REFLECTIONS ON THE STOCK MARKET DOWNTURN / THE FINANCIAL TIMES OP EDITORIAL

Reflections on the stock market downturn

My portfolio is down about 35 per cent, but I’m sticking with my small-cap heroes

John Lee


Lord Lee’s salmon fishing friend Nigel Fenton has been a beneficiary of his advice on buying into property company Daejan © Alamy Photo


These are turbulent times for investors and reflecting on what has happened to stock markets in the past few weeks is a painful business.

So, where do I start? I’m struck by how different things look since the column I penned for the Financial Times in January.

Back then, I was optimistic about the year ahead following the emphatic general election result.

I had received some very welcome takeover proceeds, “topped-up” a number of my holdings and felt very pleased with myself for buying Aviva and Legal & General on 7.5 per cent yields.

Yes, I did mention coronavirus as a concern, but nobody imagined its speed and scale of spread, and the misery and death it would bring, would drive the world into lockdown.

It is a sickening feeling to see the valuation of one’s portfolio slashed and expected dividends passed or deferred.

All of my holdings are down from peak this year, on average by approaching 35 per cent, apart from Concurrent Technologies which is marginally up.

The worst performers have been the three companies which passed dividends; Air Partner, Vianet and Vitec have all halved. I have stayed aboard all three, although I did sell some of the latter on a negative trading statement this year. In retrospect, perhaps I should have been more ruthless.

Overall, I should have acted more quickly, but my approach has always been to take the long view. In any case, some of my larger small-cap holdings are fairly illiquid. I would have benefited from applying a 20 per cent “stop loss” in some cases, but I believe these tools should only be applied to specific stocks, and not when the overall market falls out of bed.

As a long-time investor, I have been here before. Coronavirus and your money
 For me, the nearest parallel is the secondary banking crisis in the early 1970s when London & County Bank crashed, there were rumours about the viability of NatWest and property companies including Northern Developments and Ronald Lyon Estates went under. 

Then the stock market plunged — from memory, blue-chips such as ICI and Thomas Tilling were yielding 20 per cent, but no one would buy equities.

This event, now approaching 50 years ago, taught me that unprecedented falls on this scale could happen — hence my conservative approach to investing ever since. 

Finally, a number of institutions got together, started to buy and eventually turned sentiment with a significant recovery then ensuing. 

Today, the one thing that everyone agrees on is that the disruption from Covid-19 will come to an end at some stage — although nobody knows when — and sadly we are going to be reading a great deal of depressing news stories for some time.

For the businesses strong enough to survive, the eventual reward should be an explosion of pent-up economic activity and travel, and (I hope) a commensurate surge in share prices. So I am not panicking — I will stay aboard and take a long-term view about the businesses I’m invested in.

As I am looking five or more years ahead, I’m happy to be judged then.

I am always reminded of the words of investor and financier Sir John Templeton: “To buy when others are desperately selling, and to sell when others are greedily buying, requires the greatest fortitude and pays the greatest reward.” 

Thus, when we experienced the financial crisis of 2008, with shares falling heavily, I bought into excellent businesses on double-figure yields such as BBA Aviation and Fenner, the industrials group, being richly rewarded when markets recovered. Of course, there is absolutely no guarantee that history will repeat itself, but one has to take the optimistic view that we will get through this crisis.

Back to today. With the benefit of hindsight, I obviously reinvested my takeover proceeds too soon, but thankfully in solid, well-stewarded businesses, all of which survive. However, I am resigned to a significant loss of dividend income this year.

My dividend heroes will be hopefully those companies with strong cash reserves — in my portfolio, these include Anpario, Cerillion, Concurrent Technologies and FW Thorpe. Also, I have every confidence that Treatt, my largest Isa holding, will maintain dividend payments.

With so many depressed share prices, it will be interesting to see whether any predators swoop on the vulnerable, although most investment bankers are likely to be focused on rights issues for some while
Question marks remain over holdings such as Aviva and PZ Cussons, but hopefully they will be very reluctant to destroy their long, positive dividend histories.

We have seen some extraordinary price volatility in recent days. Air Partner was driven down by heavy selling and obvious concerns about the aviation industry to a low of 17p. It has since rallied by well over 100 per cent to more than 40p, as investors took a more positive view of the company’s survival — one I very much share as a long-term holder. 

In February, I had slightly trimmed my Treatt holding selling at 533p and 540p. However, when I received my Treatt dividend I used part of it to buy back half of what I had sold at an unbelievable 319p — selling them again just a day later at 389p. 

I was even more fortunate with Shell, judging them to be ridiculously oversold at £10.10 on a yield of 14 per cent. I sold 10 days later at £14. As regular readers of my column know, I am not normally a “trader”, but home-isolating generates plenty of free time.

With so many depressed share prices, it will be interesting to see whether any predators swoop on the vulnerable, although most investment bankers are likely to be focused on rights issues for some while. In time, this will become an issue for private investors who will be tapped for further equity or face dilution.

But I am thankful that I benefited from so many takeovers last year. Looking back, there is no way that we Tarsus shareholders would have been offered 425p today, with so many events being cancelled or deferred.

Over the years, I have drawn attention to the absurd discount to net asset value prevailing at family-controlled property company Daejan. In June, when its shares were £56 (approximately half its published NAV) I wrote, “I would think it makes sense to take Daejan private at the midway price, say £80, everyone would be happy and the controlling families would be spared further castigation over the board diversity issue.” 

Well, suffice to say, it duly happened at virtually precisely that figure! One fellow shareholder who benefited was Nigel Fenton, my good friend and a partner in the famous Hendersyde Beat of the Tweed, near Kelso in the Scottish borders, where I have been privileged to fish for these past 20 years. 

Nigel reinvested his proceeds from the Charles Taylor takeover in Daejan and industrial property owner Hansteen. When Hansteen was itself taken over, he bought more Daejan with those further proceeds. The following day, the Daejan “take private” was announced.

Hopefully, his salmon fishing clients like me will have the same good fortune on the river.

Which leads me to fervently hope and pray for signs that we are winning the fight against this ghastly virus and look forward to the time when our lives and the economy can emerge from isolation.

Selfishly, I am hoping to be able to cast a fly during my August Tweed week, and look forward to talking shares again on the river with Nigel.


Lord Lee of Trafford is an active private investor and author of the children’s book “Yummi Yoghurt — A First Taste of Stock Market Investment”. He is a shareholder in all the companies indicated.