H1 2021 Review / Portfolio +13.8%

Thought I would do a review of where the portfolio stands.

As at end June I am +13.8% for the year, roughly matching the FTSE AS at c12%. it has been far more volatile than is usual, pre-fed comments on tightening sooner than the market expected, I was up closer to 20%. The volatility is driven by the large exposure to natural resource co’s and volatility resulting from their underlying commodity feeding through to share prices, which are, in turn, even more volatile.

Portfolio is 3% geared at present. I am open to increasing gearing if I can find the right opportunities, but at the same time reluctant to whilst markets are close to all time highs and there is a lot of irrationality about. Through the half year the portfolio was actually more geared. I sold a buy to let (worth 8% of the portfolio value), this was done near the end of the half year so I am less geared than I might ideally be… I hold lots of gold/ silver as well, which I sometimes view as cash. This is in addition to dependable dividend stocks such as Warsaw Stock exchange, Federal Grid etc so I don’t think this is too risky. Long term I want to get to 20-30% gearing, ideally increasing during dips. I am selling my final property, hopefully by the end of the year, so this will, again reduce gearing.

As ever, weights don’t fully reflect conviction, I tend to put amounts in stocks then leave it at that unless I have a good reason to change, not ideal given past year’s performance, inflows, and some stocks relative outperformance. There are also psychological issues. In money terms the portfolio is more than double where it was at the end of 2019. This means that where once my standard transaction size was 2.5% it’s now under 1.25%. Particularly now I am in more volatile stocks this makes investing/holding harder. No easy way I have found to adjust for this, partly writing this / looking at it helps. There are worse problems to have…

All is OK here – on a country basis nice and diverse.

Segmentally I am 51% natural resources and 8.9% gold and silver metal. In many ways this isn’t ideal. To a greater/ lesser degree resource cos are hostages to fortune, driven by the price of the underlying resource. They are very cheap right now, given relatively high commodity prices, pretty much in every sector. There hasn’t been much investment for a number of years and ESG concerns make investment unattractive, whilst returns in terms of yield / free cashflow are relatively high. It won’t last forever, it’s often a trueism in the resource space that “The cure for high prices is high prices”.

Most of the attention in the markets is going towards tech / consumer co’s which are far more richly rated. It’s also useful to remember that following the dotcom crash resources outperformed. I largely missed the tech / crypto boom, hope not to miss any future resource boom, if it comes…

The allocation to resources seems about right, there are many very good value resources co’s out there right now. They haven’t re-rated sufficiently to reflect higher resource prices. So either, you get them accumulating cash at rapid rates, relative to market cap ideally paying dividends along the way, or they rerate and double (at least). The problem with this is management who in the resource space are always keen to reinvest. Doesn’t matter if the stock is trading at half book, PE<4 – let’s keep investing. What surprises me is investor’s value and tolerate this and many want companies to grow. Why take the risk if every £1 put in is not properly valued? Not my preference, as I have repeatedly said, I would much prefer to run these companies as depleting cash cows, dividend yields of 20%+ would soon rerate the share price, at which point I’d consider encouraging them to invest capital.

The risk is if money printing stops and we get a major recession, its also possible that underlying metals prices have been driven up by speculation rather than shortages / money printing. Hard to say but I am watching carefully and prepared to change my mind, rapidly if need be.

And on to individual holdings…(Red show holdings I have very recently sold.)

I’d suggest you all take a look at Tharisa THS – trading currently at a PE of 3/4. There are quite a few of these cheap companies around, also true for FXPO and in a lesser way KMR. I am on the lookout for other companies like this, so please let me know in the comments / twitter. Possible contenders include BMN, JLP, and there is a good bull case forming for tin that I would like to get into ASAP, once I can find the right stock, I don’t intend to allow resource exposure to be over 50%. There will probably have to be sells, likely gold / silver miners. There is also the possibility that resources are on a peak and could be due a fall. This might well affect performance short term, hopefully longer term I will be able to counterbalance elsewhere in the portfolio, but with such a high weight this may be hard.

Likely to add to FXPO and possibly THS, probably to a 5% weight limit (each) as they are in dodgy locations (Ukraine/South Africa) and I don’t particularly trust management. To compensate I plan to sell some of my gold mining fund and possibly Caledonia Mining / Japan Gold.

Another holding of interest may be Bacanora Lithium, an offer has been made at 67 from Gangfeng, a 30% shareholder and developer of the mine, the price is currently c60. There is some shareholder opposition, as they think the offer is too low, but I think this is highly likely to go through as it was a substantial premium to the price of 42 pre take-over, institutions will want the quick buck (as do I). There is also construction risk as the mine is in Mexico and I would prefer not to build it rather than have to deal with narcos / general extortion. To say nothing about the risk of lithium prices falling back whilst it is under construction. At the current price this gives a return of c12% if held to completion, more if the offer is raised. The stock may well fall back if the offer does not go through, logically should be to about 43 or a 26% fall. In my mind offer is much more likely to be approved than not, making this attractive. Having said that, going forwards I should probably be moving away from this type of trade to ones with more upside, particularly with my exposure to natural resources being at my limit.

I have trimmed my KAP (Kazatomprom) holding (+77%vs my first entry). I had, and arguably have, too much uranium exposure, the ‘story’ is all looking good (check out @quakes99 / @uraniuminsider on twitter for details) but the spot price isn’t, though I acknowledge it isn’t 100% reliable as lots of volume doesn’t go through spot. URNM should probably outperform KAP in a uranium bull market, though for UK investors KAP is easier to buy (you can spreadbet URNM on IG). There is also an interesting argument I have heard that the equities have gotten ahead of themselves and are pricing $50/lb uranium whilst spot is c$34. Not sure / able to calculate this for the entire sector.

On copper, my other big weight exposure, prices are still strong and there is a decent bull case. I am holding on this, mostly through an ETF, PXC.L might be of interest, seems like it will be easy to develop, potentially has a huge resource and shouldn’t need much more funding if you believe what the company says. I only have a small weight in this as I am relatively new to developers, but, to me it seems like a decent bet. It recently announced what sounds like very good news.

I have exited SO4 due to repeated management failures – at -15%, showing the advantage of a low entry price, but still disappointing. EML.L (Emmerson), also in the fertilizer space seems better but I think it will need a final placement, so I am moderating my size. I wouldn’t be surprised if this gets taken out by OCP – the Moroccan state owned behemoth who have a huge operation very near by. If it does this pre-placement I will regret not having a bigger size, lots of arguments for doing a placement before selling – so as not to be a forced seller and to get a better price.

My oil and gas holdings are concentrated in Russia, namely Gazprom/ Gazprom Neft. These might be best switched out for something that will move more. I hold them as Russia is not likely to care too much about the environmental agenda and they are both cheap and high yielding but there are probably better options out there. I just need to find them.

I bought Surgutneftgas prefs to get a 15% yield and benefit from them *eventually* investing their huge cash pile. Changed my mind on it and sold it, yield is driven far more by the RUB/USD exchange rate movement on their cash pile than oil despite them being an oil company, it could be years before they invest the cash, lowering my return, meanwhile I get 5% a year. Still up on this c 8% but it was a bit of a miss-step, it’s a decent investment for someone… you get a relatively risk-free 5% a year with a possibility of a multi bag at some unknown point in the future with a minute percentage chance of you losing to some bizare Russian fraud to keep you interested! I am trying to get into things with more upside rather than slow burners.

In a similar vein are my Russian utilities. FEES – Federal grid. Nice 6.2% net yield , PE of 4.7, P/B of 0.3. Happy to wait this out. HYDR – Russian Hydro generator again, 6% yield and trading at less than book. Waiting for some ‘ethical’ fund manages to realise that rather than paying over book for highly priced Western assets they can buy this sort of asset and actually earn an economic return. Compare this to (say) Verbund giving you a 1% yield and a PE of 41 for their hydro energy. This one may need a bit of a nudge, time to e-mail some fund managers perhaps….

My Romanian utility holding in a similar vein (Nuclearelectrica) has done much better, Up 42% over the year (more if you include the dividend). Still at just over book, when the CANDU (nice reliable tech) plants were completed in 1996/2007 so have 30-40+ years of life in them and no debt on the balance sheet. Downside is they want to ‘invest’ in finishing the other two units. As ever, I dislike this, but as the govt wants to keep the lights on and is an 82% shareholder, I am very much outvoted. Upside is that the US ‘won’ this via competition with China, the final investment decision isn’t until 2024 hopefully the Romanians get a good deal so cost overruns are on the Americans. It’s also another CANDU which tend to be easier to construct. Hope the greens keep putting their money in and driving up the price.

Steppe Cement has done well – up over 50%. I think it has further to run but would look to get out in the high 60s / 70s, depending what happens operationally. There is a definite upside limit to what this is worth, unless things change markedly.

One where there isn’t an upside limit it BXP – Beximco. I still really like this. It is valued at half what the Bangladeshi underying is and is growing pretty quickly (5-10% EPS) growth for a PE of 10. Happy to have a long term hold and will buy on weakness…

4D pharma is testing my patience, not much has happened. Awaiting results of trials, they have lots of patents but no revenue earning drugs, concerned this is being run by academics, for academics. Yet they have put millions of their own money into it. I will wait for now, but if I don’t see good results before the end of the year I will exit, despite believing in the idea.. I was in this far too early – next time won’t get in until any pharma I invest in is well into phase 2 trials, and is dirt cheap, no advantage to being in sooner.

Others that are testing my patience are the liquidators – Begbies Traynor / Fairpoint. I bought these as if COVID / Brexit causes lots of insolvencies in the UK they should do well. There is a tick up in insolvency in the UK but laws have basically been rewritten to kick the can down the road. I have exited Fairpoint. I’m concerned about allegations over a transaction they made. There is the possibility for insolvency administrators to pass assets to their friends / be corrupt, equally for them to be falsely accused of this. I am switching money in FRP to Begbies as it is arguably cheaper, better and doesn’t have this cloud hanging over it.

Bit of news on property holdings. On DCI, sounds like major shareholders have gotten sick of paying for underperformance and are *finally* cutting director fees. Could be time to add if they can get the assets sold as officially they are worth 10-15p vs a price of 5p. There is probably a continuation vote in Q4, which will almost certainly be against continuing to hold a trust at a 66% discount to NAV. Might still be a good opportunity, though I need to double check if the assets are still worth what I thought. SERE seems to be trading well, low gearing, some return of capital but at an 18% discount to NAV you are not getting rich being in this. I won’t be adding and may well exit if I can get a slightly better price or find a better opportunity, over 50% up in about 15-18 months (buying at March lows).

In terms of trades I bought NAVF – Nippon asset value fund, this is following my sale of AJOT last year. There is value in Japan, lots of companies I would like to own, nice cross holdings, economic moats, cash balances… Unfortunately they report in language that google translate doesn’t like so it’s a perfect area for external management to add value by doing things I can’t. NAVF is managed by James Rosenwald who sounds pretty sharp on this video. Performance hasn’t been great but I will give them a little while before I try something else. I am also keeping an eye on AJOT as the team did have good results within AVI Global Trust (Formerly British Empire Securities).

I have a couple of short positions in AMC/GME – and Tesla (via puts) (AMC from 49.8, GME from 194). AMC/GME is obvious, they are a modern pump and dump, the guys pumping them can only do it so far, and each time they do it their ‘followers’ mostly lose money so they lose capacity/will to pump, they only have financial capacity to push a stock up so far. The question is if I have the timing right, in the money at the moment and won’t let it turn into a loss. Tesla will face stronger competition and it’s market cap is ridiculous. The ‘data’ they are getting from the cars can’t be worth as much as boosters claim, and is also highly replicable, their ‘full self driving’ outside of motorways is a literal accident waiting to happen. I’m experimenting with relatively far-out months, instead of holding to expiry holding to c 6 weeks before, then rolling to minimise time decay. It’s a strategy I read about, I’m very new to options so will see how well/ badly it works – views appreciated. Only a small experiment so not likely to move the needle. I’d like to get better at trading options but it will take years for me to get good on my own.

Overall it’s a difficult outlook and I am finding it very hard to work out what to do next, few really good opportunities out there and even fewer good cheap ideas, particularly outside natural resources. In the past I would have raised cash holdings and waited for opportunity. No-longer comfortable holding cash given how much the authorities are printing.

As ever, comments welcome.


12 thoughts on “H1 2021 Review / Portfolio +13.8%”

  1. Blackjack Card Counters say the best staking system is 8 to 1 units i.e when an optimum situation occurs to increase the stake from 1 unit to 8 units.Applying that to a portfolio where ones standard purchase is 2-3% of one portfolio suggests one should hold 16-24% in cash so should an optimum situation occurs one would then put 16-24% into that one optimum situation.
    Franco Nevada (Canada) is my preferred Gold play.It pays Dividends without owning any Gold mines and whose share price should track the Gold price via Options. My most recent buy is Alibaba which if someone is not put off owning Chinese stocks looks undervalued on traditional ratios

    1. No, there is no formal method, mostly I have a limited maximum weight of 20% for any one stock / sector/ country. Then try to think through correlations / risk intelligently. Trying to have a 2% minimum starting weight too but not for ‘test’/ learning positions which are slightly different.

    1. I am moving out of it as it was low value / low rent/ high yield so I did the management myself. I tend to make 20% per year on shares and got a 7% yield on property with little appreciation so better getting out. I also think taxes are likely to rise.

  2. “I’m experimenting with relatively far-out months, instead of holding to expiry holding to c 6 weeks before, then rolling to minimise time decay. It’s a strategy I read about, I’m very new to options so will see how well/ badly it works – views appreciated. Only a small experiment so not likely to move the needle. I’d like to get better at trading options but it will take years for me to get good on my own. ”

    High option time decay MAXIMALISATION is actually the only goal you are looking for and have to chase, when selling them, instead of trying to minimise it as you seem to want to do (I surmise you sell options, if you buy them, then it is the right strategy).
    Options consists of two parts: the purchase fee (a small sum) and the option time premium you buy or sell to the counter party. The goal is to get the option (when sold to someone else) to expire worthless, by having the time premium to decay to the point of becoming zero at the end of the option life (expiration date). You then pocket the originally sold time decay premium in full, which is the goal when selling options.
    The longer the option runs (duration), the higher the time premium you can sell and pocket, if you find someone willing to buy it at the proposed level. As such rolling them over at 6 weeks before expiration is not a very good way to get yourself the most out of it, given that the time decay is strongest near the end of the option life. Unless you bought the option, and then will be faced with a high speed worth decrease on that option.
    The best strategy is to let them expire, if you sold them (if the shares are flat or not moving much away from the strike price), and then only open a new set of option selling trades.
    If you buy options, the opposite happen, you buy time, that will decay, first slowly then suddenly, making your bought option less worth at every passing day, until it expires worthless, and you lost your invested money.
    That is why I mostly sell options on well chosen stocks, and only buy options if I am really sure they will go stratospheric, because the underlying shares will move 10% + in a known certain direction in a known time frame, thus avoiding ‘gambling’.
    As such if you are making 20% plus on your investments on a regular pace, selling options might not be for you, since you won’t feel satisfied. But selling options is the bread and butter of Wall Street, who is often on the other side of the table were retail investors are getting creamed.
    So pick your poison.
    Options are a tool to make money, or lose money, or protect already made money. Well used tool means you make a regular income, which is attractive to a lot of prospects who aren’t looking for get rich quick schemes, because they know that the long game isn’t won that way. As such I think you may get yourself in a quandary with your regular sky high profits % expectations, and maybe a bit of humility on that side may be a good solution to be able to stay in the game of making money.
    Please continue to delete my email posts, I like to stay anonymous. You got the mail, that is what you requested, so I am done here. Good buy, and hopefully to another great blog post from your side.

    1. Interesting points, on TSLA I am bought puts. I have been looking into selling on GME / AMC but looking at what IB are telling me, despite the high volatility it seems a picking up pennies in front of steamrollers type of business, as if it moves against you losses are rapidly huge, despite high implied volatility. Convinced TSLA will slump in the next 2 years due to competition, may well be a bit early though. Thanks for the comment.

  3. DCI still there ! If mangement get kicked out ( i think unlikely) then something could actually happen. I think liquidators should have been appointed 9 or so years ago. Its a bit like a KKVL but without the sale of assets to make distributions.

  4. I found your blog just a year ago and i like it very much. There are a lot of similarities between your style/portfolio and mine. Because of your post i bought Tharisa and Ferrexpo, so thank you for this. I have some ideas, which you might find interesting.
    Diamond miners: the last years were very difficult for this industry. In 2020 worldwide diamond supply fell by more than 20% and will constraint in the next years. Demand is a little big difficult to assess, but i dońt see big discruptions in the comming years. The equities are out of favour, the market leader Alrosa has a 12%+ dividend. Petra Diamond had an restructuring this year and is trading now at 2x FCF (my estimates). I also own Lucara Diamonds.
    Fix Price Group: this russian low price retailer made an IPO in march this year. It‘s not a cheap stock (PE 2021 ~20) but they have impressive growth rates, a 90% market cap and a long way to go. I made this journey with Dollar General and it‘s nice to get a second chance. Unfortunately you won‘t like the shareholder‘s structure: two controlling founders.
    Inter Rao Lietuva: a good Business in the energy market of Lithuania with a big dividend
    And i see good value plays in mineral sands companies: Base Resources are mining in Kenia, they are trading at ~3x EV/FCF. Their main Kwale operation has just 3 years LOM, but they have expansions opportunities and they have a very good project in Madagaskar.
    And Strandline Resources has startet building their mine in Australia. They are fully funded, the market cap ist around A$200m and they think the annual EBITDA will be A$100+ annually.
    One last thing: Georgia Capital with very good infrastructure investments in Georgia, a good and well incentived management, good growth opportunities, which is trading a 50% NAV.

    1. Thanks Wolf.
      Not convinced on diamond miners – diamonds seem to be likely to be industrially produced – and aren’t actually all that rare.

      If you like like coal Thungela resources is very cheap, (own some).

      I like InterRao, looked at it before but Lithuania wants to develop.

      Base resources, not sure.
      I will check out Georgia capital, not looked at it sounds good, thanks for the idea.

  5. Really interesting portfolio. I noticed the holding of DNA2. I’ve been looking at the various aircraft leasing funds. AA4 looks like it could have an interesting risk/reward profile vs the various DNA funds (given the baseline Emirates lease risk and A380 depleted residuals.)

    Quite messy as not currently paying regular divs (due to Thai A350 leases still being renegotiated post restructuring) but seems to be building cash from the remaining Emirates leases, although company reports seem intentionally vague. Cash currently on hand could now be approaching 20p per share vs price of 24p. Assuming Thai related debt interest is serviced from Emirates/general cash until Dec 22 (when Thai leases should move from PBH to monthly payments) then Emirates leases could support ~9p annual divs (from 5p in the interim) through to 2026 (and then tailing off as leases expire.)

    So current cash of ~15-20p plus potential divs of 40p+ from just Emirates leases plus any plane residuals. This assumes that Thai debt only serviced from Thai leases from Dec 2022 onwards (as lenders only have the planes as security) but if other cash is used to supplement you would hope that is because it is expected to deliver value (DPA have disclosed far more re the Thai restructuring and revised leases may struggle to service much over pure debt interest as roughly half original rate.)

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