# SmallCap Growth AIM Portfolio 13 – New Year Review

Today’s post is a catch-up with the SmallCap Growth AIM Portfolio, which we haven’t looked at since late October. Better late than never.

Contents

###### SmallCap Growth AIM Portfolio

It’s almost three months since our last visit to the portfolio, so we’re a little behind schedule.

Back then the FTSE-100 was at 6334, so we’ve had a mini-crash since then. The index has just crawled above 6000 this morning, after spending the start of January south of that number.

At the time, the SmallCap Growth AIM Portfolio (SGAP) had 26 holdings, and we still had £4K of the original £30K investment to find a home for.

- We had two stocks (Stanley Gibbons and Pennant) that had dropped below our nominal 20% stop-loss, but we had decided to hang on to them for the time being.

In the meantime, we’ve added five more stocks to the portfolio:

- Boohoo (BOO) for £2K
- Zytronic (ZYT) for £2K
- Brady (BRY) for £1K
- United Carpets for £1K
- Judges Scientific for £1K

This additional investment of £7K means that we’ve invested all of the original £30K and started to draw on the cash reserve.

- We’ve invested £33K in total.

Here’s how the portfolio looks now:

###### 2016 position sizing

The SGAP was conceived in 2015 as a £15K portfolio with £1K in each of 15 companies. This was later revised to a £30K portfolio with £1K in each of 30 companies.

The plan for 2016 is that the SGAP will share my iWeb ISA with the Piggyback portfolio, which is being converted from a paper portfolio into a real cash affair.

- During 2016 the iWeb ISA is expected to grow to around £107K.
- This means that the SGAP will be over £50K.

Since I don’t want to hold 50+ stocks in the SGAP, I’ve increased the position size for “conviction” stocks within the SGAP to £2K. Stocks I have less confidence in, or want to open a “test” position in, will remain at £1K.

- So this explains why BOO and ZYT were bought for £2K.

Purists will argue that you should only ever invest in conviction stocks, and that you shouldn’t scale in and out of positions (I’ve said so before myself).

- I agree with these points in general, but also feel comfortable with relaxing them on a portfolio of tiny and volatile AIM stocks.

###### Performance

Here’s the portfolio again, this time ranked in order of gains:

According to the Google table, the portfolio is up 12% (Overall return figure, bottom right). That’s a slight improvement from October’s 11.1%

- The SGAP is valued at £37.9K, which is a gain of £4.65K on a base of £33.24K
^{1} - I make that 14.0% rather than 12%
- The Google figure for “Gain” is closer to my number, at 13.1%
- We’ll be digging into these performance figures later on

Between them, the 5 stocks we added in 4Q2015 are up around £170, or 2%, so they haven’t made a big contribution to date.

- BOO was the smart choice, up around 20% already
- We were unlucky with ZYT, which had a negative write-up in the widely followed Investors Chronicle
- JDG may have been a mistake – while I believe it is a good company, it’s been in a downtrend for more than six months, and my purchase has only accelerated it.

So Lesson #1 is don’t fight momentum.

Both of the existing big losers (SGI and PEN) have lost even more money.

- Lesson #2 is actually implement the stop-loss rule

A third stock (IVO) has now hit -20% and will probably be ejected in the 1Q2016 clear-out.

Another disappointment was ESR, which plunged in December after deciding to sell its assets piecemeal, rather than auctioning the company as a whole to the highest bidder.

- It was up a lot before then, so we’re only down 4%

The rest of the big winners from October are still ahead, with TSTL the best performer (up 81%). Seven of the thirty-one stocks are up by 40% or more.

Here’s the chart:

This shows an increase of 14% or £4,650, within £1 of my manual calculation.

- I’m not sure why the horizontal labels begin in May when the date range (shown top right) begins in March

Here’s the chart against the indices:

- The FTSE All-Share is down 10.3%, so the portfolio has outperformed by 24.3%, despite a nasty decline since the turn of the year
- The AIM index is up 0.7%, so the portfolio has outperformed by 13.3%

Both of these outperformance numbers are significant improvements since October, when the corresponding figures were 16.1% and 7.6%.

- So it’s been a good quarter for us.

###### Performance calculations

Next I want dig in to performance numbers. We have a number of issues:

- neither of the Google percentage return numbers in the performance table (overall return, gain%) match my own manual calculations, though the one from the graph does
- we are adding cash to the portfolio
^{2}so we need to consider money-weighted returns - we need to think about how to reflect these returns in the graph – at the moment, all the cash has been added at the start, which is misleading
- we don’t have a suitable benchmark – both ASX and AXX have issues, and Google Finance doesn’t seem to include a total return index

###### Google calculations

Here’s what the Google Finance help page says:

gain percentage = gain / cost basis

- In my performance sheet above, gain is £4,318 and cost basis is £32,960, so that gives 13.1%.

This is correct for the “live stocks” but not for the portfolio.

- The portfolio has received £33,240 in cash, and is now worth £37,891
- That’s a gain of £4,651
- The difference in cost basis is 33,240 – 32,960 = 280
- The difference in gain is 4,651 – 4,318 = 333

So unused (never-invested) cash of £280 is being ignored by Google, and an extra £53 in gains is being ignored.

This seems to be something to do with the closed position in RWS.

- This was bought for £1002.50 and sold for £765.07
- That’s a loss of £237.43
- 280 – 237 = 43
- 43 + 10 = 53 (the 1o is the 2 x commissions on the RWS trades)

So the numbers add up in a bizarre way, but I can’t work out what Google is doing here.

The second Google calculation is:

total return = returns gain / cash out

where

returns gain = market_value + cash in - cash out

Again, this seems to be taking the sold lot (RWS) into account in some way.

- The returns gains should be the gain on the stocks we hold plus the loss on RWS
- That would be £4,318.63 – £237.43 = £4,081.20
- Total return would be £4,081.20 / £32,960.05 = 12.4%

Google makes this 12.0% flat, so we still have a mistake somewhere.

We haven’t made much progress in understanding the Google calculations, but it looks like they aren’t the calculations we want in any case.

- I’m going to stick with the figure on the Google graph for comparisons with the indices
- I’ll also make my own simple calculation (value now / net cash in) for the overall gain – this should match the figure on the graph

###### Money-weighted returns

We’ve discussed money- and time-weighted returns before. Once you start adding and withdrawing money to and from a portfolio, money-weighted returns (MWR) make more sense for the private investor.

- They more accurately reflect your investment experience
- Periods with more money invested have a greater effect on your returns
- By comparing them with your time-weighted returns (TWR) you can see whether your market-timing is adding value
- Comparing the TWR to a benchmark will tell you whether your asset allocation is adding value

Most people use the XIRR function in Excel to calculate MWR, but a similar calculation be done with a spreadsheet:

By multiplying each cashflow by the number of days it was invested after the account was opened, we can work out when the average £ was invested.

- In this case, since most money was added in March and April, the average date of investment is 17th April 2015 – that’s 0.7 years ago
- In those 0.7 years the portfolio has grown by 14.0%, which is an annualised rate of 19.4%

Like XIRR, this calculation doesn’t require you to know any of the intermediate valuations of the portfolio.

It also makes the corresponding annualised growth in the indices easy to calculate:

The money-weighted average value of the ASX index for this portfolio is 3,676. Yesterday the index closed at 3278, down 398 points.

- That’s a loss of 10.8% over the money-weighted average 0.7 years that the portfolio has been invested
- Annualised, this is a loss of 14.4%

So the SGAP is outperforming the FTSE-All share by an annual rate of 33.8% to date.

The money-weighted average value of the AXX index for this portfolio is 720. Yesterday the index closed at 721, up 1 point.

- That’s a gain of 0.1% over the money-weighted average 0.7 years
- Annualised, this is a gain of 0.2%

So the SGAP is outperforming the AIM index by an annual rate of 19.2% to date.

Here’s a summary table of the money-weighted results that I will use in future reviews of the SGAP:

###### Google graph

The next problem we have is the Google Finance graph.

- To make it look smooth like it does above, I’ve had to add all the cash to the portfolio at the start.

Here’s what it looks like if I use the real dates for the cash flows:

Very lumpy, and the comparison with the indices is even worse:

These are not very useful, but the ones I’ve used at the top don’t reflect reality – the cash hasn’t all been sitting there from day one.

I imagine that there is some way to add regular amounts of cash (say monthly) according to the growth rate of the portfolio. This would be another fudge, but closer to reality.

- I’ll have to think about whether the gains are worth the effort of recalculating the amounts at each portfolio valuation.

If anyone has any ideas on how to easily make the graph more like reality, please let me know.

###### Suitable benchmarks

We suffer here in the UK from a lack of suitable benchmarks:

- The FTSE-100 is dominated by resource and energy stocks (and financials), and the FTSE-All Share isn’t much better
- The AIM market consists of 25% good companies and 75% bad ones, so the index is no guide to the market

This is compounded by the fact that Google Finance doesn’t seem to include any Total Return indices.

For now, I will stick with ASX and AXX, and add back the dividend return.

- This will only be entirely accurate at year ends, when the figure for the calendar year is published.
- But it shouldn’t drift by more than 1% or so during the year.

As we saw in this week’s other portfolio review, the yield on the FTSE All-Share for 2015 was 3.7%. The yield on the FTSE AIM 100 was 1.44%.

Adding these into the summary table produces the following:

So the portfolio is up against the FTSE All-Share Total Return index by 30.3% annualised, and by 17.8% annualised against the FTSE AIM 100 Total Return index.

###### Conclusions

- We’ve added five more stocks to the SmallCap Growth AIM Portfolio (SGAP), taking us up to 31 holdings
- we should have sold the two stocks that hit the -20% notional stop-loss
- we shouldn’t have bought JDG, which was in a downtrend

- Total cash into the portfolio is £33,240
- Current valuation is £37,891 for a gain of £4,561 or 14%
- Position size for 2016 is £2K for conviction stocks, £1K for experimental holdings
- target for year-end is a £50K portfolio with 25-30 stocks

- Google’s calculations for gains don’t match mine, apart from the figure on the graph
- We’ve started to calculate money weighted returns for the portfolio and its benchmarks
- It’s probably not worth the effort to re-jig the cash flows to make the Google graph exactly match the growth of the portfolio through time
- There are no suitable benchmark indices for the SGAP, and we’ll have to stick with ASX and AXX for now
- We will add back the annual yield on the ASX and AXX to allow Total Return comparisons
- The SGAP is up 30.3% pa against the FTSE All-Share Total Return index, and 17.8% pa against the FTSE AIM 100 Total Return index

Until next time.

*This article is part of a series on the SmallCap AIM portfolio. The rest of the articles – together with a live tracking spreadsheet – can be found here.*

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