This is a review of the investment portfolio for the first quarter of 2017. I am still playing catch-up and so this review is a month late.
I started the year by switching from the TW Overseas Equity Unhedged Tracker Fund to the TW Global Equity Tracker Fund. Originally, I bought the Overseas Unhedged Fund, purely as an hedge against the pound. If the pound was to fall, then the value of the fund would rise. It was a Brexit thing.
In my last post, ‘My New Investment Strategy For 2017‘, I outlined the need for a more long term and robust investment strategy. Taking a short to mid-term view on political or currency movements did not form part of the new strategy. From now on, the Global Tracker Fund will be the core holding in the investment portfolio.
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The Overseas Unhedged Fund invests solely in the Standard Life Overseas Tracker Pension Fund. They are effectively, one and the same. So the Global Tracker does still consist of unhedged equity investments. The Emerging Markets and FTSE Index Funds are also unhedged. In fact, most overseas investment funds are unhedged by default, unless stated.
Whenever investing in unhedged overseas equity funds, the underlying fund value as well as the currency exchange rates will affect the fund share price. Therefore, the optimum time to invest in such funds is when the pound is strong against the local currency and the when the regional stock market is under performing. conversely, the fund price will go up when vice versa happens.
I tend to track both currency and stock market with regards to timing the drip feeding of cash into the Global Tracker Fund. I reduced the cash pile slightly to approx. £35,000 over the last quarter. However, unless we get any significant pullback, I’ll hold tight. New monthly contributions will continue to be invested into the Global Tracker Fund.
One Really Bad Speculative Investment
I did have a really, really, bad investment, iGas Energy. I first came across this company a few years ago. It’s a UK only oil company with profitable, conventional oil assets. Unfortunately, all the profits from the money making side of the company are going into the loss making shale gas discovery side of the company. You know, the very thing half the country is protesting against.
iGas Energy has now run into some very serious cash flow problems. The company is laden with debt. A large chunk of the debt is in the form of bonds and those bond holders are homing in on iGas Energy’s assets. This is certainly not a company any sane person would even think about putting in their wife’s pension!
I messed up here and I am happy to admit it. I was emotionally attached to the company. Even though I knew it was a bad egg, I took a punt and paid the price. I bought the shares in iGas Energy in October 2016 for £1699 and sold them last month (March 2017) for £689. That’s not a typo, you read that correctly. Once news of cash flow problems broke out, the share price tanked.
Companies like iGas Energy do not fit the strict investment criteria for 2017. For that reason, the shares have now been sold. My decision to invest in iGas Energy goes against all my own rules of investing. In fact, maybe I should remind myself of the rules!
Invest In High Quality Companies
At the end of last year I decided to invest my wife’s pension into shares of high quality, small companies in the UK. Being my wife’s pension money, I needed to have a very strict investment criteria. Without going into too much detail on what that is in this post, some of the things I consider are:
- Good earnings per share (EPS) growth
- Good revenue growth
- Low market capitalisation
- Low debt
- Good margins
- Strong cashflow
- Positive trading updates
- A dividend yield and good dividend cover
- Good future prospects
- A good share price movement
- Director dealings (buying, not selling) and holdings
- Minimal Competition
Two companies came through the other side of my stock screening process. Those companies are Burford Capital and Kainos Group.
Burford Capital is a global leader and specialist in civil litigation finance. It provides funding for unresolved commercial legal disputes and profits from the settlement of these cases. In over 90% of civil litigation cases, settlement is reached before the case goes to court. The investments in these litigation cases can take several years to come to fruition though. That’s why the share price only started to take off recently. Burford Capital listed on the AIM market in October 2009 at £1.00, and was trading by £7.70 at the end of March 2017! Most of that gain has been since the start of 2016 as you can see in the share price chart below.
Normally I am very wary of such meteoric share price rises over a relatively short period of time. However, I believe Burford Capital have the figures to justify the current valuation of a price to earnings ratio (PE) of 18. In fact, I go further to say this is way too low a valuation for such a growth stock. The profits from the investments in the early years are starting to come to fruition now. Burford Capital continues to make record investment into their litigation portfolio.
They committed $378m of new capital to finance investments in 2016. That’s 83% more than the prior year’s level of $206m. In 2014, Burford committed $153m, so they have more than doubled their commitment pace in only two years. You can see a trend here. The investments they are making now should continue to reap impressive rewards in years to come. 24 members of the management team own over 14% of the equity and you can easily see why.
Burford Capital reports it’s earnings in US dollars and so has benefited from the weaker pound and stronger dollar. Income rose 59% to $163.4m. Profit after tax, and excluding the charges for the recent acquisition of their closest competitor, Gerchen Keller Capital (GKC), rose 75% to $115.1m. Operating expenses declined as a percentage of income, to 23.9% (2015: 25.1%). Return on equity rose to 21.1%.
Cash performance also saw a substantial increase. They generated $216m in cash from investment returns, up 48% from $146m last year. They continue to increase their dividend each year and this year is no exception. The year end dividend has been increased from 8¢ to 9.15¢. Burford Capital go ex-dividend on the 25th May 2017.
Below is a recent video featuring Burford Capital’s CEO, Christopher Bogart. He does a great job at explaining more about what Burford Capital does, where they came from and where they are going. He also covers the latest set of financial results. I encourage you to watch it.
Kainos Group is a provider of digital services and digital platforms. The group has three divisions:
- Digital Services – The Digital Services side of the company develops customised online digital solutions, principally for UK government departments and agencies, along with private sector organisations. They migrate paper-based systems and transactions to online platforms that are capable of handling high volumes of data and transactions. They are also more accessible, easier to use and save time and money through increased efficiency. Typical solutions involve high volume, often complex, online interactions between a UK government department or agency and UK citizens.
- Evolve – Evolve is Kainos’ proprietary software product, developed in conjunction with medical practitioners and hospital managers. It is used for digitisation, storage and workflow of patient records. It is the UK market leader in the digitisation of patient notes in the acute sector of the NHS. Evolve automates the digitisation of medical case notes and operational documents, enabling them to be captured, intelligently tagged and used in digital environments. It is currently licensed for use in more than 70 NHS hospitals, assisting those hospitals to meet the government’s stated desire to achieve a ‘paperless’ NHS by 2018.
- Workday Implementation Services – Workday provides cloud-based human capital management software, which enables enterprises to organise their staff efficiently and analyse their workforce data. Workday’s software suite covers the full life cycle of human capital management, as well as financial management software.
I found Kainos Group by manually scouring companies over on the London Stock Exchange website. I think that’s just about as tedious as any stock searching process could ever get! When I was looking for investment potential, I was looking for bar charts that all went up nicely, like the ones below.
More precisely though, I was looking for solid EPS and revenue growth, as per my rules above. Ideally the company should be paying a dividend and should be able to cover it well. The dividend cover is the ratio of a company’s net profits to the total sum allotted in dividends to ordinary shareholders. All those items are covered as you can see below.
The financial highlights from the November 2016 interim results are below. The numbers are not quite as good as I would have liked. The CEO said to this: “In our Digital Platforms business, slow procurement in the NHS was offset by solid growth of Smart, a trend we expect will continue for the remainder of this year. We remain confident that investment in our Digital Platforms business is on target to deliver future returns”. The share price has been a little lackluster until recently, partly due to the tight NHS budgets. The company is growing strong in all other departments though.
The company has a market capitalisation under £300m and has no debt whatsoever. Some investors may not actually consider that a good thing, as generally growth stocks tend to have some debt at least.
Kainos Group floated in 2015 at £3.00 and has grown since then. They have consistently delivered EPS growth of over 25% over the last few years. It’s acceptable to allow the odd year of slight under-performance but i’m hoping the H2 figures are better. It had a price to earnings valuation of just under 20 at the end of March 2017. It’s producing a dividend yield of 2.5% and so is a good growth/income combination also.
The one thing that does get me excited about Kainos, is the increase in staff numbers. No company increases it’s staff count by over 18% in one year unless things are looking up! Kainos Group has since opened a new office in Germany. This is to help accelerate the expansion of its fast-growing Workday services business in Germany, Austria and Switzerland (DACH region).
Portfolio Up 8% – Outperforming The Markets
I switched from the TW Overseas Equity Unhedged Tracker Fund to the Global Equity Tracker Fund on 4th January and transferred approx £5,800 of cash to the Global Tracker Fund on the 9th January. I also transferred another £3,500 late in march, from the TW Deposit and Treasury Fund to the Global Tracker Fund.
Reducing my cash pile over time is part of my new strategy. Cash doesn’t earn anything. That said, the stock market continues to defy gravity and all the time it does, I am in no rush to reduce my cash reserves.
Our portfolio is up 8.26% already this year. Strip out cash and that is a return on equity of nearer 12%.The MSCI All Companies World Index is up 6.41% and the FTSE All Share Index is up 3.02%.
The share price of the TW Global Equity Tracker Fund has gone up 5.8% during the first quarter and the shares in my employers SIP were up 5%. Given my disastrous investment in iGas Energy, we have come good thanks to Burford Capital and Kainos Group who have saved the day.
Burford Capital & Kainos Group Already Outperforming
The shares in Burford Capital were bought for approx. £4.70 during October 2016. They started the year at £5.72, and were at £7.70 by the end of March 2017. That’s an increase of over 29% this year alone and an overall uplift of 48% since purchase.
I bought the shares in Kainos Group for £2.07 in November 2016. They started the year at £2.04, and were at £2.28 by the end of March 2017. That’s an increase of over 11% this year and an overall uplift of 9.65% since purchase. Whilst these figures seem a bit dull in comparison to the Burford Capital figures, I would take them anytime!
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