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Diary of a Dumb Investor: so many bargains!

I've taken the hit on some of my worst investments, picked a fund to give my portfolio backbone, and found an exciting new stock.

 
Diary of a Dumb Investor: so many bargains!

I've finally done it, and boy does it feel good. Some of my worst-ever investments have been vanquished from my portfolio, as I try to reimpose some order on my disparate collection of stocks.

Rolls-Royce (RR), Pearson (PSON) and Imagination Technologies (IMG) have all gone, and thankfully not as cheaply as they would have last week.

I'm counting my lucky stars to have prevaricated long enough on my overhaul to enjoy a hefty surge in the shares of Rolls-Royce (nowhere near enough to lift me out of the red, mind, but welcome nonetheless) after the aircraft engine manufacturer dispelled fears of a sixth profit warning in two years. Yes, I would have cut those losses even more had I waited until today, rather then selling them on Monday, but I was too anxious not to look a gift horse in the mouth.

Imagination Technologies meanwhile enjoyed a bounce on the news boss Hossein Yassaie was stepping down and the business was being overhauled.

Pearson has gone too, as part of a clear-out to make way for some proper diversification to my portfolio. I had been eyeing two global funds, Fundsmith Equity and Lindsell Train Global Equity , to provide some US, UK and Japanese exposure, and as the Lindsell Train fund held a hefty chunk of Pearson, it made sense to get rid of my own holding.

Change of heart

Except that, having sold Pearson, I've had a change of heart on the funds I should pick. The Fundsmith and Lindsell Train funds do a good job of bolstering my asset allocation, but I'm a bit worried that I could be investing in both funds, which have had a remarkable run, just as their investment styles come out of fashion.

Both funds sit right towards the top of the Global Equities sector over three years, with returns of 63% for Fundsmith and 56.5% for the Lindsell Train fund. They both have similar investment styles, buying a small number of 'quality' companies, with a bias towards firms that provide consumer goods, like tobacco and beer.

These are just the sort of stocks labelled 'expensive defensives' by their critics, I read, after the shares have been on a long bull run over the last few years. This isn't a new criticism, and as Fundsmith manager Terry Smith has argued, you would have lost out on a fair chunk of returns if you'd listened to them before.

But I wonder if they might now have a point. If I look at the way markets have performed over the last month, it is some of the areas that have been out of favour leading the way, like miners and emerging markets. And even those previously more wedded to 'defensive' stocks are now starting to consider some of those areas that have for a long time been shunned.

I think they might be right, and that a contrarian, 'value' approach to investment, seeking out those companies which have been unfairly punished, might prove fruitful this year.

Looking for 'value'

So who do I turn to for this? I still want more of a backbone to my portfolio, something to complement by holding in RIT Capital Partners (RCP ). One investment trust that caught my eye was Murray International (MYI ), which has received the thumbs-up from analysts who believe its value approach could be coming back into style.

But I'm not sure it quite fits the bill for me. While it is a global fund, it has precious little in the US, with a bias towards emerging markets. All well and good, and which I guess makes sense for a value investor, but I've already got quite a lot in emerging markets.

So I had a look at other global funds and investment trusts with a value approach. Morningstar's style screener proved useful for this. I 'screened' all the funds in its Global Large-Cap Value Equity category, and it threw up more than 300 funds, most of which I had never heard of, and a lot of which I couldn't buy on Hargreaves Lansdown anyway. I also did the same for investment trusts.

It was when going through this list that I started to have qualms about my search for value. All of the funds I looked at were rooted at the bottom of the performance tables over three years, which I guess is to be expected given that value investing has been itself badly out of fashion over the last few years.

It made me question my bet that value investing could triumph over the expensive 'defensive' stocks that have led the markets over the last few years. While I am worried the latter could come unstuck, do I really want to pile all my eggs into the value basket, especially for an investment that is meant to serve as the backbone of my portfolio?

Boring fund, exciting stock

So I've decided on a compromise. The Bankers (BNKR ) investment trust offers the right sort of asset allocation: while more than a third is invested in the UK, it also holds healthy chunks in the US, Japan and Europe. And while it does not have an explicit value approach, it is not heavily focused on the defensive areas of the market that have done so well to date. I think it should leave me less vulnerable if the market either changes direction or progresses along the same lines it has done over the last few years. Not the most exciting choice, granted, but look at where excitement has got me over the last few months.

I'm putting £4,000 in the fund, more than my normal amount, as I want this fund to form the bedrock of my portfolio. But that still leaves me with plenty of cash to invest, and I want to get started right away.

The market sell-off has left a lot of shares looking unfairly punished. One of them to have caught my eye is the relative minnow Mattioli Woods (MTW). The Alternative Investment Market-listed Sipp provider has been consistently growing revenues and dividends, with profits before tax also up in each of the last four years (although a slightly higher tax bill last year prompted a slight dip in earnings per share). And the company, which also operates an employee benefits arm, could be a big beneficiary of pension freedom, and the greater need for financial advice.

The shares have drifted 11% since the start of the year, and I reckon a lot of that is to do with the sell-off in financials. It can't have much to do with interim results issued earlier this month, which appeared solid. Analyst opinion on the stock is unanimous: the three brokers rating the stock all moved their recommendation from 'hold' to 'buy' in the last two weeks.

But what has really convinced me is the fund managers holding it: Citywire AAA-rated Alex Wright, AA-rated Anthony Cross and Julian Fosh, and even the manager of a fund 'Pensioner' flagged to me after my last post: A-rated Keith Ashworth-Lord, who runs the ConBrio Sandford Deland UK Buffetology fund, is also a backer. Here's my portfolio after the changes.

My portfolio: click to enlarge

Any opinions expressed by Citywire or its staff do not constitute a personal recommendation to you to buy, sell, underwrite or subscribe for any particular investment and should not be relied upon when making (or refraining from making) any investment decisions. In particular, the information and opinions provided by Citywire do not take into account your personal circumstances, objectives and attitude towards risk.

10 comments so far. Why not have your say?

talbot

Feb 18, 2016 at 14:01

A good choice with Banks Investment Trust I have held the for a long time and I don't thick you will go far wrong with Bankers

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Maverick

Feb 18, 2016 at 14:50

Talbot (and Dumbo) - Oh yeah? Have you looked at Bankers' graph since the middle of last year? Aren't you trying to catch a falling knife?

One year performance -8.9%, 3-year performance 14.6%. Surely you can do better than that for the "bedrock of your portfolio"?

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Anthony Tinslay

Feb 18, 2016 at 18:30

Well DI your "slowness" to act might have saved some of your Rolls Royce loss but at what price did you actually sell.? Also before you get carried away just sit for a moment and calculate the actual cost of all these changes in portfolio. Your broker must owe you a good lunch I expect! No mention of your unhappy Russian Securities investment?

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CUEBALL

Feb 18, 2016 at 19:48

I'll wager his sells outperform his buy's over the next 12 month's

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ben ski

Feb 18, 2016 at 21:16

Have you considered private equity? Unlike US investors, we get fantastic tax-breaks on PE investment, and have far better listed PE options available

For exposure to the US, look at Pantheon Private Equity, for the UK look at Electra Private Equity ... Now my favourite is SVG Capital – very globally diversified – however it suffered huge losses in the financial crisis

This was down to being over-levered – today, having survived that, I think it's probably one of the less dangerous PE trusts out there ... These trusts are generally on 20% discounts ... El-Erian made the point a year ago that QE had pushed a lot of investors into listed equities and bonds – private equity, micro-caps and start-ups may be some of the few places you can find value today ... Also perhaps a look at Henderson UK Absolute? It's nice to offset high return/high risk investments with more market neutral investments – indeed, this is what RIT Capital attempts to do

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dereklkl;l hdjkaK;LL'a

Feb 19, 2016 at 15:52

Di

Are you sure you did not just "toss a coin" for your selections???

Your stated deliberations still smack of a total lack of clear objectives!!!

I am sure HL appreciate your efforts as much as you do. No doubt they are awaiting your next contribution to their profits with bated breath. I am sure they will not have to wait long for your next toss of the coin.

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croppp

Feb 20, 2016 at 10:07

Glad to hear that rolls royce won for you i thought this share would fall .there is still the worry about where this market is going up or down red or black.a bargin is a bargin if it proves to be .so talk for awhile and watch .

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john_r

Feb 22, 2016 at 10:41

Considering Brexit your move to more international stocks may be a good defensive move. I also follow your logic for selecting an IT but I am totally at a loss why you plumped for Bankers.

For me a picture tells a thousand words and I look at past 3 year and 5 year charts for a comfort feeling before jumping in. Bankers doesn't give me this.

If you really needed something to form a bedrock in such a small fund then I'm surprised you passed over Fundsmith with its boring but steady 15% annual return. And to accompany this with something spicier but less defensive why not look at North Atlantic Smaller Co's Trust **. Seems these two fund managers may just have the midas touch.

** Acknowledgement to Cueball for revealing this trust to me in other posts

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snoekie

Feb 26, 2016 at 03:54

I sold pearson, a rare sale for me. Sold before they really dropped, and I do not see an early rebound after selling the star in the crown.

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Agnus nus

Mar 30, 2016 at 17:55

Hold on very tightly, we are in for a bumpy ride.

The poorer countries have had enough and want a slice of the cake, can't blame them really, we've used and abused them for far too long.

Let's hope lessons are learnt and we can all move forward to a fairer way of trading and just generally, being honest.

So called democratic societies need to consciously, dig deep and stop trading with corrupt despots who are fiddling about with things for their own gain. We go into the markets blindfolded with a set of rules resembling the dirty tactics used in the of year dad's sack race.

Greed, what can you do?

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