Wizard's Annual Review 2018

[Wizard]

I have now completed my 2018 analysis so thought I would provide an updated summary. All but one of the investments reported on here are in my SIPP, but one is held elsewhere. I also have a couple of other non-income portfolio holdings in my SIPP which need to be excluded.
This follows on from last year’s review, which can be found here:

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Background

I have held Co-Op Group bonds in my SIPP for some time, having bought former Co-Op Group preference shares at distressed prices and the bonds were issued as part of the subsequent restructuring. The equities were purchased throughout 2016 and 2017.

Portfolio as of 31st December 2017

The portfolio, as reported at the end of 2017 looked as follows:


2018 Activity

Having thought at the end of 2017 that I would use existing cash and newly injected funds in this portfolio to buy international ITs I have not done so. I did inject another chunk of capital into my SIPP, but this is still sitting as cash and has not been accounted for in this portfolio as I am not yet sure if it will be used to acquire income producing assets or not.
Therefore, the only two changes to the portfolio this year have been the corporate actions by SLA and GFRD respectively. In effect the capital returned from SLA funded most of the participation in the GFRD rights issue, with the balance reducing the cash balance in the portfolio.

As of close of business on 31st December 2018 the portfolio looked like this:



2018 Performance

Clearly, the big story this year has been one of capital losses across almost the whole of the portfolio. The rump of CLLN went, but by the start of 2018 this was already a small part of the portfolio, so even though it shows a 100% loss the bulk of the value had gone long before the start of this year. Of the rest WPP, GFRD and RMG were the really big contributors to the losses. ADM and GSK were the only two to buck the trend and ended up on the year.
With my 42TE representing close to half of the portfolio value in capital terms this clearly has a massively disproportionate impact, so the small drop in capital here was helpful overall. Indeed, this should be dropping in value, given it is trading over par but will be redeemed at par at the end of 2025, so logically the value should be trending to par. This is offset by the nominal coupon of 11%, which means even at the current values its running yield is significantly higher than most equities in my portfolio.
With 20:20 hind sight, not reinvesting the cash balance from last year or this year’s dividends back in to more equities was a good decision, as the typical capital losses were significantly more than the shares would have thrown off in dividend across the year. But to be fair that was never on the agenda, as stated in last year’s review, if these funds had been invest it would most likely have been in to ITs with a focus outside of the UK. Still, even the ITs I was looking at are down versus their position at the start of the year by more than I would have paid out. I’m not claiming this as a masterful investing decision, but rather a combination of luck and inertia. However, I think cash has been in my top 5 performing assets in the portfolio this year.

2018 Unitised View

I explained the baselining of my unitisation in my 2017 review and will not repeat that here. However, in carrying out my unitisation update this year I did notice an error in my calculation for last year, as for some reason I had too low a value in against SGC. Having corrected that my value per unit at the end of 2017 should have been 110.4, not the 109.6 reported in my 2017 review.
Unsurprisingly given the significant capital losses for a number of my holdings, which were more than the dividends paid, the value per unit is down at the end of 2018. However, it could have been much worse, close to half the portfolio is in 42TE which contributed more in dividends than it lost in capital terms and I did not add to the portfolio with assets that then lost value. The result is a unitised value of 104.2 as of 31st December 2018. Put simply, the performance of the bonds to some extent mitigated a very bad year for the equities.

2018 Plan

At this stage I think my plans for 2019 are pretty much what I said my plans at the start of 2018 were, to add more geographical diversity in my portfolio with the purchase of ITs. But it didn’t happen in 2018, so who is to say it will in 2019!

I have to say, the price falls in equities over the course of this year and the resulting yields do attract me more than at the same time last year. But a number of high yield shares have hurt high yield investors recently and I do worry that at least some of the current high yielders are offering that yield for a good reason and I'm not confident of my ability to sort the wheat from the chaff so to speak.

Given my experience this year I am also not ruling out sitting on the cash for some time yet.

Any comments, observations, suggestions much appreciated.


Terry.