The Final Tally
What an end to the year it has been! Up until end-Nov, the Boon Fund was having a struggling year, barely break-even and hugging the FTSE All-Share return. However, December saw my best-ever monthly gain, nearly +11%. As a result, I end the year up +9.7%, comfortably beating the FTSE All-Share benchmark of +3.8%.
This outperformance was not as much as in 2022, but marks three years in a row of outperforming the FTSE All-Share:
6.7% outperformance in 2021
15.4% in 2022
5.8% in 2023
The brings my cumulative 3-year absolute return of +49%, compared to the FTSE All-Share's return of +15%. Not bad at all. My goal with the Boon Fund is to have a minimum 8% a year outperformance, to justify the time spent actively picking shares. My three-year average is 9.3%.
ISA performance chart (3yr) vs FTSE All-Share
SIPP performance chart (3yr) vs FTSE-100
Insight into my portfolio strategy and activities
At the start of this year, I talked about my problem of increasing my capital in my ISA and SIPP YoY (paywall), and committing to invest in more mid and large caps. I therefore focused more of my efforts on companies with market caps greater than £200m and good trading liquidity, so I could take larger positions.
Between my two portfolios, ISA and SIPP, I tend to put small caps into the ISA, and mid and large caps into the SIPP.
The performance of my ISA (+74% 3Y) and my SIPP (+33% 3Y) has been vastly different. My hypothesis is that I excel better at small caps than large caps, for a variety of reasons:
I am an amateur, and large caps tend to have more complex financial statements and much more information to process. Small caps are easier to understand.
I have a lack of time, doing this part-time. A small cap takes less time to research and understand.
I have a disadvantage when it comes to large caps, as there are many more professional investors tracking, who have more resources, time, and experience than I do.
Price dislocation in small caps happens more frequently and occur for longer periods of time before they are spotted and closed by other investors. I have a bigger window of opportunity to buy and sell at dislocated prices.
My methodology has so far avoided any “zeros” in small caps, which is one of the main ways to lose money with small cap investing.
In addition to the shift in focus to larger caps, I also vowed to slightly increase my number of holdings to further diversify and de-risk. 27 tickers (including ETFs) passed through the Boon Fund in 2023, compared to 24 in 2022 and 25 in 2021. So a modest increase. I had wanted more than 30, but time pressures held that back.
I also vowed to hold less cash, as I have been guilty of under-deploying my funds in 2021 and 2022. This served me well during the bear market in 2022, but I know long-term it does not pay to keep cash if I need to outperform the market consistently. In 2021 and 2022, my average cash level was 40% and 32% of the Boon Fund. In 2023, I made progress at 29% average for the full year, and ended the year at just 20%. This was due to being more aggressive in deploying more funds from August onwards, which was the right call to catch the bullish market in Q4.
Most notable gains and losses
Costain (COST) – Bought in Nov22 at 36p, and exited a year later in Nov23 at 50p for a +39% gain. I had sold because I felt that the risks were increasing and further upside limited, especially with the HS2 cancellation and further squeeze in infrastructure spending by the local and national government. However, the bullish markets have pushed the shares even higher to 63p at the end of 2023, so I had left some money on the table by being too hasty with my sell. I still believe that Costain will struggle to grow their revenues in 2024, so I see the current price as being a bit too toppy.
Metro Bank (MTRO) – Bought in Oct22 for 74p, and exited in Aug23 for 106p for a +43% gain. At one point, the shares had chased up to 150p; agonisingly I did not sell as I believed that the fair value was north of 200p. I sold out when the core investment thesis for me, the expansion of Net Interest Margin, looked like it was running out of steam. This was a lucky break, as shortly after they ran into trouble for something completely different, had to a hugely dilutive fundraising, and now trade in the 40p range. However, Metro was always just a short-term play to me, as I recognised it was never a strong company, and I did not have long term faith in their business model. So I got out at the first sign of clouds on the horizon. There was just a very long price dislocation as the markets had not cottoned on to the fact that the widening of Net Interest Margin would produce an easy windfall for Metro Bank, who have a lot of zero-interest-paying current account deposits. Where will it go from here? Unfortunately I do not have a view, and have stopped tracking, as this seems a bit too complex for me now. Plus there is a shareholder with >50% of the shares, which I usually avoid.
Chapel Down (CDGP) – Bought in Jul & Sep22 for around 19p, sold over H1 2023 for c36p for a +86% gain. This is a share I had been tracking for a while, as I was fascinated by the long-term climate shifts that will one day make the South of England perfect weather for growing wine producing grapes. I cottoned on to the great weather conditions in the summer of 2022, that would lead to be an amazing harvest that autumn, both in terms of quantity and quality. Again, the price dislocation here was long; I was able to top up cheaply in Sep22, when the bumper crop was already a near-certainty, and harvesting had already begun. I sold out in H1 of 2023 as I thought the increase in sales volume in the years to come had already been priced in. I should have had more faith in climate change, as 2023 summer was another excellent year for grape growing, with the crop for 2023 even better than 2022. The share price has ended at 78p. I missed out on another doubling of the share price! I still track this, as I think strong 2025, 2026 revenue and profit growth is in the bag, just waiting for some share price weakness to buy back in.
None of my sales this year produced a huge loss. XSPS was exited for about a –7% loss, Gem Diamonds (GEMD) at a –6% loss. This could be because I have held on to my losers this year? I have the following current holdings which are underwater:
Surface Transforms (SCE) – One of my disasters this year. Bought in May23 for 34p, now at 11p, more than -65% down. The usual story – blue sky share, (almost) pre-revenue, pre-profit. Compelling story, but lack of proven substance. Delays. Dilutive fundraisings. Why do I keep falling for these? I did the same back in 2022 with Oxford Biodynamics (OBD) . However, my perserverance with that has paid off – it has gone from 37p in Dec21 to a low of 11p, and then now at 28p. Maybe Surface Transforms will do something similar? With both – I still strongly believe in the story and the possible pathway to profitability. But of course, that is what every investor claims when they invest in blue sky shares that goes to zero eventually.
Phoenix (PHNX) – a holding since Feb22, but the underperformance has really been in 2023, with a –13% capital loss on paper. However, overall with dividends I am up +5%! This shows the power of holding strong dividend paying shares that continue to maintain healthy payouts over time. I took weakness in the price during 2023 to do a top-up, and this is now my largest holding. I continue to hold as I cannot believe the market cap it is trading at, given the certainty of the cashflows over the next few years, let alone the growth opportunities from buying more closed books as well as its newly established arm writing new policies. However, maybe that is just my amateur investor naivety – I'm not an expert in this very complicated sector. But Lord Lee is a fan, and this sector is one he does research heavily in, and he is quite conservative in what he invests in, so there’s that.
Lessons Learnt, strategy adjustment for 2024
For 2024, I aim to do the following things differently:
Strategy u-turn and go back to focusing more on small caps, instead of diversifying to mid and large caps. Given the clear signs that I am better at finding under-valued small caps than large caps, I should fish where the returns will be more plentiful for me.
This means no more dabbling in ETFs. I have held a few in the last two years, with mixed success. Mainly this was me frustrated of my large cash holding and worried I would lose out. I should have more faith in my abilities; being able to generate substantial outperformance even with huge cash holdings each year (2021: 40%, 32%, 29%). I have no extra skills compared to anyone else to predict the direction of indexes and baskets of shares.
Learning to ride my winners further. I missed out on a few more big moves. I should be less jittery when there are just rain-shower clouds on the horizon, and learn to spot these versus thunderstorm clouds.
Watch blue sky shares for longer. I have conviction that the pre-revenue, pre-profit shares I look at aren’t worth zero. But that doesn’t mean that they are susceptible to delays, dilution, bear sentiment. I should track and be more patient before buying. Good ideas always takes a bit longer, and more trouble, to commercialise.
Stick to the FTSE small caps. I am loving that liquidity is drying up, investors are leaving. This means less competition, more price dislocations. Perfect for me. I hold on average more than a year before selling, so daily liquidity is not as important to me as I previously thought.
What next
With three years of solid performance, I think I have the confidence to continue investing time actively managing my portfolio. I love seeing that my Fund is now almost 50% more than three years ago. I love seeing that despite the really terrible UK markets, especially the AIM, I am still able to outperform and generate good positive returns, meaning that my analysis is adding value.
As I keep adding new capital to my ISA and SIPP, and also seeing capital appreciation, I can see a pathway to retiring from the 9-to-5 in the next few years, and spending more time on shares, as well as personal and philanthropic pursuits. That is the dream: outperform the markets consistently, generate surplus gains to draw for living expenses, while still growing the capital base yearly. I’m excited for 2024!
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