Friday 15 February 2013

January 2013: "following Woodford" update.

OK so I'm a bit late with the 3 picks update as I try to assimilate Neil Woodford's decision to offload the High Income Fund's remaining holding in Vodafone (http://blogs.telegraph.co.uk: Investment guru Neil Woodford sells Vodafone despite good results), following the company's recent reporting of disappointing quarterly revenues results. 

In spite of this:
"The company reiterated that it expects adjusted operating profit in the upper range of £11.1bn to £11.9bn for the 2013 financial year, while projecting free cash flow at the lower range of £5.3bn to £5.8bn. 

The results follow market forecasts of “growth deterioration” at the firm and a reliance on Verizon Wireless for revenues. 

Precisely for that reason, it is of import to point out that on the conference call the outfit's Chief Financial Officer, Andy Halford, said Vodafone’s cash-flow will beadequate to cover its future dividend payments. " (http://www.sharecast.com: Vodafone reports decline in quarterly revenues, confirms forecasts -UPDATE).


But, looking at January, it was a good month for all 3 options, as all 3 moved up strongly. 
Perhaps not enough for the 3 picks though which continues to lag the 2 managed options despite recovering quite strongly into a positive position with 3.74% gain to date.
Of the 2 managed options the flagship High Income Fund still leads the way with an 8.56% total gain, just ahead of the Edinburgh Investment Trust's 7.77% gain.

There were no transactions in the month to report.


Shares Price£Value %Gain
Inv. Perp. High Income 1110.14 5.87 6513.44 8.56%
Residue 0.00
Dividends
Total 6000 6513.44 8.56%
Edinburgh Investment Trust 1182.00 5.30 6264.60 4.41%
Residue 0.43
Dividends 200.94
Total 6000 6465.97 7.77%
3 Picks
BAT 61.00 32.83 2002.63 0.13%
Glaxo 138.00 14.45 1994.10 -0.30%
Vodafone 1191.00 1.72 2049.71 2.49%
Residue 3.68
Dividends 174.56
Total 6000 6224.69 3.74%



Transactions in the month:
Invesco Perp. High Income N/A
Edinburgh Inv. Trust N/A
3 Picks N/A




Chart wise the picture is as follows:
Click to enlarge, close to return

So what to do now about Vodafone where my hand is being forced due to it no longer being a High Income Fund holding.
And, given that the strategy for the 3 picks is based upon selecting an investment from each of the 3 largest sector weightings in the top 10 of the High Income Fund, I now have to sell Vodafone (virtually), and replace it (virtually). 

Looking at the current top 10 as of the 31 January 2013, I can see that the fund is now hugely weighted towards Pharmaceuticals and Tobacco companies which now occupy the Top 6 spots and 39.27% of the whole fund. 
Further, assuming that Tobacco is being classed (here at least), as Consumer Goods then Reckitt Benckiser adds 4.90% to that figure.

Bizarre that the Top 3 holdings are Healthcare companies but the next 3 could be categorised as the antithesis of Healthcare.        
  • Top 10 holdings                      %
  1. AstraZeneca                         8.94
  2. GlaxoSmithKline                  8.21
  3. Roche                                    6.22
  4. British American Tobacco  5.66
  5. Reynolds American             5.29
  6. Imperial Tobacco                 4.95
  7. BT                                          4.95
  8. Reckitt Benckiser                 4.90
  9. BAE Systems                       4.78
  10. Capita                                    3.73
  • Total                                      57.64
  • Total number of holdings:  113
The sector breakdown for the whole fund is as follows:

  • Breakdown by industry sector   %
  • Health Care                             34.25
  • Consumer Goods                   21.42
  • Industrials                                 20.42
  • Utilities                                        8.19
  • Financials                                   7.97
  • Telecommunications                 5.21
  • Consumer Services                  1.63
  • Basic Materials                         0.29
  • Technology                                0.12
  • Unit/Investment Trust/Other      0.12
  • Oil & Gas                                   0.02
  • Cash                                           0.38
  • Total                                         100
Based on the guiding rules so for, that would see me trade Vodafone for.... BT, as Telecoms continue to be the 3rd biggest sector represented in the Top 10.
Not ideal for me at all, as trading Vodafone for BT is not something I would personally choose to do.
Alternatively, the next sector in the top 10, and the 3rd largest weighted sector in the whole fund, would be Industrials as represented by BAE.

So its a coin toss between:
  1. sticking to the Top 10 as the primary sector guide and picking BT,
  2. using the whole fund as a sector guide and choosing BAE or,
  3. a final option would be to pick another from the top 2 weighted sectors in the Top 10.
I was actually quite comfortable retaining Vodafone in this virtual experiment so this is giving me quite a quandary which, it wasn't ever intended to.
I will discount the last option as this will reduce diversification.

But the strategy was for the decisions to be guided by Woodford's actions so I will have to put personal views to one side and go for......BT?
Although it is tempting to go for BAE's higher yield.

I do think that Neil Woodford's current strategy has concentrated things hugely around 2 sectors within the Top 10 so I think it right to add the option of looking at the largest sector weightings in the whole fund as well.

As I first saw this on the published articles on the 11, I'll make the change at today though so thats the 15th Feb.

Related article links:
http://blogs.telegraph.co.uk: Investment guru Neil Woodford sells Vodafone despite good results
http://www.sharecast.com: Vodafone reports decline in quarterly revenues, confirms forecasts -UPDATE
http://www.fool.co.uk: Woodford's Invesco Perpetual fund sells its stake in Vodafone Group plc (LON:VOD).
http://www.invescoperpetual.co.uk: Invesco Perpetual High Income Fund


Saturday 9 February 2013

January 2013: Portfolio Update.

With January passing like a blur, the FTSE100 remains in high orbit above us mere mortals at 6276.88, following a gain of 6.43% in the month!

Unfortunately, with Apple proving unable to defy gravity (for the moment!), the Merchant Adventurer's Index has not followed the same accelerated upward trajectory of the FTSE, managing a lesser 3.63% in the month, even with 2 healthy dividends from Rolls-Royce and National Grid.

A one month "tax free" gain of 3.63% is not to be sniffed at but with these things being relative the FTSE's 6.43% is quite a comprehensive beating.
Seems that with Washington doing "just" enough to put off diving over its own fiscal cliff, commentators around the world can now see an end in sight to the credit crunching dominoes.

Not sure about you but this "expert" opinion does little to convince me that the issues have been resolved as yet.
However, this additional appetite for risk seems to have been enough for investors and fund managers to push up market prices fairly rapidly in a relatively short space of time despite the continuing downgrades in forecasts.
Some suggest that January has  started to see a flow of funds out of bonds, as bond yields fall, into equities.
Could be that markets have/are getting a little ahead of themselves though and patience might just be required now if markets decide to take a breather.


But looking at my portfolio, Apple's fall did most of the damage with a 1 month fall of -12.70%, and Morrison's was the next worst performer at -4.56%. 
Both were held back by disappointing trading figures that seem to confirm a loss of market share. 

It remains to be seen if Morrison's can turn things around quickly or if management's lack of ideas see them snatch at analyst's advice to push on with convenience store formats and online groceries. 
More importantly (to me at least), is that management don't lose sight of core skills/products and don't burn cash on strategies that are not properly thought through or value enhancing to the Morrison brand.
The company's finances have always been managed quite conservatively and served as a strength. It would be terrible to see Morrison's become another example of new management spending all the family silver because it seemed the easiest option.

As for Apple, well the company is currently on a downer at the moment with all the negative perception of its "stalled" growth prospects and loss of innovation. 
Analysts/Commentators are looking for the next "killer" product from the company, even though they probably won't recognise it if it does come.
Most seemed to dismiss Apple's attempt at the smartphone v. Nokia's dominance and, even following that success, couldn't understand what an iPad would be useful for, never mind categorise it as a new market.

On the positive side there were two dividends received and double digit gains from BG, and Vodafone, which all seemed to bounce from recent lows. 
William Hill was another double digit gainer as it continues to benefit from positive speculation over its planned acquisition, and results (its own and Playtech's), which points to momentum from its online operations. 
A slightly more recent boost might also be coming from Jersey state comments that suggest a softening in online gaming restrictions in the US.

Aerospace also continued to do me proud with Rolls-Royce and GE both delivering solid gains.
Rolls- Royce's gain came in addition to the aforementioned dividend and has been strong following recent shaming headlines regarding agents and contract sweeteners.
GE has recently increased its dividend payout.

National Grid continues to be under some moderate pressure with a question mark over its future dividend policy given the current disagreement with the regulator. This has fed some analysts suggestions of more moderate dividend growth or even (heaven forbid), a rebasing, which is technical lingo for a cut.

Elsewhere, Aviva has paused for breath following recent gains with analysts also uncertain as to the next direction in the dividend. 
My hope is that the improved capital position and strategic sales have done enough to hold the dividend at current levels going forward, at least until economic conditions improve and bring some sales growth along with an improved profile of risk given the company's exposure to sovereign debt in its operating regions.

Tesco is also starting to build some recovery momentum, in contrast to Morrison's, as the company's strategy starts to show some traction in UK sales.
Worth noting is that Sainsbury's decline from the top spot took many, many years to reverse, so if Tesco has managed to recognise, and possibly stem, the outflow inside 12 months, it is a significant achievement. 
And all against the backdrop of extreme competition from strongly improving rivals.


Merchant Adventurer's Index
Forecast 1 month YTD 25 mth
Price % holding Div. yield % gain % gain % gain
R-R 946.00p 33.60% 2.07% 8.30% 8.30% 51.85%
National Grid 691.50p 16.35% 5.91% -1.64% -1.64% 25.05%
Aviva 366.70p 11.57% 7.09% -1.69% -1.69% 8.53%
BP 466.75p 5.48% 4.55% 9.88% 9.88% 1.97%
Apple ** $456.21 5.42% 1.71% -12.70% -12.70% 18.13%
IG Group 446.00p 4.31% 5.04% -0.89% -0.89% -6.54%
William Hill 384.10p 3.85% 2.92% 10.34% 10.34% 125.01%
General Electric ** $22.29 2.46% 2.61% 8.31% 8.31% 43.74%
Centrica 350.20p 2.36% 4.66% 4.98% 4.98% 5.61%
SSE 1419.00p 2.10% 5.93% 0.07% 0.07% 15.84%
Microsoft ** $27.47 1.92% 2.78% 4.82% 4.82% -3.22%
BAE Systems 339.60p 1.82% 5.73% 0.80% 0.80% 2.91%
Vodafone 172.10p 1.79% 6.25% 11.43% 11.43% 6.80%
BG Group 1120.00p 1.76% 1.43% 10.62% 10.62% -13.58%
Morrisons 251.00p 1.70% 4.70% -4.56% -4.56% -6.20%
Tesco 356.30p 1.53% 4.17% 6.04% 6.04% -10.68%
Cash 1.98% 0.00%
100.00% 3.89%
1 Month YTD 25 mth
Virtual Portfolio gain (incl. Dividends)
- 1 month gain   1644.62 -  1704.36 3.63%
- YTD gain         1644.62 - 1704.36 3.63%
- 25 month gain 1264.20 - 1704.36 34.82%
- 37 month gain 1000.00 - 1704.36 70.44%
FTSE gain (excl. Dividends)
- 1 month gain   5897.81 - 6276.88 6.43%
- YTD gain         5897.87 - 6276.88 6.43%
- 25 month gain 5971.01 - 6276.88 5.12%
- 37 month gain 5412.88 - 6276.88 15.96%
Transactions:
05/01/2012 Div Rolls-Royce @ 6.9p per share
19/01/2012 Div National Grid @ 13.93p per share
Notes: 
*     US Dividends are adjusted for exchange rate and 15% withholding tax
**   Sterling : Dollar exchange rate = £1: $1.5855 as at 31/01/13



Thankfully, stretching over 2 years the chart illustrates a better picture of relative performance than January in isolation, with a 34.82% portfolio gain v. the FTSE 100's 5.12%.
Over 3 years the comparable figures are now 70.44% v 15.96% as shown in the table above.




Click to enlarge, close to return.

But with Mining and Financial sectors leading the charge in January, it will be interesting to see if this will continue through 2013. And, if there is a genuine recovery building then we should see other cyclical sectors rerating, such as housebuilding.
None of which I am invested in!

However, I will continue to focus on dividend paying companies believing that these can continue to form a solid foundation for my portfolio, with an expected level of return that can be re-invested.

February is already shaping up to be an interesting month with Europe once again looking to undo previous good work, with internal squabbles over the unified currency, and political concerns in Spain, Italy, France, and Germany. 
And all this despite analysts and senior banking figures suggesting that the worst is over.

There's also anticipation of the incoming Governor of the Bank of England, amidst a growing debate over whether inflation should be the primary target for the BoE. 
A debate that seems long overdue given Mervyn King's failure to maintain the current inflation target with his unspoken mantra that debt and profligacy is good and savings bad.

So, all in all, an interesting start to the year.


Previous posts:
December 2012: Portfolio Update (2012 Year-end).