Private Investor's Diary: Why I'm buying this once-sold small-cap trust

It was easy to make money in March; equities, bonds, commodities, gold and bitcoin were all up. Bitcoin gained 14.2 per cent, thanks to the launch of bitcoin exchange traded funds (ETFs) in the US earlier this year. It peaked at a new all-time high of $73,000 before profit takers took the price down 10 per cent. Gold gained 8.1 per cent to $2,214 an oz, ending the month at an all-time high. Markets are betting that central banks will not be as tough on inflation as they say. With high government debt, markets suspect that allowing inflation to run hotter is the path of least resistance to reducing the debt burden as a percentage of gross domestic product (GDP).

Commodities also benefited, with copper up 4.5 per cent to a 12-month high, aluminium up 4.6 per cent and platinum up 3.5 per cent. Oil was in demand, with Brent crude up 6.1 per cent to $87 per barrel – its highest since mid-October.

Continental European equity markets had a good month, with the Italian MIB up 6.7 per cent, the Dax up 4.7 per cent and the CAC up 3.6 per cent. In the UK, the FTSE All-Share (TR) Index gained 4.8 per cent, and it was nice to see the FTSE 250 close behind, up 4.6 per cent. The Aim All-Share remained lacklustre, up just 1 per cent. The Nikkei 225 was up 3 per cent, making it the best-performing primary index this year, up 21 per cent. For once, the US was nearer the bottom of the table. Due to the strength of the US economy, the market has pushed out expectations of the timing and extent of interest rate cuts. March's consumer price index (CPI) inflation released on 10 April was again higher than anticipated. Markets now only expect two interest rate cuts in the US this year. The Bank of England and the European Central Bank are likely to pre-empt the Federal Reserve by cutting rates in June.

The UK continues to see net withdrawals from UK-focused equity funds. Calastone's latest numbers point to a £2.2bn withdrawal in the first quarter as investors increase their overseas exposure. The economic news in the UK improved, with inflation dropping further than expected in February to 3.4 per cent. With the drop in the energy price cap in April, inflation is likely to fall below the Bank of England's target of 2 per cent. We will see what the March number has in store, but whatever the governor says, it will be difficult not to cut rates at its May or June meeting. As the second quarter progresses, the UK consumer could be feeling much more chipper. They will receive a boost from real wages growing faster than inflation and boosts to net income from lower National Insurance payments and significantly lower energy bills. With an increasing number of UK takeovers and the potential for UK growth to beat expectations, we may be nearing the end of the relentless selling of UK equities.

Portfolio performance

The JIC Portfolio was up 3.2 per cent compared with 4.8 per cent for the FTSE All-Share (TR) Index. Since its inception in January 2012, the JIC Portfolio has gained 294.8 per cent, equivalent to an annualised return of 11.9 per cent. By contrast, the FTSE All-Share (Total Return) Index is up 136.3 per cent, with an annualised gain of 7.3 per cent. Over five years to 31 March 2024, the JIC Portfolio was up 44 per cent versus 31.2 per cent for the All-Share (TR) Index.

Five of my positions were up more than 10 per cent in March, and just one was down more than 10 per cent. Hvivo (HVO) led the way, gaining 17.1 per cent. It took the price back to my purchase price, having dropped during February after the company's founder reduced his stake in the business. Results last week confirmed it was trading in line with expectations. Next up was Glencore (GLEN), up 16 per cent, which benefited from the rise in the copper price to a 12-month high. Sylvania Platinum (SLP) bounced 14.2 per cent, helped by the recovery in platinum group metal (PGM) prices and the introduction of a share buyback.

4imprint (FOUR) responded nicely to 2023 results, gaining 11.2 per cent. Earnings per share came in slightly ahead of expectations, and the dividend was increased by 27 per cent. Given the strength of its balance sheet, with $104mn (£83.5mn) net cash, it said it was examining ways of returning cash – perhaps through special dividends or share buybacks. Gamma Communications (GAMA) gained 10.9 per cent. Its 2023 results were in line with expectations. Still, robust cash generation meant the dividend was increased by 17 per cent, and it has started a share buyback. It was pleasing that I added three of those five stocks to the portfolio since the turn of the year. Harbour Energy (HBR) and Serica Energy (SQZ) were up 9.3 per cent and 8.6 per cent, respectively, benefiting from the higher oil price.

There was no news from IG Design (IGR), but it fell 11 per cent. The company's results are due in the middle of the month, and I'm hoping that March's fall was due to boredom and thin trading in the shares. Having had a good run in January and February, Bioventix (BVXP) gave up some of its gains, falling 9.2 per cent. Half-year results to 31 December were reassuring. The interim dividend was increased by 10 per cent. The outlook statement was positive, and it is excited about its progress in developing an antibody for testing for Tau proteins present in early-stage dementia. Shoe Zone (SHOE) was off 6.2 per cent, not helped by a cautious trading update. The 6.2 per cent drop included an ex-dividend of about 6 per cent. Such is the strength of cash flow, it paid a special dividend of 6p in addition to its final of 8.9p. 

The Funds Portfolio was up 4.3 per cent compared with 3.2 per cent for the FTSE All-World (GBP, TR) Index. Since its inception in June 2020, this portfolio is up 34.5 per cent versus 57.5 per cent for the All-World.

Every position in the portfolio was up in March. The best was Nippon Active Value (NAVF), up 5.3 per cent, and the worst was Polar Capital Global Healthcare Trust (PCGH), up just 1.4 per cent.

Activity

It was a much quieter month on the trading front, with only two trades to report. I reduced Me Group (MEGP) to 5 per cent on 4 March at 165.2p and added Herald Investment Trust (HRI) on the same day at 2,123p. Herald was launched in 1994 by Katie Potts, the lead manager. It invests in mid and smaller companies in the telecoms, media and technology sectors and has an excellent long-term record. One of my best decisions was to add it to the JIC Portfolio in March 2012. Stupidly, I sold it in June 2013 for a small profit; I would have made over four times my money if I had held on. My intention, this time, is to give it time. The latest fund update shows 40 per cent exposure to UK equities, 30 per cent to North America, 11 per cent to Europe, the Middle East and Asia and 11 per cent to Japan. The top 10 holdings, which include UK names such as Next 15 (NFG), YouGov (YOU), Diploma (DPLM), Trustpilot (TRST) and Volex (VLX), make up 21 per cent of the portfolio.

I also added Herald to the Funds Portfolio. I funded the purchase by selling Fidelity Asian Values (FAS), which I sold for a tiny loss. I also sold Global X Copper Miners ETF (COPX) on 19 March at 2,387p and reinvested nearly all the proceeds in BlackRock World Mining (BRWM) (on 19 March at 516p). I took the position up to 10 per cent, thus maintaining the exposure to commodities. Historically, the two funds have traded in line with each other. The ETF includes dividends, whereas BlackRock World Mining pays the dividends out to shareholders. The gap between the two had opened substantially in the past six months. It was an opportune time to switch, especially as BlackRock World Mining was due to go ex its final dividend of 17p on 21 March. Other attractions were that the BlackRock trust stands on an 8 per cent discount to net asset value (NAV) and has a 2023 yield of over 6 per cent. You can read more at www.jicuk.com.

Other news

Luceco (LUCE) made a sensible acquisition, which should add around 8 per cent to turnover. 2023 results, later in the month, were in line with expectations. However, it was slightly more generous with the dividend than forecast. It reassured me about the current trading, and the share price rallied 15 per cent. It remains my most minor position at 2.2 per cent of the portfolio. With a decent tailwind, I'm hopeful of further progress, given a valuation of around 12 times 2024 earnings forecasts. IG Group's (IGG) third-quarter update (the quarter ended on 29 February) was reassuring. However, there were no changes to full-year forecasts. The new chief executive, Breon Corcoran (ex-chief executive of Flutter), was quick to stamp his mark. Charlie Rozes, chief financial officer, is stepping down as of 31 July, and Jon Noble, chief operating officer, is leaving immediately. The board recruited Corcoran to improve the performance of the business, so I should give him time, especially as the valuation is so compelling. According to the consensus forecast, it is valued at 8.5 times May 2024 earnings, falling to 7.2 times May 2025. It yields 6.5 per cent.

Premier Foods (PFD) agreed with the trustees of the RHM Pension Scheme to suspend pension deficit contribution payments from 1 April. This development came far earlier than expected and means that Premier Foods will benefit from a £33mn boost to cash flow in the year ending March 2025. The group anticipates no further contributions to be payable after 1 April 2024. £33mn is meaningful in the context of a company that generated an operating cash flow of £87mn last year. The share price jumped 15 per cent on the news, but has since drifted back slightly to 148p. Seeing the chairman buy £76,000 shares at 154p was reassuring.

Serica Energy released an update on its reserves. Its 2P reserves increased by 7.7 per cent during 2023. The 10mn barrel increase in reserves was despite producing 14mn barrels of oil equivalent. Over 90 per cent of its 2P reserves are in fields already under production. It has more than replaced its reserves every year since 2018, which is a testament to its skill in eking out reserves from existing assets. Harbour Energy's 2023 results were disappointing due to lower oil prices and the impact on cash flow from the energy profits levy. The market already knew much of this due to an earlier update. The completion of the Wintershall Dea acquisition later this year will substantially change the overall shape of the company. It will pay two $100mn dividends this year, leaving it on a yield of over 7 per cent. The share price initially fell but is now 5 per cent above the price on the day before the results.

Company buybacks

Research from Goldman Sachs demonstrates the importance of corporate buybacks in the US. Since 2000, US corporations have been responsible for $5.5tn in net demand for US equities. Households and foreign investors added another $2.4bn. As in the UK, pension and mutual funds have been net sellers, amounting to $2.7bn. Without corporate demand, it is debatable whether the US equity market would have done quite so well, which brings me to the UK.

I would like to see many more UK companies buying back stock. Last month, Ecora Resources (ECOR), an ex-holding of mine, reduced its dividend and launched a share buyback. In this case, starting a share buyback makes sense, given the shares are trading at a considerable discount to NAV. Some of my investments are buying back shares, including Gamma Communications, Sylvania Platinum (SLP), and IG Group. Others have done so over the past year: Shoe Zone, MeGroup, Glencore and Harbour Energy.

There is a case for high-yielding companies such as Polar Capital (POLR), Serica Energy, Next Energy Solar Fund (NESF), Paypoint (PAY) and Hargreaves Lansdown (HL.) halving their dividends and spending the money saved on share buybacks. Management should be transparent that it is not a one-off but part of a longer-term plan to improve total shareholder returns. Next (NXT) has been doing this (successfully) since 1997. Last year alone, it bought back 1.5 per cent of its share capital, and estimates it will buy back £288mn-worth (2.5 per cent of current market capitalisation) in the current year ending January 2025. Each year, its annual report forecasts the surplus cash it expects (before distributions) and how much it intends to spend on buybacks. Since 1997, the reduced number of shares issued has significantly contributed to the compound annual growth in earnings per share. I suggest reading the Next annual report should be compulsory for the chair of every FTSE 350 company.

Dividend update

So far this year, a dividend income of £10,079 has been declared, up from £8,785 a month ago. I have received £6,179, with the remainder due in the next few months.

Outlook

I can't help but feel increasingly optimistic about the UK market. Eventually, the outflow from UK equity funds will reverse. Given the lack of liquidity in UK stocks, UK mid and small-caps could move sharply higher. I'm old enough to remember 1975 when the FT All-Share Index more than doubled between 20 January and the end of February. Presumably, those who sold throughout the second half of 1974 did not expect the move. Circumstances are nothing like as dire as in the mid-1970s, but UK valuations are cheap relative to other markets and history. It won't take much to see another leg to the rally that started last October. The catalyst? Lower inflation, interest rate cuts and a realisation that the economy is improving. As for other markets, Japan looks to be on a roll after decades of artificially low-interest rates; continental Europe is likely to see interest rate cuts, and, in the US, plenty of liquidity is still searching for a home.