As markets have now closed for the year across Europe, including here in Dublin, it seems timely to review how the portfolio performed in 2023. Unlike a lot of investors, I don’t generally monitor short-term (weekly/monthly/annual) returns at the portfolio level – I find metrics like that to be just ‘noise’ considering that I am investing on a ‘forever view’ and would hope to never have to draw down on my capital.
For what it’s worth though, my portfolio was +18.7% in 2023, which compares very favourably to both the FTSE All-Share (+3.9%) and the Eurostoxx 600 Index (+12.8%), which I view as more natural benchmarks than the relatively more tech heavy S&P 500 (+24.6% at the time of writing – US markets will close tonight my time) given that my track record in picking tech winners is very poor compared to most other sectors (and you see this mapped to my portfolio components and weightings below). Whilst the 2023 outcome is pleasing, I know the market can be fickle at the best of times and I see no reason to deviate from an investment strategy that is focused on finding businesses with strong balance sheets, good market positions and obvious long-term value creation catalysts.
Before we get into the review itself, a reminder that absolutely none of this – or anything else on my blog – is investment advice – I don’t make any recommendations, these are simply my own subjective opinions that may prove to be on the money, hopelessly wrong or simply somewhere in between. As always, you should do your own research.
Getting back to the job at hand, coming into 2023 I said that I was “looking to up my exposure to healthcare, energy, TMT, industrials and retail” and also said I expected “to see a number of takeovers/value realisation (sale of assets and return of cash proceeds to shareholders) events across the portfolio”. On the first part of that, I added to existing shareholdings in Aviva, BT, Harbour Energy, Haleon, Marks & Spencer and Premier Miton, while I bought shares for the first time in Alliance Pharma. While I am happy with all of those names, hindsight is 20/20 and I would have done better had I topped up my Amazon and DCC positions too.
In terms of disposals, I exited Hammerson, where I viewed the rising interest rate environment as unfavourable for a business with elevated borrowings and consumers who are exposed to cost of living pressures. STM Group agreed to be taken over at c.2x what I originally bought into the company at, with this sale expected to close during H1 2024. Eastern European Property Fund (EEP) sold its remaining property asset during the year and made an initial distribution that was larger than what I paid for its shares in the first place, with two further distributions guided for 2024.
Looking ahead to 2024, I expect to buy more energy, healthcare, financial and media names where I see helpful structural drivers. STM and EEP aside, I also expect to see further transaction-related (i.e. sale of some/all of their assets) distributions coming from the likes of Palace Capital and Peel Hotels.
Financial Services (6.7% weighting)
The interest rate environment weighed heavily on three of my four positions in this pot, with middling performances from Abrdn (-5.6%); City of London Investment Group (-24.5%); and Premier Miton (-36.9%) as AUM struggled due to clients pivoting to safer assets that offered reasonable yields for the first time in many years. Assuming we are at peak yields now though, risk-on sentiment should support growth in AUM for equity-focused asset managers.
I see attractive drivers of value for each of these into the future – Abrdn has been: (i) meaningfully paring overheads, such as through fund closures/mergers; (ii) Simplifying the business by divesting non-core assets such as minority shareholdings in Indian insurance and asset management companies; and (iii) Slashing its share count through buybacks – shares out fell from 2.00bn at end-2022 to 1.86bn by the end of November, which is especially significant given the Group’s uncovered dividend. Assuming it materialises on the back of falling risk-free rates in 2024, the bounce of the ball on market conditions (and associated AUM inflows to its equity funds) and a lower share count should see concerns about the dividend reduce. One threat to this thesis is falling NII, as ABDN has benefited from the rising interest rates in recent times.
For CLIG, the narrative is similar – falling rates should lead yield hunters to look for other income sources. PMI is in a similar boat, but with an extra kicker, namely the acquisition of Tellworth Investments (AUM £0.6bn) which is due to close in 2024.
The three asset managers all offer good yields – ABDN 8%, CLIG 9.5%, PMI 9% per Bloomberg consensus – which compensate patient investors pending a re-rating. Sure, a prolonged market slump would pose risks to these dividends, but I suspect the bad news is in the price for these names.
The fourth Financial Services company I have is STM Group, which gained 90% this year after agreeing to a takeover. This represents a satisfactory 2x return on investment.
Industrial Goods & Services (11.0% weighting)
I have five holdings in this sector pursuing differentiated strategies and executing well against these.
Rheinmetall, which is strongly exposed to the structural growth in Western defence budgets, gained 54% this year as its order book swelled on foot of rising threats to the free world.
International Distributions Services rose 28% as investors bet that the resolution of a ruinous industrial dispute will lead to a step change in performance.
DCC gained 42% on a re-rating driven by strong underlying performance and (I suspect) an investor re-evaluation of ESG rules of engagement.
Irish Continental Group had a quieter year, adding just 1%, not helped by challenging deep sea trading conditions, but the Group’s ongoing opportunistic on-market share purchases suggest management sees a better underlying performance.
Piraeus Port Authority (+47%) continues to reap the benefits from the rebound in cruise travel and its partnership with China’s COSCO, although security threats in the Red Sea and Eastern Mediterranean are a challenge given its position as the largest port in South-East Europe.
Personal / Household (9.1% weighting)
External headwinds (inflation-linked both in terms of input costs and consumer disposable incomes; and also FX) and tough comparatives turned off investors from the two brand behemoths in my portfolio, Reckitt (-6%) and Unilever (-9%) in 2023. Uninspiring strategy refreshes did little to excite the market either, although neither business model lends itself to excitement.
That being said, both companies have been buying back their own shares this year, which seems like tidy business given their undemanding (mid-teen earnings) ratings. Both businesses have also been modestly reshaping their portfolios in recent times, which should provide a further tailwind when the aforementioned external headwinds give way to more normalised trading conditions and volume recovery.
Healthcare (5.6% weighting)
Addressing my underweight position in this sector has been a priority for some time. This year I added Alliance Pharma to the portfolio – I view this as a cheap (2024 consensus PE of just 7.5x) business with a nice product suite and strong focus on free cash flow generation. I also doubled my holding in Haleon. I know this is a 2023 review but it is worth mentioning that I increased my holding in Smith + Nephew in 2022. I expect to invest more capital in this sector in 2024.
Haleon is essentially flat (-1.7%) this year, but that doesn’t surprise me given that c.40% of the share register is ‘loose’ – still held by the original selling shareholders GSK and Pfizer – GSK sold stock at 328p in October, close to the 330p IPO price, and I suspect it will look to sell more of its remaining 7% holding at or around this level in 2024. This technical overhang is holding back the share price, but the fundamental HLN story is one of strong brands generating strong cash flow, leading to rapid debt paydown. I also wonder if HLN may consider using its cash flows to offer to repurchase some of the GSK shareholding in 2024.
GSK was also flattish (+0.9%) during 2023, despite making strong progress on its development pipeline – at the end of September it had 67 vaccines and specialty medicines at various stages of development – and also making progress in resolving the Zantac distraction. A multiple of only 9.3x consensus 2024 earnings suggests the market is giving minimal credit to the firm for the clear progress it is making.
Smith + Nephew is executing well against its strategic priorities, raising FY revenue guidance in its Q3 trading update in November, while all three divisions are showing healthy momentum. The market is not yet giving management credit for this, with the shares -2.8% this year, but if the recovery is maintained, I think the stock will perform well in 2024. As an aside, I think the GLP-1 impact on orthopaedics is overplayed by the market – there are clear demographic tailwinds (ageing and wealthier populations) for the likes of SN/.
Alliance Pharma is essentially flat on where I bought it earlier this month.
Basic Resources (12.5% weighting)
In this vertical I have BHP (+4.7% in 2023) and Kenmare Resources (-10.0% in 2023).
As one of the world’s largest mining groups, BHP is somewhat at the mercy of economic developments, including commodity pricing. But the Group has continued to execute nicely on the corporate development side, completing the A$10bn OZ Minerals acquisition, strengthening its position in copper (and to a lesser extent gold), while its giant Jansen potash mine in Canada is now expected to commence production in CY2026. The Group is also working on projects to materially increase iron output at WAIO, a timely move with pricing strengthening to an 18 month high this week. As a globally significant producer of future-facing commodities, including those essential to progressing decarbonisation and supportive of increased urbanisation, BHP is perfectly strategically positioned, in my view.
Kenmare Resources (market cap £352m) is of a different scale to BHP, but it is nonetheless a very attractive proposition, producing 7% of the world’s titanium feedstocks from a single asset with a c.100 year remaining reserve life. The Group is highly cash generative, allowing it to undertake accretive capex and share buybacks. A severe lightning strike and upward inflationary pressures on capex weighed on the share this year, as did expectations of weaker commodity prices, but its low rating (Bloomberg has it on 4.1x consensus 2024 earnings) surely discounts more than enough bad news. I think this stock would be cheap at twice the price.
Oil & Gas (2.6% weighting)
Similar to healthcare, I have been adding to positions here in a push to increase my weighting to this sector. My conviction view is that we are in an energy supercycle, driven by years of underinvestment. Yes, decarbonisation is a laudable policy objective, but the effective achievement of this is decades away.
Harbour Energy (+1.4%) was headed for a lacklustre 2023, weighed down by restrictive UK government energy policy. In the background though, it has remained cash generative and focused on distributions, including buybacks that reduced the share count from 847m shares at end-2022 to 770m at end-November 2023. That share count will grow again in the short term once the recently announced transformative acquisition of Wintershall Dea closes next year, but that will leave HBR in a far stronger position, with much larger scale, low leverage, increased reserve life and higher exposure to gas.
For Woodside Energy (-16.4%), despite the poor share price performance, 2023 was a year in which it made significant progress on its development portfolio, which should unlock structurally higher cashflows from here. Like Harbour, it is looking at a transformative acquisition through a potential merger with Australian gas peer Santos.
Banks (9.9% weighting)
The interest rate environment gave both of my holdings in this sector a tailwind coming in to 2023. While we may well be at peak rates, the banks have other cards to play – strong distributions, revenue resilience through structural hedges and benefits from diversification initiatives, while disciplined post-GFC underwriting should minimise soured loans.
Lloyds Banking Group (+5.1%) and Bank of Cyprus (+102%) have both seen strong profitability (and associated capital generation); resilient asset quality; and disciplined cost management.
Distributions are key parts of both banks’ investment cases. Lloyds pared its share count from 67.3bn at the start of the year down to 63.6bn at end-December through buybacks. Bank of Cyprus received the green light to pay dividends for the first time in 12 years back in April, which is a testament to the remarkable job management has done in turning that business around.
Retail (3.6% weighting)
My decision to double my holding in Marks & Spencer at the very start of January proved to be an inspired one, with the stock increasing by 121% this year.
The transformation in the prospects of both Food and Clothing & Home are a testament to the management team, with the Group gaining market share in both segments despite the well-documented pressure consumers are under. One underappreciated part of the MKS story is its rapid financial deleveraging – it is headed for net cash on a pre-IFRS16 lease basis in the not too distant future on my numbers – and while a number of commentators are saying its low double digit earnings multiple is up with events, I would argue that it hasn’t seen balance sheet strength like this since before the GFC (at least).
Another consideration is that several of its rivals look to be under significant pressure, which may create opportunities for MKS to mop up more market share if the High Street retrenches further.
Insurance (2.9% weighting)
Like Retail I only have one name in this segment, with Aviva flying the flag here. The shares have had a flattish 2023 (-1.8%) despite continuing to make strong distributions – I suspect the interest rate environment did the damage here (as income investors could – and did – look elsewhere for yield), but that seems likely to reverse in 2024 – Aviva yields 8%, roughly double the yield on the FTSE All-Share.
Food & Beverage (8.6% weighting)
A tougher year for my names in the sector. Nonetheless I see both Kerry and Origin as being well positioned for the megatrends of nutrition, sustainability and food security.
Kerry Group had a more challenging 2023 (shares -6.6%), with the Q3 trading update seeing EPS guidance pared to the “low end of the previously stated 1% to 5% CER range”. Similar to the likes of Unilever and Reckitt (both qv) it has compensated for some of the pressure by launching a share buyback (€300m in its case), its first since 2007. Kerry had a relatively quiet 2023 on the M&A front, but its strong balance sheet (consensus net debt / EBITDA of only 1.1x for end-2024) means it could step up the pace of dealflow (with obvious implications for EPS momentum) in 2024.
Origin Enterprises has also seen more challenging (recent) external trading conditions, with its share price falling 20% in 2023, but like Kerry it remains very cash generative and is currently working through another (€20m) share buyback programme – an excellent use of surplus capital given its current low rating (Bloomberg has it on 6.7x FY 2024 earnings).
Travel & Leisure (5.9% weighting)
My exposures here are mainly in Ryanair, with smaller shareholdings in two UK hotel businesses.
Ryanair (+56%) had a super 2023, benefiting from the ongoing resilience in international air travel and structural advantages over a number of its competitors. Its significant cash generation is supporting a multi-billion euro fleet programme and shareholder distributions.
Peel Hotels delisted a number of years ago. It sold two hotels in April, which moved the Group into a net cash position. It has a NAV of just over £1 a share while its shares last traded on the AssetMatch platform at just 30p. Buybacks plainly make sense given such a mismatch, which would provide the twin benefits of an exit for the impatient and NAV accretion for those of us in no hurry to check out. Hopefully 2024 will see the Group sell some or all of its four remaining hotels.
Daniel Thwaites (shares -17% in 2023) is similar to Peel in that its shares (currently 85p on the Aquis index) are at a huge discount to the latest (September 2023) NAV of 420p a share. Where the two differ is that Thwaites has (manageable) net debt, a function of its growth strategy (it has been investing heavily in its hotel portfolio in recent years). Buybacks look less likely here, but I think Thwaites can (and should) look to grow its 10-strong hotel portfolio by one hotel a year out to the rest of this decade at least.
Media (1.3% weighting)
My sole exposure to this sector is Scotland’s STV, which completed the transformative acquisition of Greenbird Media earlier this year, lifting its Studios business to >60% of earnings. The Group’s strategy of using the commercially dominant legacy linear broadcast business, which has the same audience share as its 10 or so next largest commercial rivals combined (BBC doesn’t carry ads), as a cash cow to finance its growing Digital and Studios businesses is paying off handsomely. The share price, -29% in 2023, isn’t yet reflecting this, with a valuation of just 7.5x consensus 2024 earnings suggesting that the market sees STV as ex-growth. I believe the opposite is true, and that these shares can re-rate strongly from here.
Utilities (9.9% weighting)
My ‘green’ exposures in the portfolio had a mixed 2023, with Greencoat Renewables (-10%) struggling as a result of the interest rate environment (it’s a favourite of income investors) while Renewi posted a 7% gain, helped by bid interest (later withdrawn) from Macquarie.
I do think Renewi was right to reject the Macquarie approach as, in my view, it fundamentally undervalued the Group – the initial proposal of 775p/share in September represented a multiple of just 8.4x EBITDA – which seems skinny for a leading circular economy player. I think RWI’s fair value is at least £10/share (For balance, Bloomberg analyst consensus gives a blended price target of 829p).
Greencoat Renewables’ strongly cash generative model means that it should, in my view, be able to continue to add to its pan-European renewable assets portfolio. If policy rates start to come down in 2024 as expected, this should give the shares a lift, as utilities are viewed as ‘bond proxies’ by income investors.
Real Estate (4.4% weighting)
My four remaining real estate holdings (the residual Hammerson position was offloaded in early 2023) had a mixed year.
EEP sold its remaining asset, the Markiz building in Istanbul, at a good price and made an initial distribution in late 2023 of 45p/share that more than covered my original in-price. This was a very satisfactory outcome given the challenging conditions for Turkish real estate in recent years. Further distributions are guided for 2024 as the company winds itself up.
Palace Capital posted a modest gain of 4% this year despite the interest rate headwinds for property stocks and concerns about UK commercial real estate valuations. This is because the Group has reduced net debt to de minimis levels, while also successfully executing multiple better-than-book-value disposals and ongoing share buybacks at a meaningful discount to NAV. It’s not unrealistic to think that PCA could sell all of its remaining properties by the end of 2024 if rates come down as much as futures pricing suggests they will.
PRS REIT (-3%), as an income play, struggled in this rate environment. However, the completion of substantially all of its development pipeline means development risks have sharply reduced and the dividend should be covered by underlying earnings in 2024. Lower risk free rates should be a tailwind for the share price in 2024, in my opinion.
SPDI (-30%) had a sluggish 2023, making some progress on the Arcona tie-up but the Ukraine war remains a headwind for fully completing that transaction. Arcona is delivering well on its strategy though, which offers the prospect of indirect NAV accretion via SPDI’s shareholding in Arcona. The stock is not without its risks though.
Telecoms (1.2% weighting)
My sole exposure to this space is BT/A, whose shares rose ‘only’ 10%, held back by what I suspect are technical factors (perception of loose shareholdings). As with the likes of Haleon though, these technical factors mask a fast-improving fundamental story, with BT/A returning revenue and EBITDA growth, while it has a clear glide path to a step-change in free cash flow generation from the completion of the FTTP capex and execution of its cost take-out programme. The stock is very cheap at 6.6x consensus 2024 earnings and yields 6.2%.
Construction/Materials (2.2% weighting)
My sole exposure here is CRH, which had a sparkling year, rising 73% as the market cheered on improving fundamentals (including its positive exposure to US government infrastructure-led stimulus) and the technical lift from changes to its listing arrangements. It has a highly cash generative business, supporting accretive M&A, buybacks and dividends.
Technology (2.6% weighting)
My exposures here are two megacaps, Amazon and Prosus.
For Amazon (shares +83%) 2023 was a terrific year, with the Group advancing on all fronts (AWS, retail, advertising, subscriptions). The Group seems on track to lift revenue from 2022’s $514bn to $1trn+ by 2028. Profitability is about to lift off too, due to cost take-out initiatives and the Group’s growth into its previous excess capacity. The stock is not the cheapest at 13.4x consensus 2024 EV/EBITDA, but that is not a demanding multiple for a business of this quality.
Prosus had a very frustrating 2023, with the share price falling 8%, essentially mirroring its main asset, a quarter share in Tencent (-7%). However, PRX trades at a discount to the value of its shares in Tencent alone, so the underperformance makes no sense given that: (i) PRX has been selling shares in Tencent to finance ongoing buybacks at a sharp discount to NAV; and (ii) PRX has brought forward plans to deliver profitability from its own-operated asset base. If sentiment towards China turns more positive, PRX could have a very good 2024.
Theodosian Capital 