Wednesday 25 April 2012

Portfolio Ex-Dividends and Rolls-Royce newsflow

 A few of my portfolio holdings have gone ex.dividend today. As at 9:08am:

- Centrica @ 311.23p, -11.3p (-3.5%) v. a dividend entitlement of 11.11p on the 13 June.
- Rolls-Royce @ 812p, -8p (-0.98%) v. a dividend entitlement of 10.6p on the 4 July.
- Tesco @ 317.82p, -7.63p (- 2.34%) v. a dividend entitlement of 10.13p on the 6 July.

So more or less in line with the actual dividend entitlement and the fact that the FTSE100 is more or less flat this morning at 5718.58, +9.09 (+0.16%) with these dividends adjusted for.

Rolls-Royce in particular has been pulling at the reins recently with plenty of positive newsflow in March and April, which even includes the recent re-entry into service of the repaired Quantas A380 that cast a very dark shadow over the company when an engine apparently exploded on its wing.

Elsewhere, Jefferies has upped its price target for Rolls-Royce to 950p (http://www.sharecast.com: Friday broker round-up) and the company continues to create news momentum with contract wins.
The largest recent announcement being a potential $598m contract (including options), spanning 5 years with the US Department of Defense.
Interestingly, March and April's announcements and contract wins are all either Defence (US) or Marine, rather than Civil, which can only help to diversify the company's revenues going forward.

At 812p (xd), the company's share price continues to show strength and resilience and a return to the 52 week high of 844p doesn't look beyond it.
It continues to be my portfolio's largest holding and has already achieved the first of my 2 stage target for the year which was 825p (Rolls-Royce Powers through the £1bn Profits barrier for the first time).
The second stage, 880p, continues to look achievable if the company achieves what it says it will and markets retain some stability.

Co-incidentally, 812p was the company's share price as at 31 March so looking at my March Portfolio update (March 2012: Portfolio Update.) I can see that the shares have gained 8.77% year to date plus a dividend payout to come (4th July), worth 1.49% (11.11/746.50p).

With the Aerospace season set to kick off in June with the Paris Air show there could be plenty more to come from Rolls-Royce.


Article links:
http://www.sharecast.com: Rolls-Royce to upgrade engines for the US Air Force

Previous related posts:
- Rolls-Royce Powers through the £1bn Profits barrier for the first time.

Tuesday 24 April 2012

Apple Q2 Results lead bounce back in after hours trading.

Apple @ $598 in after hours trading with a trading session high of $604.

Well there you have it. Apple appears to have bounced in after hours trading on the Nasdaq after reporting:
- Q2 sales of $39.2bn (2011 Q2: $24.7bn) including 64% international sales
- profits of $11.6bn (2011 Q2: $6bn)
- gross margins of 47.4% (+41.4% v. 2011 Q2)
- 35.1m iPhones sold (+88% v. 2011 Q2)
- 11.8m iPad's (+151% v. 2011 Q2)
- 4m Macs (+7% v. 2011 Q2)
- 7.7 iPods (-15% v. 2011 Q2)

So Mac sales were up, iPhones almost hit the record busting Q1 no of 37.05m (with the benefit of an extra week in it), iPads continued to grow, and iPods continue their expected decline. 
And with another $10bn of cash surplus to add, the company is now estimated to have around $110bn.

Not bad going.

Looking ahead, Peter Oppenheimer, the CFO, also added a company Q3 Revenue expectation of $34bn.

What was all the worry about then?
Still fair to say that the Cupertino juggernaut is venturing into unknown territory with the year on year comparables it is achieving, and still being expected to achieve.
The cash pile and the announced dividend/share buyback program might help to balance returns v. expectations but the challenge can only get tougher.

There is now a huge weight of expectation on the company and its product pipeline (with iPhone 5 etc.) but, for the moment, and given all the surrounding negativity, I am a happy (and somewhat relieved) shareholder.


Article links:

Related posts:

Sense of foreboding ahead of Apple's quarterly statement.

Apple @ $557.75, -$13.95 (-2.44%)

I've had a reasonable day given the towelling that markets took yesterday. 
But I am more than a little concerned about Apple ahead of the markets close and their latest quarterly update.
Lots of focus on the company over the last couple of weeks with some quarters calling a bubble and others touting $1000 per share.
Mac sales are in focus as are iPhones given Qualcomm's recent warning about chip availability. I've also just read a report regarding "betting" on Apple options that the shares will shift by more than 7.15% (either way), with these results as opposed to the "normal" 4.25%.
It does seem that there is a subtle sea change in investor support for the shares with many willing the company to falter in order to be proven right.

Given that the shares are off their highs of $636.23 (-12.4%) in a fairly determined trend, which includes today's 2.44% (currently), it is strangely unsettling.

With last quarters record busting $46.33bn of revenues (includes an extra week plus Christmas), the company has been given a little relief with analysts estimates coming in at $36.8bn for this second quarter. Although, it has to be said that this still implies 50% growth on the same quarter last year.
Post Christmas, growth in China will be a big factor I would suggest.

Up to now the company has managed analysts expectations pretty well and I hope that this has continued.
As ever with Apple, the expected numbers are huge and the comparables significant, and more significantly there are voices queuing up to see them fail.
To be fair the company delivered record results in Q4 2011 (Apple update: record breaking 4th quarter results disappoint!)which also managed to disappoint but bounced back strongly in Q1 of this year (Apple blows away Q1 Forecasts with Record Quarterly Sales and Profits. ).

Fingers crossed for a happy outcome but I might end up chewing a few nails whilst I wait in trepidation.

Related posts:

Monday 23 April 2012

Computers taking over LloydsTSB / Scottish Widows Investment!

Interesting to read about Lloyds latest strategy for its Scottish Widows Investment arm in the following article: http://www.thisismoney.co.uk: Lloyds sacks half of fund managers for robots.

Apparently the bank's Scottish Widows Investment Partnership, with some £143bn under management, is reducing its 38 fund managers to just 15 due to criticism about its poor returns and the high charges that come with investment in their funds.

What is the bank's strategy to improve this problem...., computerised, or "robot" funds!

The funds will now be managed from a single UK location and computers will be used to "manage" money (I assume between funds?) rather than buy and sell stocks and shares.

And, although clearly rationalising resource and reducing management costs to itself, LloydsTSB / Scottish Widows has yet to suggest that this might lead to a cut in charges to customers!

I can't speak for the company's performance but, given this article, I can say that it wouldn't inspire me or fill me with confidence to hold investments/pensions with them as I can only see "robot" funds responding to situations and more likely to follow the herd/peers in order to match "average" performance.
Its more than likely the case that one could invest in a tracker for lower charges and more transparent performance.

Certainly not for me but further underlines that the "professionals" can't always get it right.

Related articles:

Sunday 22 April 2012

9:48 Tuesday 17th April: 10,000th page view!

9:48 Tuesday 17th April 2012 is the time, day and date that this blog had its 10,000th page view.

Wow, that feels quite momentous to me so thanks to all of you for taking an interest and that 10,000th page viewer.

Now on 10,238, the total is made up of viewers from:

United Kingdom - 4723
Germany - 1560
United States - 1301
Russia - 585
Singapore - 292
Netherlands - 113
France - 94
New Zealand - 93
Latvia - 81
China - 55

There have been many, many more countries but Google data only picks up the top 10 of everything. 
The last month's top 10 picks up additional country views from Australia; Brazil; India; and the Philippines.

Hopefully, I can continue to write things of interest and lets see how long before the next 10,000 milestone is reached.

Thanks again. 

23 April - Just noticed that my Alexa site rank is now 17,306,289 (22,727,395)!

Thursday 19 April 2012

Investment tools: Pound cost averaging approach.

"In the ... post (Strategy for the Euro?), you talk about pound cost averaging and brokers offer this service....to keep fees down, did you use the companies share administrator to acquire new holdings? I.e. for lloyds, you had a account with Equinity?"

OK, so I have mentioned pound cost averaging in a few posts now but probably not fully explained how this might be applied.

The trailblazer, in my opinion, was Halifax, which previously marketed an account called Sharebuilder whereby you could choose to set up automated regular monthly trades to purchase blocks of shares as small as £25 with a dealing charge of £1.50.
You were given a choice of the same 4 "dealing" days within any month should you have a particular preference.
Halifax did state a minimum £25, but, as far as I could tell (and experienced), there was no limit other than your funds, and the charge would still be £1.50.

For someone who has traded, there is a blind spot (as the date is set in advance), so you wouldn't know the exact price you are going to be trading at and once into the trading day have no easy option to cancel.
But you do need to remember that the strategy is to pound cost average so any swings and roundabouts should be smoothed out over time in your monthly evolving average holding price.

Although I no longer use Halifax I did find the service to be very flexible with:
- the choice of 4 trading dates,
- being able to set up/change/cancel the night before a trading day, and
- I never found a share I couldn't trade (aim etc).
I even used it for one-off purchases with more substantial amounts that were still dealt for £1.50 (+stamp duty).

I have also used other brokers (Selftrade being one) which have matched the dealing charge but only offered 1 dealing date in the month and restricted to FTSE 100 shares. TD Waterhouse is another who offer this service.

Its a strategy normally associated with Unit trusts but I found it to work well with high yielding shares (either rock solid or in recovery) as you get a reward for your patience with the dividends whilst also "saving" up to a reasonable stake.
Once you've reached a reasonable stake you can re-direct your savings towards another share.
Depending on your savings amount you may  choose to buy more than one company from the off. It might take longer to reach your stake targets but introduces diversification.
Diversification adds a further means of managing risk whilst also improving your probability of success by purchasing more than one share.

I also think that it serves as a useful half way house for those individuals who are:
- looking beyond savings accounts
- wanting to trade/own individual shares (as opposed to funds),
but:
- might not have substantial capital to start with
- need to manage exposure
- want to start a regular savings/investment habit

It does help to manage risk/exposure with smaller regular purchases and I try to view the little extra expense (average price v best price) as a sort of insurance premium.
Trying to time shares by finding the bottom (or top?), whilst theoretically rewarding, can also prove to be a stressful and ultimately fruitless exercise
A strategy such as this can also complement, or run alongside, an existing portfolio as it still drips feed regular amounts into the market that might otherwise be seen as too small to trade.
And, in uncertain or sideways trading markets such as these last couple of years have been it could be particularly useful as a means to manage risk v. horizon.
For example, despite what many of might say it is difficult to commit capital to falling markets as your personal risk alert and fears heighten.
However, committing smaller "automated" regular amounts that are relatively insubstantial and not immediately missed, allow you to sleep at night whilst still managing personal levels of risk and buying value in the market.
Buying on a peak increases your average purchase price but remains below current market price and buying on a dip lowers your average purchase price.

I believe that the brokers mentioned term their offerings as regular investment options as part of a Dealing Account (so they aren't a stand alone service) and that the Halifax charge is now £2 (http://www.halifax.co.uk/sharedealing/investment-options/ways-to-invest/regular-investments/).
It should also be said that the brokers mentioned still offer real-time trading within the same accounts for the "full" charge.
Remember though, that there may be a annual management charge for any trading account.

I would assume that these 3 brokers are not alone in offering this service so you should look to your own preferred broker/dealing service first should you wish to explore this strategy.

The service and strategy is equally applicable to executing within an ISA or SIPP (account charges apply), and most brokers these days seem to offer fund supermarket options allowing you to undertake a similar strategy with funds alongside individual shares should you wish to do so.
Remember also that with a 2012-13 annual ISA allowance of up to £11,280 (http://www.moorestephens.co.uk: Increased ISA allowances for 2012/2013 ), you could put a regular savings habit towards this allowance.

Its not where I started from as a strategy, but on a last thought, in this day and age it is all too easy to dismiss small amounts and regular savings but they can all prove useful in helping to start a savings habit and taking "cumulative" steps towards your financial goals.


Article links:
- http://www.halifax.co.uk/sharedealing/investment-options/ways-to-invest/regular-investments/
http://www.selftrade.co.uk/services/price-list/dealing-charges.php
- http://www.tddirectinvesting.co.uk/choose-an-account/regular-investing/
- http://www.moorestephens.co.uk: Increased ISA allowances for 2012/2013

Earlier posts:
- Strategy for the Euro?
- My end of year tax planning.

Wednesday 18 April 2012

Wed 18 April FTSE100 dividend impact.

Always interesting to me to see the impact on an index of shares going ex-dividend and as per last time ( Wed 7 March FTSE100 dividend impact), Reuters appear to have done the grunt work with the following article:- Ex-divs to take 9.1 points off FTSE 100 on April 18.


Tue Apr 17, 2012 5:49am EDT

LONDON April 16 (Reuters) - The following FTSE 100 companies will go
ex-dividend on Wednesday, after which investors will no 
longer qualify for the latest dividend payout.   
According to Reuters calculations at current market prices, the 
effect of the resulting adjustment to prices by market-makers would 
take 9.10 points off the index.   
         
 COMPANY          (RIC)            DIVIDEND         INDEX IMPACT
                                   (pence)           (points)   
 Aggreko                            13.59             0.14
 BAE Systems                        11.30             1.41
 Capita                             14.20             0.34
 Kazakhmys                          12.6768           0.10
 Legal & General                     4.74             1.07
 Old Mutual                          3.50             0.75
 Old Mutual                         18.00             3.84
 special div.                                       
 Petrofac                           37.20 cents       0.23
 Resolution                         13.42             0.71
 Smith & Nephew                     10.80 cents       0.23
 Tullow Oil                          8.00             0.28



So 3 life assurance companies: Old Mutual, Legal and General, and Resolution, account for 7.81 points and BAE accounts for a further 1.41 points as they all trade without the dividend entitlement.
The other interesting thing to note is the statement "resulting adjustment to prices by market makers", which is interesting given the assumption of electronic trading and the view that prices are just determined by buyers and sellers. 
Market makers have traditionally provided recognised points of contact to buy and sell particular shares in order to maintain liquidity but, I assume, they themselves are managing cash floats (to buy), working capital (shares), and margins of profit on their trading.

 Article links:

Earlier posts:

Tuesday 17 April 2012

Investment spotlight: Can Weir Group continue to pump up profits?

Weir Group @ 1652.95p,-10.05p (-0.72%)

I've been taking a keen interest in Weir Group, the pump specialist, who's share price has come back from a high of 2236p to the current 1652.95p.
The company has a global presence and occupies a niche position supplying the Oil & Gas; Minerals; and Power and Industrial sectors through 3 division bearing the same name.
Major customers include BHP Billiton, Shell, Rio Tinto, Vedant, Anglo American, Xstrata, and BP.

Sales consist of new equipment and a growing aftermarket business along with exposure to the latest, if highly controversial, shale oil extraction methods.
Oil and Gas occupies around 30% of the company's forecast revenues and it appears that concerns around the viability of this latest trend has resulted in the current pull back of the share price.
The Power and Industrial division has also been subdued following the tsunami/Fukushima nuclear disaster of last year.

Over the last 5 years:-
- Revenues have doubled (£1009m to £2292m) and profit before tax has more than trebled (£109m to £391m)
- Operating margins have steadily increased over the last 5 years from 10.97% in 2006 to 17.62% in 2010
- Return on Capital Employed has also increased over the same period from 33.23% to 58.98%.
- Although not a headline grabber, the dividend yield has actually doubled in the last 5 years from 16.5p per share to 33p paid out last year.
- Over the same period, dividend cover has improved from 2.41 times to 4.05.

- Cash has swung around from £54.2m in 2007 to £114m in 2011 and it looks like there was a major acquisition in 2007 with the decrease in cash and increase in borrowings from 2006.
- Gross borrowings are now £695m (payable inside 5 years) and swallow up 62% (gross gearing), of shareholders funds (net assets) which themselves total £1118m. 
62% is a big jump on 2010's 39.9% gross gearing figure and is probably due to acquisitions. I note that the Preliminary accounts also refer to a post balance sheet acquisition of around £114m.

- Utilising the available cash would result in net borrowings of £582m and gearing of 57.9%.
- Interest cover, based upon payments of £19.4m and adjusted profit before tax of £410.9, is a healthy 21.18 times so should be manageable (see later for cash flow v earnings v borrowings though).
- Net assets (Shareholders funds) have more than doubled from £545m to the already stated £1118m.
But, there is a size able intangibles figure (goodwill) of £1332m, which if excluded takes the net asset figures negative by £214m. 
Serves to illustrate that there have been significant acquisitions over the last 5 years which requires healthy future cash flows to justify.

- Cash flow per share is 94.02p per share but it is a concern that this is significantly below the 133.6p earnings per share figure.
- Headcount has increased by 2,000
- Current liabilities were recorded at £796m, up from £534m.
- Consensus growth is forecast at 18% (2012) and 10% (2013) bringing the forecast P/E down to 10.8 (2012), then 9.6 (2013).

Earnings forecasts do seem to be going up despite general market concerns around Chinese growth and the demand for commodities: oil, gas, and minerals.
But it might be that investor's expectations for the company had got ahead of analysts forecasts and have now reverted to the average which has pulled the share price back.
I am concerned at the proportion of intangibles which potentially negates all shareholders interest as it outweighs the remaining assets.
This also points towards what might have been a highly acquisitive few years for the company and I note that they continue to look at acquisitions so, it seems that shareholders have already put a lot of faith in the company's management.
But it remains to be seen if this continues to be borne out particularly when cash flow has started to fall short of earnings per share. 

Generally this shortfall can be put down to lead time differences between monies going out on working capital etc and monies coming in. 
In most cases the effect is only minor but to illustrate the point it can create a mini credit crunch at which point liquidity in the form of short term credit may be required, the result being that a company might possibly "waste" money on finance charges just to bridge the shortfall between cash coming in and cash going out. 
I note that in these most recent results Weir's short term borrowngs jumped from £6.3m to £92m, which is part of a bigger jump, from £534 to £796m, in the overall current liabilities (payable within 12 months).
However, as mentioned, the company also makes reference to a post balance sheet purchase of Novatech at £114m along with the repayment of bridging finance used to purchase Seeboard so, I would assume, that these numbers now look more favourable.

On the positive side, the numbers do illustrate success in the company's strategy and I particularly like the strategy:
- to build on technical expertise with new equipment
- target high growth, long cycle industries
- establish long term relationships with aftermarket support
- sharing of technology and expertise across sectors

It actually sounds a lot like my view of the Aerospace market but it remains to be seen if this is the case although I can certainly see that potential with the company's subdued Power division when you consider the life cycle of a nuclear plant.
And looking forward, the company's management are forecasting decent growth in 2 of its 3 divisions. 
But they also continue to look at strategic acquisitions as a driver for growth, the rate of which, is a concern.


Positives and negatives then but there is a track record so, on that basis, with just a little bit of positive economic news and/or upside surprise, I can probably see Weir returning to its 52 week high of 2236p and probably pushing beyond this to 2368p.
2368p would give a very handsome 43% gain in addition to the yield of 2.2%.

However, it is very much dependent upon your forward view on the state of the global economy and whether or not there is a bubble in commodity prices to correct.  Any hiccough in demand needs to be watched for as this would bring cash flow and borrowing concerns into focus.


Sunday 15 April 2012

New proposed investment strategy based upon Neil Woodford's top 10.

Like the morning after a night before! investors and global markets appear to have woken up and remembered that it hadn't just been a bad dream and that there is still a hang over of concerns over economic stability, growth and inflation.
But I also notice that Lehman Brothers is coming out of the bankruptcy protection under which it has been thus far trading (http://www.bbc.co.uk: Lehman Brothers to repay creditors more quickly), which will enable it to start selling off assets and repaying creditors with an initial first round of payments potentially equating to $22.5bn, as part of an overall estimate of $65bn.
Surely must be good news for the creditors.

Anyway, looking forward, I mentioned in my last portfolio update that I have sold the portfolio's holding in the Invesco Perpetual High Income Fund (March 2012: Portfolio Update. ) but believe that there may be a useful low maintenance strategy that could be utilised by virtue of continuing to follow the fund's highly rated manager Neil Woodford.

One of my reasons for selling was that I had started to mirror some of the Invesco fund's choices  (December 2011: Portfolio Update) which, but for sales of National Grid and Tesco would have meant seven of my portfolio being duplicated in the Invesco fund. (16/4/12 amendment:- Or 8 given the news that the fund also owns Morrisons).

However, I am still hugely respectful of Neil Woodford's reputation and an admirer of both his performance and willingness to stand resolute with his strategy, so I will continue to put weight on his views.
And whilst a further grumble of mine is a lack of opacity and an odd disconnect between his fund's pricing and the apparent movements of his largest holdings (even with the understanding that there is a natural lag), I think it worthwhile to continue to monitor his performance against both the Edinburgh Investment Trust (also managed by Woodford), and a basket of his leading choices.

What do I mean by that? Well, in my March portfolio update I also suggested that there may be a reasonable strategy here for an individual investor to follow the flavour and philosophy of a major fund manager by selecting a basket of the fund's key picks. 
This kind of concentration, and limited diversification, is not something that Woodford could adopt due to the risks but might present a more acceptable level of risk v. reward balance to an individual investor (remember the research and monies invested by Woodford).

Open to debate but as of the fund's most recent report:
- the top 10 holdings occupy 55.33% of the fund's investment. Within that 55.33%:
- 20.62% is in Pharmaceuticals
- 16.14% is in Tobacco.
- 9.49% in Telecommunications

Top 10 holdings                             %
AstraZeneca                               7.90
GlaxoSmithKline                        7.86
Reynolds American                    6.07
British American Tobacco         5.96
BT                                                 4.86
Roche                                           4.86
BG                                                 4.77
Vodafone                                      4.63
Reckitt Benckiser                       4.31
Imperial Tobacco                         4.11
Total                                            55.33
Total number of holdings: 108

So if I was to pick 3 it would be:
- 1 pharmaceutical from Astrazeneca or GlaxoSmithKline.
- 1 tobacco and my preference would be for British American Tobacco with its greater exposure to emerging markets
- 1 telecoms with my preference being for Vodafone due to its: global exposure; exposure to smartphone products; and (within both those points), its shared ownership of Verizon Wireless the second largest mobile carrier in the US.

That's 2 of 3 picks then. I just need to decide between the lower rating, higher dividend yield, and net cash position of Astrazeneca or, the apparently more resilient drug pipeline of Glaxo, its larger vaccine business, and its commitment to develop its consumer products business which includes brands like Horlicks, Ribena, Sensodyne, Aquafresh, Macleans, and Lucozade. Putting it down like that suggests that Glaxo has more strings to its bow and opportunities  for growth than Astra, so Glaxo it is then.

I might easily have picked the largest holding of each sector though which would result in AstraZeneca, Reynolds, and BT. Although you could substitute BAT's for Reynolds in order to maintain a UK sterling based portfolio.
You might note that picking one of each dominant sector brings a small measure of diversification with it.

I'm also going to start with a notional £6000 and put £2000 (less stamp duty and dealing charges) in each and will start it from Friday's closing prices and try to use an indicative spread which I'll look for next week when markets open again.
Mid prices then:
- Invesco Perpetual High Income Accumulation units - 530.75p
- Edinburgh Investment Trust (Invesco Perpetual) - 489.1p
- GlaxoSmithKline - 1402p
- British American Tobacco - 3129.5p
- Vodafone - 169.45p

2 of the 3 picks have already gone ex-dividend so that might give the Invesco fund a minor head start but we shall have to see how that pans out.
I shall attempt to show dividends in the portfolio as cash until re-invested but, on the fund side, I have used the Invesco fund's accumulation units which automatically re-invests dividends.

I just need to finalise the amounts invested, and a few more rules, but it looks like we have a strategy to experiment with!


Related articles:

Earlier posts:

Saturday 14 April 2012

Irrational markets article (daily mail).

I hadn't just cottoned on to the fact that today (now yesterday!) was Friday the 13th until I read the following amusing, and disconcerting, article:- http://www.dailymail.co.uk: Friday 13th - and 13 reasons why today's markets are irrational.

Taken directly from the Daily Mail article:

"The 13 'unnatural events' that sum up today's bizarre markets:
 
1. The financial situation of many developed economy governments has never been worse ... yet the rates at which they can borrow money have never been lower. The US has 3.3 times more debt outstanding than a decade ago and yet the yield demanded by the market has fallen from 6.1 per cent to 2.0 per cent
2. Investors are lapping up corporate bonds (P&G 10 year at 2.3 per cent and McDonalds 30 year at 3.7 per cent) whilst selling the same companies equity where the well covered equity dividend yield is higher than the corporate bond yield.
3. Bond yields are below 2 per cent indicating that there is a very low probability of inflation and a high probability we are turning Japanese. Meanwhile, gold races onwards and upwards as central bank money printing points to a probability of inflation.
4. Bond yields are at all time lows, and no one wants to borrow money even at this rate... but central banks keep spending billions to try to get rates down just a little bit more.
5. Some of the smartest investors in the world (Warren Buffett, Seth Klarman, Jeremy Grantham) think bonds are hideously over valued and yet most pension funds are looking to increase their allocations to bonds and bond funds continue to top the best selling fund tables.
6. Corporate earnings are at their all time highs, are strongly mean reverting and in the long run grow at about 5 per cent nominal… so of course for this year, the sell side forecasts 10 per cent growth and fund managers and strategists continue to talk about how cheap equities look on one year forward P/E’s.
7. The average holding period for UK equity has fallen from 10 years in the 1950’s to 22 SECONDS!! Note to David Cameron, if you are expecting shareholders to exert greater influence on management remuneration, owning a stock for 22 seconds makes attending the AGM quite tricky.
8. The ECB, backed by European sovereign states, is lending money to European banks at 1 per cent so that the European banks can lend money to sovereigns by buying government bonds of European states or put it back on deposit with the ECB. Everyone seems to think this is great but when Bernie Madoff did it he was arrested.
9. Articles about how hedge funds swallow up 85 per cent of their client’s investment gains in fees continue to appear alongside articles about investors’ intentions to increase exposure to hedge funds.
10. During the credit crisis the ratings agencies rated over 50,000 subprime CDO’s as AAA….and yet the markets still hang on their every word.
11. Luxury goods used to be the first thing to go in an economic decline whilst basics would hold up. But now we have Tesco posting their worst sales for 20 years whilst Burberry grow sales at 20 per cent and new orders of Bentleys are up 50 per cent.
12. The vast majority of economists and strategists have proved hopeless at forecasting anything…. And yet continue to be hugely over confident in their ability to predict the future. “A Chinese hard landing is as likely as a comet destroying the earth.” - Jerome Booth, Daily Telegraph 19th February 2012.
13. Most investors would choose pile A (enough gold to fill the infield of a baseball pitch) in this year’s letter from Warren Buffett over pile B (which includes: a) all the farmland in America with output of $200billion annually AND b) 16 Exxon Mobils generating $640billion annually AND c) $1trillion of cash) because ‘gold is the only true store of wealth’. "

The clearest theme appears to be a confusing contradiction which illustrates the push me pull you direction prevalent in global markets.
But I especially like the last point which further suggests to me "how to think like a rich man?"; and that personal discipline, recognising your personal investment horizons, and being realistic about your goals are absolutely fundamental.
It also won't be easy to achieve them with various sources seeking to draw you from your path by feeding both the extremes of your fears and hopes for the future.

Some of the points have fueled my concerns about the integrity of any recovery, inflationary risk (in bonds, commodities, prices etc), and any negative longer term effect that cheap credit might yet fuel again without a clear cultural and behavioural change.

The dependency being placed on China to rescue the world is also concerning given that it has traditionally been the beneficiary of growth (on the supply side) but is now being seen as a growth driver for commodities, and a fast expanding frontier for growth for all Western consumer brands.
Inevitably some will succeed and many will fail.

As for the ratings agencies, they do also seem to be out of touch and must surely find a way to be much more transparent about their methods and computations to re-establish credibility.

Just stating the bleeding obvious and saying that a country or company is going to be downgraded because of "market sentiment" (Contagion Flu! ) as the right words haven't been spoken by politicians is no use to anyone and does little more than appease the majority with what they want to hear.
Particularly given their inability to remotely recognize the multiplying effect of debt risk in the run up to the credit crunch which opens them up to the criticism of failing to substantiate and doing little more than telling the majority what they wanted to hear i.e. that they were all onto a good thing.

However, a scenario stress test (with understandable but unpalatable variables), of a company's balance sheet or cash flow projections at least gives a view on what or how circumstances might cumulatively weaken a company's finances to reach a sufficiently concerning conclusion.
How else could they be substantiating their views and ratings?

The article also serves to downplay my constant fear that someone always knows more than me as the points made serve to illustrate that there are always at least 2 sides to any point.

All food for thought!

Article link:
- http://www.dailymail.co.uk: Friday 13th - and 13 reasons why today's markets are irrational.

Monday 9 April 2012

Investment thoughts: Is the Sky falling in on BSkyB!

BSkyB @ 635.50p, -22.50p (-3.42%).

So James Murdoch has stood down as Chairman of BSkyB (but retains a non-executive position on the board) in a move that may help to deflect some of the negativity linked to News Corp, (through the long running phone and email hacking scandal that led to the demise of The News of the World), from spreading to BSkyB.
Unfortunately, it appears that Sky News has created its own news-worthy headline with media reports that the company "was a heavy faller on reports that its Sky News unit had been involved in hacking the e-mails of a man accused of faking his own death. Sky said it believed it was in the "public's interest"."

I find the last part of that statement, where Sky News justifies its actions as being in the public's interest, particularly intriguing when despite arguably also being in the public's interest (given the Leveson Inquiry into media ethics), it has taken this long for this admission to come out.
I can only think that the story was about to break! 


It certainly seems to be a widening circle of questionable investigative methods but it remains to be seen if Sky can put up a sufficient defensive firewall to maintain its respected position of neutrality.

Even more important to Sky's fortunes is the need to ensure that nothing threatens its ability to bid for and retain the rights to Premier League football particularly at a time when the broadcasting industry has opened up a new front of competition with the entry of Netflix into the UK and the increasing viability of Internet TV.

It has home court advantage, is the incumbent pay TV operator in the UK, and has deep pockets but, in my view at least, the company's unique selling point and jewel in the crown continues to be live Premier League football.

So if the company can satisfactorily defend its reputation (James Murdoch's stepping down helps, even more so if the episode goes with him), BSkyB should be able to protect its position as the major source of live Premier League football in this country which could mean that the company, on 13 times forecast earnings and a yield of 3.9%, might yet present a brave but compelling investment opportunity.

Related articles:

Saturday 7 April 2012

March 2012: Portfolio Update.

OK so the balloon has certainly started to deflate towards the end of March with the FTSE100 pulling back 2.21%, driven hard by a sell-of in commodity and financial stocks amidst renewed concerns about Chinese growth, technical recessions, lack of growth, and European debt v. bailout funds.

Not a case of deja vu anymore though, more Alzheimer's, as it is the same issues of recent years and, despite very recent rhetoric to the contrary from the ECB (http://www.bbc.co.uk: ECB chief Mario Draghi says worst of euro crisis over), it certainly doesn't seem that the so called powers that be have put confirmed solutions in place.
To be fair though the ECB has been significantly more pro-active since the appointment of Mario Draghi in Nov. 2011.
You might also suggest that there are sections of the investment industry that actively promote and benefit from volatility hence the constant play on fear and emotion to drive markets up and down.

However, the FTSE100 does remain up a satisfying 3.05% year to date.
Within my own portfolio William Hill and Apple have been the strongest gaining performers in March with advances of 16.44% and 9.97% respectively, helping to offset losses on the 2 worst performers, Aviva and BP.
Welcome dividends from Microsoft, SSE, and BP also helped to shore up the portfolio to a flat performance for March and 7.89% year to date.
Actually, slightly disappointing that the portfolio is 3.15% down on its 2012 high though, which was achieved on the 14 March.

Controversially, the big news is that I have sold the portfolio's holding in Neil Woodford's highly regarded High Income fund following receipt of the fund's first dividend of 2012.
Many of you might have realised that it has been in my mind to do so for sometime now, particularly as many of my holdings have started to mirror those of the Invesco Perpetual fund. The 2 sector exceptions being Tobacco and Pharmaceuticals which I still hope to address at some point.
This fact coupled with the mystifyingly hard to track movements v. individual holdings in the FTSE100 (particularly his big plays on Astrazeneca, Glaxo, and BATs), is just too much opacity for me to be comfortable with.
Add in the annual management fee of 1.5% for a fund manager with such similar holdings only adds to my frustration.

At 6.64% of my portfolio, the fund doesn't seem to be a significantly influential factor either way although, to be fair, it has delivered an individual return of 27.6% (capital plus dividends) in 27 months.

It would be interesting to set up a little experimental measure by picking maybe 3 of his big playing dividend payers and measuring their collective performance against the overall performance of the Invesco Perpetual fund.
Its not really something that he could do with such a large fund, where more diversification is essential, but seems a reasonable investment strategy for an individual investor.

I also see that there is a slightly riskier but possibly more transparent means of investing in Neil Woodford's expertise, as he appears to be managing the Edinburgh Investment Trust as well. I say slightly riskier due to its access to gearing (issuing bonds) as a means of raising funds for investment much like a company would.

At just £1bn the Edinburgh Investment Trust is much smaller than the 2 Invesco High Income funds, appears to have a similar top ten in flavour and make up, and comes with a smaller expense ratio of around 0.66% v. the High Income fund's 1.5% annual management charge (http://www.thisismoney.co.uk: The 20 low-cost trusts that offered an average 24% return).

Anyway back to my portfolio which as mentioned earlier finished level for the month of March.
Note that for the purposes of illustrating individual performance I have shown Invesco Perpetual at its final portfolio valuation.

Merchant Adventurer's Index







Forecast 1 month YTD 27 mnth

Price % holding Div. yield % gain % gain % gain
R-R 812.00p 32.32% 2.40% -0.25% 8.77% 67.94%
National Grid 630.50p 16.71% 6.22% -1.71% 0.88% 16.17%
Aviva 331.50p 7.27% 8.49% -9.99% 10.21% -5.31%
Inv. Perp. High Inc. *** 540.47p 6.64% 3.68% 1.94% 5.20% 27.92%
BP 462.55p 4.08% 4.33% -6.06% 0.45% 6.26%
Apple ** $599.47 5.75% 0.00% 9.97% 43.60% 208.89%
IG Group 450.00p 2.87% 4.92% 1.72% -5.64% 49.57%
Morrisons 298.00p 2.26% 4.03% 2.76% -8.65% 17.77%
BG Group 1448.00p 2.54% 1.09% -4.58% 5.19% 32.84%
William Hill 261.40p 2.93% 4.01% 16.44% 28.90% 52.88%
General Electric ** $20.07 2.45% 2.54% 4.83% 8.72% 28.13%
Microsoft ** $32.25 2.49% 2.01% 1.10% 20.53% 30.47%
Centrica 316.40p 2.39% 5.21% 4.08% 9.37% 0.18%
SSE 1329.00p 2.21% 5.95% 3.02% 2.94% 15.47%
Vodafone 172.20p 2.01% 7.39% 1.68% -3.75% 6.87%
Tesco 330.00p 1.59% 4.59% 4.40% -18.21% -17.28%
BAE Systems 299.90p 1.80% 6.42% 4.09% 5.19% -6.06%
Cash
1.69% 0.00%











100.00% 3.94%






1 Month YTD 27 Mnth
Virtual Portfolio gain (incl. Divs)

0.02% 7.91% 52.10%
FTSE gain (excl. Divs)

-2.21% 3.05% 6.08%
- 1 month gain   5871.51 - 5742.03




- YTD gain         5572.28 - 5742.03




- 27 month gain 5412.88 - 5742.03











Transactions:





13/03/2011 Div Microsoft @ 10.74p per share (*)


14/03/2011 Sell Invesco Perp @ 540.47p per share


23/03/2011 Div Scottish & Southern @ 24p per share


30/03/2011 Div BP @ 4.3p per share









Notes: 





*     US Dividends are adjusted for exchange rate and 15% withholding tax
**   Sterling : Dollar exchange rate = £1: $1.60 as at 31/03/12

***  Invesco Perpetual Accumulation units (Dividends re-invested). Yield shown is based upon most recent payments.

And visually.

Click to enlarge, back/close to return

So Invesco has gone and I have yet to replace it but am looking to re-invest the funds gradually over the next six months as opportunities present themselves. A key objective will be to replace the dividend and, on that score, I am not averse to adding a pharma or tobacco such as Glaxo, Astra, or BAT to my portfolio. But I am also open to topping up existing holdings.

I am also starting to form the strong opinion that portfolio's (particularly buy and hold) eventually achieve a level of tracker status with the major indices except for when: new funds are added, individual holdings are "churned", or dividends re-invested all of which change the timing and entry point of investment relative to markets.
The pairing of this investment opportunity with market dips (buying when others are selling), appears to be a fairly understandable means of beating the index.

The comprehensively media covered indices understandably react to the macro-economic environment and, in most cases, the weight of all this sentiment (positive and negative), is enough to drag the majority of its constituents down but the year on year performance of an index is still anchored to the point it started the year at. 
But, an investment when the market is below its starting point obviously has a much better chance of going on to beat the performance of its index due to it having a lower (cheaper) starting point.
It still comes down to belief in, and doing some homework on, an individual company's prospects, and the longer term direction of markets and global recovery, but serves to give me a basis of further rationalising buying when others are selling and how it is still possible to outperform a seemingly sideways trading FTSE100.

Time will tell.