Report on Q4 2013

Report on Q4 2013

7 Jan 2014

The FTSE 100 rose by 4.4% in the quarter for a full year gain of 13.9%. The FTSE 250 (that’s companies from 101 to 350) performed twice as well in 2013, rising by 28.8%. There are never truly hard factual reasons why share prices move but it generally remains the case that smaller companies’ share prices are relative beneficiaries of improving confidence. Large blue chips do better when investors are seeking protection. It is also probably the case that smaller companies are less well known and consequently deliver more surprises. Note that in bad times they typically deliver more bad surprises which point takes us back to why large stocks do better when investors are nervous.

It is reasonable to conclude that confidence improved in 2013. The mood implied by the yields offered by government bonds rose from clinically depressed to merely grumpy – in the case of the UK this was from 2.0% in January 2013 to 3.0% now. In the US the rise was slightly sharper, from 1.8% to 3.0%, but it was much the same story. The bond markets are suggesting that we are looking at a fairly gentle, low inflation recovery. Analysts sometimes name this “Goldilocks” (not too hot, not too cold) and it feels like a very comfortable investment environment.

Comfort eventually causes complacency and this is exactly why it is wrong to commit one’s investment strategy to an opinion about the future, no matter how tempting. Investment is always about how probability is priced. Consensus rarely offers compelling value.

I am pleased though not surprised to say that my satellite index of companies with female executives quite dramatically extended its outperformance against the FTSE 250. After the first nine months of 2013, the FTSE 250 was +25% but the 27 companies with female executives had risen by 35%. After the full twelve months, those numbers were +29% and +46% respectively.

As for the shares that I recommended this year, in Q3 I wrote that I was surprised that Enterprise Inns rose by 40% in Q3. In Q4 it was much quieter, rising by 6.5%. I am not attracted by the value of the company now and I don’t much care for reports of the way it treats its tenants. I have sold it from my pension fund.

ICAP had an excellent Q4, rising by 20.7% as it appeared to benefit from the normalisation of bond markets and more specifically from its half year results and maintained dividend.

Go-Ahead Group rose by 4.8% but returned 8.1% in the quarter including the dividend paid in November. The shares have galloped ahead by another 4% this month for no reason that I can see (except that it’s good value).

Home Retail Group rose by 14.7% in Q4. I wrote about this again on 6 December along with three new recommendations, Halfords, UBM and Drax. Of these, only Drax has moved up so far – but it has a female CEO so apparently that’s only to be expected.

It was a poor quarter for a couple of stocks that I don’t like. In my Q3 I wrote that I was surprised that M&S was trading as high as 500p. The shares fell by 13% in Q4. A company that I dislike much more is Debenhams due to its pointless and frankly irresponsible share buyback scheme. The company issued a profit warning on 31 December and scrapped the share buyback scheme. Really, I couldn’t have been more pleased. Spurred by a 12% fall on that very day, the shares returned -28% over the quarter.

Finally, it is a year since I wrote that I don’t trust UK property as an investment. I appear to be in a minority. Moreover, the 0.5% bank rate, QE and the attraction of London to foreign investors are arguably combining to keep prices rising. The new decision to impose CGT on foreigners’ properties (the “oligarch tax”) has been ruthlessly deferred until after the next general election. Though it may make no difference as rich foreigners probably regard London property as a haven first and an investment second. Of course I will not change my view that there is a demographic time-bomb waiting to go off when the baby boomer generation needs to cash out. I was wondering what the average age of a UK property owner is and came across a projection that the average age of today’s young adult buying their first property in London will be 52* and 48 in the South East. I wonder if that factors in their student loan repayments.

*I asked my 19 year old daughter to guess this number and she said 32. Oh dear.

There may be trouble ahead…..There may be teardrops to shed….”

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