Boon's Fund Recap – Year End 2022! +12.0% vs FTSE AllShare -3.4%

See all the previous BBB Monthly Recaps here.

2022 Performance +12.0% vs FTSE All-Share benchmark of -3.4%

2021 Performance +21.6% vs FTSE All-Share benchmark of +14.6%

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(Part Time) Fund Manager’s Report

Another year end! It feels like just yesterday that I started chronicling The Boon Fund at the start of 2021, which is a combination of my ISA and SIPP portfolios. What a year it was; after the huge euphoria and bullishness in markets that was 2021, albeit with fear of COVID, things have completely flipped in 2022. Investors ran fearful and fleeing the markets in 2022, but masks were thrown away with abandon during the year.

While my absolute performance in 2022 of +12% fell short of my 2021 performance of +22%, it did better on a relative basis when compared to my chosen benchmark, the FTSE All-Share. A 1560bps outperformance in 2022, compared to 700bps in 2021.

My target for active stockpicking, given the time and effort required, has always been to try to get at least 700bps to 1000bps yearly outperformance to the benchmark, so 2022 has been a good year.

(of course there are nuances, I’m including dividends but also real life bid-ask spreads and trading costs and stamp duty in my performance, while benchmarks do neither)

This 1560bps beat is even better when viewed through this additional lens; my average funds under management increased by 40% from 2021 to 2022 (combination of gains from 2021, as well as moving more old DC pensions into my SIPP). As many of you know, when you have more funds to invest, it is harder to maintain performance (more on this in the Looking Forward to 2023 section).

What has contributed to the great outperformance this year? A couple of factors:

• Some realised gains; my analysis on realised positions showed that my realised positions were positive over the two years.
• Alot of unrealised gains; I’m currently sitting on a number of positions that are very positive, but unrealised. Begbies Traynor (LON:BEG) (+56%), Appreciate (LON:APP) (+54%) , Metro Bank (LON:MTRO) (+60%) , Chapel Down (OFEX:CDGP) (+80%)
• Dividends; a small but significant 12% of my total gains are from dividends, the other 88% from capital gains.
• A bold contrarian call in November 2021; to add Xtrackers S&P 500 Inverse Daily Swap UCITS ETF 1C (LON:XSPS) which is a short ETF for the S&P500. This benefited from both the drop in the S&P500 as well as the strengthening dollar in 2022. I had gotten very worried about market valuations towards the end of 2021.
• Large cash position; I stuck to a stubbornly high 30% cash average throughout 2022. Lower than the 39% in 2021, but still enough to protect me from some of the declines in the market.

A total of 25 companies (incl 2 ETFs) were held in my portfolios, at any one time in 2022. I exited the year with just 14 holdings, running a rather concentrated portfolio (my preference is to have 15-20 holdings at any one time).

Gains were distributed from a variety of different shares, which I am pleased about. I count a total of 6 shares (both realised and still holding) where I have a 40% or more gain; this is one of the criteria I use to select shares to buy – do I think they can achieve a 40% or more gain within 12 months. I also had some big loss-making shares, like Fulcrum Utility Services (LON:FCRM) and Oxford Biodynamics (LON:OBD) but thankfully, they were small holdings to begin with.

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Performance Summary

The BBB ISA

The BBB SIPP

Detailed holdings in comments.

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Looking into 2023

On the macro situation…

Chaos. I don’t know about you, but I am really struggling to form a personal view on where I think the macro-environment is going in 2023. I have never had this dilemma before, I have always had a view that I strongly believed in. Sure, it was usually only 50% right, but at least there was a clear view in my mind. Now, my view is as cloudy as it has ever been. Yes, I think inflation is peaked. But no, all indicators are that a recession is coming. Yes, consumer spending is holding up well, but how can it with inflation outstripping wage growth by a far margin. Yes, no more COVID restrictions means more certainty, but China re-opening throws an uncertainty into the machine. Yes, most companies and financial institutions now have decent balance sheets, but no – interest rates have risen so quickly there is going to be a shock and maybe a dominoes of failures somewhere in the global economy.

My investment process depends on the macro view. I not only look for shares that are undervalued, but I look for companies where the path to improvement is clear and highly likely to succeed, and there are macro tailwinds (whether sector or wider). The macro tailwinds is essential, because I am banking on a PE multiple inflation to turbo-charge my gains, and those usually come from more positive investor sentiment in a sector or wider. I have neither strong and positive wider economy or sector macro views at the moment, which frustrates me.

On a lack of shares to buy…

This has cascaded down to my potential buy list. At any time over the past two years, I have always had at least one or two shares trigger my buy prices, and be “in play” for a purchase. Often, I then go into hyper-research mode, to satisfy myself that my logic is sound; I don’t always pull the trigger on the trigger. But in the last few weeks, I’ve had a dearth of any buy triggers. It is not likely the market has rebounded strongly either, lifting all boats. So I am at a loss. Maybe it is the system telling me that everything is still overpriced? Maybe.

So with my macro uncertainty and lack of buy options, I’ve decided to use January to decrease my holdings further. I have sold ITV (LON:ITV) in the last few days; it has had a good strengthening recently, but I feel like Q4 ad sales will be soft, despite the World Cup, and the guidance forwards will be weak, as all high-frequency marketer surveys suggest a pull-back in brand advertising spend in 2023. In addition, I also think ITV Studios growth rate will rapidly slow down, as the streaming services reign in their content spending to be more frugal. They really should have sold Studios in early 2022 and locked in some value there. ITVX looks to have had a damp launch, and will struggle against the ad-supported tier of Netflix. Meanwhile, it will cannibalise linear ITV watching, which I have a strong suspicion generates higher ad rates than the digital ads in ITVX.

I am also looking to sell down a few more positions, especially those where I see the risks increasing. Overall, I am aiming to end January with a higher net cash position. But that might all change if some of my watchlist trigger my buy prices and come in-play.

On the pains of a growing fund size…

I start out 2023 with a fund size that is 30% higher than when I started 2022. AND I have added another 20% into it as of Jan 1st, which is the last bit of consolidation from my DC pensions over the years. This is going to be a challenge to deploy. I am still a one-man band, still working a 9-to-5, so I cannot ramp up the number of shares I analyse and track. The easiest way, of course, would be just to just increase my ticket size of each holding.

However, to date I have held many small cap shares, and lately I’ve found myself hitting my max liquidity rules, in terms of position sizing. These rules are there to allow me to sell the shares when I need to, without moving the market or having to take a bid price way below the stated bid-ask spread.

This means that going into 2023, I am going to track less small caps, and move more into mid and large caps. Market capitalisation of at least a few hundred million. At this range, I can still buy like 3%, 5%, or even 10% of my fund size without hitting my liquidity rules.

However, my nervousness is that part of my success so far has been identifying undervalued small caps. They are easier to find, as there are less investors looking at them. Buffett always claims that if he has only a few million to invest these days, he would find fantastic returns, rather than the hundreds of billions he has to deploy now. So with this change of investment strategy, 2023 is going to be an interesting year. Can I maintain my great outperformance in 2023 but with a fund size 50% larger than I started 2022 with?

On tech valuations…

I am also going to start adding more tech companies to my watchlist, as I feel their valuations will be bottoming out in H1, and their growth momentum come back. Many of them have done big capex investments in 2022. This coming year, they’ll be up against softer comparatives, and those investments should start to pay off. You can take your pick here - ASOS (LON:ASC) Boohoo (LON:BOO) THG (LON:THG) Deliveroo (LON:ROO) all massive capex in 2022, massive cash outflows. The key is to see, which one made smart investments, and which ones just burned cash and have nothing to show for it?

I especially like ASOS (LON:ASC) – they have, in my opinion, a genuine moat, decent brand equity, acceptable debt levels, actually very strong NTAV backing, and strategic value potential (ie takeover from a US or EU player). But they are such a mess, and changing course on such a big ship takes time, that there is still at least a few quarters of bad results to come.

To get a sense of how undervalued it is, consider this: it is trading at 0.15x Price-to-Sales. If I take the darling of consumer cyclicals, Next (LON:NXT) it is trading at 1.71x. Clearly Asos shouldn’t have the same valuation as Next, given its poor profitability record. But that stark a difference?

Even a simple “profitability run rate” model shows multi-bagger potential. If you take this year’s revenues and say they can, over the next few years, grow it a modest 25%. And then you assume a very modest operating margin of 4%. Currently, the SP is trading at low single digit PE multiples, which is crazy. And getting to a 4% operating margin should be easily doable for a company like ASOS. Imagine if they get to 8%, 10%+... (which is what Next achieves).

On housebuilders…

Housebuilders as well has gone onto my list. As I’m not a sector expert, I am just going to track two big names I have tracked in the past - Barratt Developments (LON:BDEV) and Vistry (LON:VTY)  along with non-housebuilder Harworth (LON:HWG). Between the three, I reckon I will be buying shares in at least one of them before 2023 is out. House and land prices are slow moving beasts. But there will be a shakeout, inevitably, because of the debt-fuelled nature of the housebuilding sector. A player will crack, with tightening credit conditions and increased interest costs, and be forced to sell. We have seen that already, with the BlackRock commercial property fund - forced sales. So my view is to be patient, and wait for that shakeout to happen.

On consumer cyclicals…

Consumer companies are always well represented on my watchlist, and there will be lots of pain coming. The consumer belt tightening will be coming; exhausted savings, exhausted credit card limits, increasing mortgage payments, increasing rents, wages failing to keep up. There will be administrations to come from the weaker players, but the remaining players will emerge stronger. I actually like the look of Marks and Spencer (LON:MKS) but feel the price is too high at the moment, and it will drift lower when there is a sector decline in H1. It has a whole bunch of property assets to unlock over the next few years as well, and I do believe their M&S Food will be buoyant; people trading down from a restaurant meal to a gourmet night in. They are also less susceptible to income squeezes (focused on middle and upper incomes) and competition in the low end (Aldi and Lidl). As Next (LON:NXT) has shown, good players will pick up market share, even in a challenging environment. Just have to wait for the weak players to exit.