DIY Investor Diary: why I ditched tracker funds for one space stock

“Just buy a tracker” has been a winning mantra in the last decade, with investors making plenty of money from funds that simply follow the market. 

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The sheer bulk of said returns, combined with numerous studies highlighting the shortcomings of active money management, have pushed many of us into passive funds over the years. 

Source: FE Analytics. Past performance is not a guide to future performance. 

But some investors are moving in another direction. Take one ii customer who gave up on index funds and switched to picking stocks individually a few years ago, having seen the greater gains that were available if he got things right.

That strategy has worked for now, helping him achieve financial freedom at an early age and indulge an interest in company research. And yet the volatility involved could see him eventually return to the humble tracker fund. 

Leaving the rat race via stock picking 

This ii customer is just 46 but managed to exit corporate life last year and enter a state of “semi-retirement”, which involves a combination of investing and so-called side hustles, last summer.  

He now focuses on running a concentrated portfolio of shares, as well as a hobby of buying items at auction to sell on eBay. 

“I started with clothing but focus on everything from hi-fi equipment to antiques,” he says of his eBay store. “There are also vintage things, things I know a bit, like cycling equipment. You just find things that work and sell.” 

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When it comes to finances, over the years the investor has already built up a self-invested personal pension (SIPP) of £2.5 million, thanks to a combined focus on investing and his career in the food industry. 

“In my early 20s, around the time of the dotcom boom, I was a student and invested some of my student loan – once I made enough for my first car I cashed out,” he says. 

“I focused on my career and maximised the pension contributions through ensuring I got full employer match.   

“I started more seriously planning for retirement in my late 30s, often contributing chunks of bonus payments to the cause.” 

He has £459,000 invested in an ISAs and wants it to cover his outgoings until he can access the SIPP in around a decade.  

The customer, who is married with two children, aims to take roughly £6,000 a month from his ISA, although this amount can vary depending on how much money he makes on eBay. 

The shift from passive…to active 

This individual has invested for multiple years, noting that he “went down the index route, which did well for a few years”. But a big part of his recent success was to abandon tracker funds in favour of buying individual stocks. 

As a tracker fund investor he says he would often make a total return of 15% to 20% a year, which seemed satisfying at the time.  

But he also made good use of company pension schemes, and the ability to check how these were invested and the underlying performance, eventually convinced him of the case for stock picking. 

“One Christmas I was with Aviva [for my workplace pension and], I could only invest in funds,” he says.  

“They had a set-up where you can check the funds and annual performance. I looked at it and there was a Baillie Gifford fund up 100%. And I thought, if I had had that, how many years would that have taken off my timeline [to retiring]? 

“When you’re locked into indexing, you think nobody can beat the market. My logic is, that’s not true, people can and do beat the market.”

He started this switch in an incremental manner, dedicating a small percentage of the pot to ideas that could generate big returns. Over time the balance shifted, with this investor building up a highly concentrated portfolio. 

And as the table shows, portfolio growth has really accelerated in the last two full calendar years in particular. We should stress that these figures include new money he has invested in each of these years. Readers will also note that he did not escape the sell-off of 2022 unscathed, either. 

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The ii customer is not sure exactly which Baillie Gifford fund inspired his turn to active management.  

But there are a few candidates: he believes the epiphany may have occurred during Christmas 2020, a year that saw Baillie Gifford US Growth Ord (LSE:USA) make a share price total return of 133.5%, with Pacific Horizon Ord (LSE:PHI) returning 128.6% and Scottish Mortgage Ord (LSE:SMT) making 110.5%. 

The portfolio 

Like many a dedicated stock picker, this investor enjoyed the process of research, from reading company reports to examining technical analysis.  

He also delved into social media, using what was then Twitter, as well as reading books such as Christopher Mayer’s 100 Baggers: Stocks That Return 100-to-1 and How to Find Them. 

It was on social media that the individual came across AST SpaceMobile Inc Ordinary Shares - Class A (NASDAQ:ASTS), which makes up an eye-watering 80% of the portfolio.

As the table shows, there’s also a 5% weighting to Kraken Robotics Inc (TSX:PNG) and 4% apiece in Amazon.com Inc (NASDAQ:AMZN) and T1 Energy Inc (NYSE:TE).

Positions which he describes as “more speculative”, in the likes of QuantumScape Corp Ordinary Shares - Class A (NASDAQ:QS), ASP Isotopes Inc (NASDAQ:ASPI), Ascent Solar Technologies Inc (NASDAQ:ASTI), Intuitive Machines Inc Ordinary Shares - Class A (NASDAQ:LUNR) and Velocity Composites (LSE:VEL), each account for less than 1% of the portfolio and are not shown in the table. 

To touch on the big beast, AST Spacemobile is a Texas-based designer and manufacturer of satellites, and is building a cellular broadband network in space.

Like some other investments associated with the space exploration trend, it has enjoyed phenomenal returns of late, with the shares returning around 200% over a 12-month period.  

The share has been a big success for this investor, who has experienced plenty of volatility but maintains his conviction thanks to the depth of his research.

“I bought at $8 and rode it down to $2, built my understanding and deep conviction and have since added heavily on drawdowns,” he says.  

“Conviction is important to enable large drawdowns to be seen as opportunities and not to get wiped out.” The shares commanded a price of around $90 at the time of writing. 

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This is, of course, an approach that might prove too stressful for some, and it’s something that can take its toll on this individual too.  

He notes a day in February when AST Spacemobile was down by 15% because it had done a capital raise. “If it weren’t as up to speed, I’d think ‘I give up’ and get out,” he says. 

He adds that he might move back into index funds over time, both because the research is time-consuming and because holding individual stocks “can be a roller coaster”.

But picking promising shares has served him well for the time being.

In our DIY Investor Diary series, we speak to interactive investor customers to find out how they invest in funds and investment trusts, what their goals and objectives are, current issues and concerns regarding their portfolio, and what they’ve learned along the way. The aim is to provide inspiration for other investors, and we would love to hear from more people who would like to be involved. We do not require those featured to be named. If you are interested, please email our senior fund content specialist: dave.baxter@ii.co.uk