but it was always a possibility given how low yields had fallen. Of course, the flip side of this is that the long-term case for the 60/40 portfolio is probably rather stronger now that yields are coming back to more sensible levels.

The UK’s bias towards energy stocks and other value companies has meant it’s held up pretty well although it’s still in negative territory while the investment trust index that I keep an eye on is down 19%. Although there has been a marked increase in alternative asset trusts in recent years, a lot of equity trusts still have a growth bias and that has dragged down the average return.  This index includes all the investment trusts in the FTSE All-Share, 192 at the last count, representing about 70% of the trust sector by market cap.

Where we go from here is the question that everyone’s asking but no one knows the answer to. We always have to deal with unknowns and uncertainty when investing but rarely to the extent that we are seeing now. What we can say is that profit multiples for US stocks have come down a lot already (the forward P/E for the S&P 500 has gone from 22 to 16 times) but the earnings estimates these forecast numbers are based on have actually risen slightly in recent months. Many commentators think that may change when the next set of quarterly results roll in and we get a clearer idea of whether higher inflation and rate rises will cause a recession in the US.

Although I’ve toyed with the idea of taking a more defensive position across my portfolio, I’ve decided to leave things pretty much unchanged for the time being. That’s partly due to my investing timeframe, which I’m hoping is at least a few decades, and partly due to the fact that I have other assets outside of my portfolio that help lower my overall risk profile.

My performance by holding

Here’s how my individual positions did on a share price and NAV basis along with their current rating. The column headers should be sortable (they might not be on some mobile devices).

Holding	Share price H1	Net asset value H1	Premium/ (discount)
Gresham House Energy Storage	+23.3%	+16.1%	+19.1%
Bluefield Solar Income	+8.8%	+6.7%	+3.2%
HgCapital	-20.4%	+0.8%	-24.7%
JPMorgan Global Growth & Income	-13.4%	-9.5%	-0.9%
KR1	-73.9%	-68.3%	-31.9%
HICL Infrastructure	-0.1%	+7.7%	+5.6%
Vanguard All-World ETF	-10.7%	–	–
Lindsell Train Global	-9.5%	–	–
RIT Capital Partners	-12.1%	-5.6%	-8.4%
Bellevue Healthcare	-23.8%	-18.5%	-4.1%
Fundsmith Equity	-17.7%	–	–
Worldwide Healthcare	-12.5%	-6.1%	-7.6%
Baronsmead Venture	-6.9%	-9.0%	-4.2%
International Biotechnology	-11.4%	-8.0%	-3.3%
Henderson Smaller Companies	-34.1%	-30.2%	-15.1%
Smithson	-41.3%	-31.2%	-12.1%
Keystone Positive Change	-42.6%	-32.3%	-16.6%
BlackRock Smaller Companies	-38.2%	-29.0%	-15.5%

The two renewable trusts have done best while my infrastructure fund is flat for the year to date. All three are fairly small position sizes unfortunately although that’s also the case for my worst performers like Smithson, Keystone, and the two UK smaller-company trusts. KR1 is a tiny position for me so I’m happy to let that ride despite the very heavy losses incurred to date. I have it earmarked as primarily a learning exercise although it’s been rather more educational than I would have liked!

My major positions are down between 10 and 20% which is a useful reminder of the importance of position sizing. When I do venture into a new trust or sub-sector of the market, particularly one that has performed well recently, I think it’s important to tread carefully.

I don’t think there’s a great deal to add in respect of the individual trusts I hold but here’s a quick summary:

• I’m not aware of any style or manager changes across my holdings so each trust appears to be keeping to the same basic strategy.

• The premium at Gresham House Energy Storage should fall to single digits when its next quarterly NAV is announced, based on what they’ve signalled. The trust has big expansion plans for the next couple of years and still seems to be executing very well although I still consider it a riskier proposition than other renewable trusts.

• Bluefield has raised more money, hence its relatively small premium, although I suspect investors are probably also waiting to see how its diversification into wind and energy storage plays out. There could also be some lingering concerns about whether it might get caught by energy windfall taxes.

• HICL is still struggling to increase its dividend, keeping it flat for yet another year, but its NAV has been boosted by inflation-linked revenues.

• Lindsell Train is beating Fundsmith (due to less tech) but Smithson’s highly-rated investments have taken a real beating and it’s begun to buy back its shares now that it’s trading at a notable discount.

• Bellevue’s bias towards small- and mid-caps has meant it’s been the worst performer of my three biotech/healthcare trusts. Manager Paul Major still believes this part of the industry is best placed for the long term and the trust has increased its gearing level a bit so that’s something I plan to keep an eye on.

• JPMorgan Global Growth & Income’s merger with Scottish Investment Trust is taking a little longer than expected but should complete soon. Its usual premium rating of a few per cent seems to have disappeared in the past month but, even though its 30 June NAV was down compared to last year, it’s planning to increase its dividend slightly rather than reducing it so that remains at a fixed level of 4% of its 30 June NAV.

• RIT’s NAV has held up fairly well this year although its figures tend to be a little dated so they need to be treated with a little caution.

• The boards of both Henderson Smaller and BlackRock Smaller tend to be rather reluctant to do much in the way of share buybacks so their discounts can widen out more than other small-cap trusts when markets are in risk-off mode.

• Keystone is, understandably, keeping a low profile. It’s made a couple of purchases of questionable quality but the top ten holdings seem a little more robust than some other Baillie Gifford trusts. It’s also only got four unquoted positions so its NAV figure is less open to question than the likes of Scottish Mortgage or Baillie Gifford US Growth.

• HgCapital is the holding I’m watching the closest right now. Its pro-forma NAV for 31 March and adjusted for subsequent disposals is 455p but its share price has dived in recent weeks as investors think the high multiples used in its valuation are likely to be reduced substantially. A recent FT story may have knocked sentiment as well — it highlighted how Hg and other VCs have sometimes booked higher valuations when selling to other funds that also they run, although other external investors also seem to be involved in these transactions as far as I can tell. A couple of directors have bought shares since I intitally published this article, which is encouraging, but HgCapital’s interim result date of 12 September is firmly marked in my diary.

• Timely disclosure is still a concern for me at KR1 although the recent annual report signalled improvements should be made in this area over the coming year.  The revised bonus scheme will see a large number of shares being issued in respect of the performance for 2021 (around 23m I reckon) but set a very high watermark before any subsequent payment is made. Past ‘crypto winters’ have seen the KR1 team make astute investments and there’s no gearing and minimal cash burn so it’s better placed than most to take advantage of lower prices. It did make a $5m investment several months ago in a fund run by the ill-fated Three Arrows Capital but this has been fully provided for and looks to be a rare mis-step.

One notable feature has been how discounts have widened out across my portfolio this year. That’s not unusual in bear markets of course and something all trust investors should be aware of. On a rough calculation, I reckon widening discounts have knocked about four to five percentage points off my first-half returns. I’m hoping that effect will reverse when markets do recover although there’s no guarantee that it will.

Gearing levels are also something to watch out for as they can magnify falls in bear markets. I’ve got five equity trusts with low double-digit gearing at the moment but minimal gearing across the rest and nothing in the two open-ended funds or ETF, so it hasn’t had much impact on my portfolio.

My trading

Topping up, mostly in the form of reinvesting cash received from dividends, has been the name of the game for me this year.

I’ve added to HgCapital, Bellevue Healthcare, Bluefield Solar Income, Henderson Smaller, Smithson, Worldwide Healthcare, BlackRock Smaller, International Biotechnology, Keystone Positive Change, KR1, and Vanguard All-World ETF.

I sold a little HICL and some JPMorgan Global Growth & Income, the latter as part of an ongoing process to tidy up and reduce my taxable positions. I haven’t done anything with Fundsmith, Lindsell Train Global, Baronsmead Venture, RIT, or Gresham House Energy Storage. I reckon my portfolio turnover has been 2% this year so that remains very low. It’s been 5%, 9% and 7% for the last three calendar years.

I’m not considering any major portfolio changes right now. I’m watching a few trusts more closely than others of course but I’m not currently planning to get rid of anything in the near future or making any major position size changes.

Read my fund profiles at Money Makers

I’m continuing to write weekly fund profiles over at Money Makers with recent pieces covering AVI Global, Cordiant Digital, AEW UK REIT, Seraphim Space, Warehouse REIT, Capital Gearing, 3i Infrastructure, Pershing Square, and BlackRock Throgmorton. I’m working on HarbourVest Global Private Equity at the moment and that should be published later this week — it’s one of many private equity trusts sitting on a very wide discount right now.

Here is the sign-up page if you’d like to find out more.

   

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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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