Looking at the new additions

Summer Success!

Since the tensions of the UK Referendum on exiting the EU things have been going pretty well for the model portfolio and in particular the new additions of Atkins (WS) and Interserve in July (see Some New Holdings) that were bought on some key contrarian factors that I feel allow investors to still purchase shares with a degree of safety even if, as I believe, overall equity market conditions remain unfavourable with prospective returns skewed to the negative.

For both shares things stacked up favourably when compared to the overall market and peers; these simple factors were enough to make me invest and I tried to avoid getting bogged down in trying to forecast what may or may not happen. I do try and avoid getting drawn into a “story” when it comes to investing as its easy to find comfort in this and use it to justify your decision – if you like the story your judgment can become clouded and you look for data to reinforce why you should be investing rather than assessing objectively.

It can be all too easy to buy into a story and use it as evidence for your investment decision

However, the story is interesting and as with anything looks obvious in hindsight!

I had already decided to buy these companies as I believed them to be oversold based on some key metrics, they had enough financial security and had suffered in terms of price declines in the last twelve months with Interserve in particular reaching multi-year lows. With a contrarian strategy you are looking for a turnaround to happen that means investors realise that there is value in the shares and start to return to them and the price appreciates back toward the norm; typically there will be a trigger that causes this to happen which can take many forms: –

  • Management release a more positive trading statement
  • Analysts expectations for earnings prove to be too negative and the Company unexpectedly outperforms
  • Changing business conditions
  • New products are successfully launched

This list is not exhaustive but you get the idea!

Since purchasing these shares on 22nd July Atkins (WS) has increased by 19.2% and Interserve a whopping 56.4%; so what happened?

lse-atk-1 lse-irv

Well first of all they had declined substantially from high valuations and concerns regarding the UK exit from the EU and the Service Sector was extremely concerned that the economy would slow substantially in fact the UK Services PMI (Purchasing Managers Index) was at a seven year low.

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At the same time investors had been flocking to defensives with cyclicals underperforming in comparison to them, and the wider UK Equity market.

The sharp rebound that you can see in August was the trigger for shares in the service to rebound; whether this lasts is another story and presents me with a new problem…..do I sell one or both of these shares?


Model Portfolio Continues to Perform

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I remain heavily invested in Index Linked Gilts and continue to seek out value in selective equities.

 

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