Diary of a Private Investor

Rebalancing Update Q3 2017

In my posts of 23 June and 1 July, I outlined the rationale for taking an overweight position in IQE and how I planned to mitigate that risk by flattening and broadening the remainder of the portfolio; adding more income and more conservatism, as measured by both volatility and market capitalisation. The main phase of this restructuring is now complete and the revised holdings/weightings can now be viewed here. Below, I have listed the trades I have made since my last update at the beginning of this month:

Sold Out
Eco Animal Health (EAH)
Stadium Group (SDM)
System1 Group (SYS1)
Microgen (MCGN)

There is nothing fundamentally wrong with any of these companies but I wanted to take some profit and some risk off the table. All four companies have gone straight back onto the watchlist and therefore, future repurchase is entirely possible.

Top Sliced
Petards (PEG)
Zytronic (ZYT)
Games Workshop (GAW)
Beximco Pharmaceuticals (BXP)

Again, there is nothing fundamentally wrong with any of these companies but I wanted to bank and reinvest some profits.

New Holdings
Oxford Metrics (OMG)
Concurrent Technologies (CNC)
Tristel (TSTL)
Bodycote (BOY)
TT Electronics (TTG)
Acal (ACL)
Bloomsbury Publishing (BMY)
Qinetiq (QQ.)
Accrol (ACRL)

These new holdings are mainly entry positions aimed at broadening the portfolio. They are also companies that I believe offer good growth potential in the current environment. Once you have DYOR, I am happy to discuss further on Twitter or Stockopedia. The one exception is BOY in which I have taken quite a large initial position based on a) good current trading, b) the patent pending technology in 3D printing and c) forecasts that are almost certainly too conservative and due an upgrade.

Added
Safecharge (SCH)
Impax Asset Management (IPX)
Hurricane Energy (HUR)
Anglo Asian Mining (AAZ)
Somero (SOM)
Centamin (CEY)
3i Group (III)
Henderson Far East Income (HFEL)

This is a real mixed bag. HFEL is a conservative, strong performing income share that also provides geo-diversity. SCH is a decent income share that might benefit from industry consolidation. IPX is going great guns and if their Assets under Management (AuM) continue to grow, I can foresee a re-rating at some point. In the meantime, I get good growth and a decent, rising dividend. SOM I decided was chopped too quickly on an earlier trading update and I have rebuilt my position. CEY is gold with a yield and I have added so that the position size remains consistent with the portfolio growth. And I am building a long-term core holding in III.

That leaves Hurricane Energy (HUR) and Anglo Asian Mining (AAZ) – the former a highly speculative sucker stock and the latter a highly speculative super stock, according to Stockopedia’s risk ratings and styles. Both are now long-term, core holdings where I am happy with the position size. In some respects, they are both adding upside risk to supplement IQE and offset the reduced upside risk in the remainder of the portfolio.

Current Strategy
The portfolio is now returned to 33 holdings which is where It started the year. My main focus is to have a balanced, diversified portfolio of around 50-60 holdings, two years’ from now. Why two years? That’s my official retirement date. I might stop work before then to focus on investing full-time but two years will be when I have full access to everything I have accumulated, hopefully providing a perpetual income without diminishing the capital. I am very close to hitting my targeted retirement number right now but unfortunately, much of it is not accessible until 2019. In short, IQE could help me bridge that gap at some point over the next couple of years and also provide my wife and I with what we are referring to as a “frivolous spending fund” in our retirement. In that context, the increased risk of my overweight position (IQE is currently 16.99% weighting) can be seen in context.

But boy oh boy, what an exciting prospect IQE is. There is a technological revolution underway with things like 5G, IoT and Data Centres about to take centre stage, not to mention other innovations like augmented reality and facial recognition which are anticipated to be part of the next generation smartphones. IQE’s advanced wafer technology will play a part in facilitating ALL of these high growth technologies – as I have been saying for a while now, it is a classic “picks and shovels” play. From an investment perspective, IQE is now in the midst of an upgrade cycle, as has been highlighted by both the company and its brokers. Sometimes, the probability of winning over the possibility of losing is just so strong that it is worth taking on extra risk. I am taking a 2-3 year view with IQE, although I will begin top slicing at some point, to fund the remaining build of the long-term, perpetual portfolio.

Let me be clear though – there is risk in IQE as a shareholding and therefore, increased risk to have an overweight position. Things can go wrong for any number of reasons – the dreaded unknown unknown or a major black swan event can happen at any time. That’s investing.

The overweight IQE position is somewhat offset by my larger holdings in HFEL, BVXP and IPX which I regard as long-term keepers that have a high probability of achieving solid capital growth and a rising dividend income over the next 2-3 years. I regard all three as low risk, largely immune to Brexit and other financial challenges such as inflation/recession, although some people might disagree with my risk assessment – I’d be happy to have the debate on Twitter/Stockopedia.

There are some other areas of the portfolio that I need to keep an eye on. I’ve got reasonably large positions in SCH (dividend and industry consolidation), IGG (dividend and industry consolidation), SOM (dividend and organic growth), BOY (dividend and organic growth) and CAML (dividend and exposure to copper which I think will be in short supply with all the technology advancements like electric cars). I’ve also got potentially high risk positions in HUR and AAZ, although again, I am taking a 2-3 year view and trying to ignore the volatility along the way.

What I’d really like to see is a market correction so that I can assess how resilient the portfolio will be when the market eventually turns bearish, although I doubt many readers will thank me for wishing that. At the moment, we are in a generally bullish market where good performance/news is well rewarded, in line performance is tolerated and poor performance/news is punished. That feels like a fairly rational market to me. Inevitably, this means some of my holdings will go up and others will go down. I will continue to cut those holdings that do not perform, especially selling without emotion when there are company specific reasons to do so, such as profit warnings and/or stop loss breaches. And all things being equal, I will be able to continue top slicing gains on winners in order to compound returns across the whole portfolio.

Happy investing folks!
Simon (Twitter: @BrilliantLeader)

 

Disclosure – At the time of writing I own shares in PEG, ZYT, GAW, BXP, OMG, CNC, TSTL, BOY, TTG, ACL, BMY, QQ., ACRL, SCH, IPX, HUR, AAZ, SOM, CEY, III, HFEL, IQE, CAML, BVXP, IGG at the time of writing this article. A full list of my portfolio holdings and weightings can be found here.

 

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