We’re working on some internal data research tools at Stockopedia which will contribute to a lot of editorial insights, and we hope, some really great product launches in future. Here’s a few insights from my own recent research into the performance of UK StockRanks strategies in the last few years.
(Disclaimer: Past performance not an indicator of future results etc).
1. Sector Diversification - does it reduce returns ?
How did a NAPS portfolio process (picking the top 2 stocks from each sector) stack up against selecting the top 20 ranked stocks without any additional diversification ? Here’s a chart of the NAPS based approach…
Meanwhile the top 20 by StockRank without additional diversification:
The performance was very similar, but the sector diversified portfolio performed much more smoothly. The “Top Ranked” portfolio was only invested in an average 3 sectors throughout the whole period, whereas the NAPS invested in 10 sectors consistently. Essentially, the NAPS process led to stronger risk-adjusted-returns.
The observant will know that my New Year’s NAPS portfolio (written up here) returned only just over 5% in 2017. The reason it didn’t keep up with the first chart above was because I meddled with my original rules ! Meddling with rules hasn’t paid.
2. Just 10 stocks - do concentrated portfolios outperform ?
Does extra breadth in a portfolio really add any performance ? I’ve long argued that if you are a systematic investor it makes sense to broadly diversify. If you are genuinely a talented stock picker (which you probably aren’t) then you should concentrate. Here’s a chart of a Top 10 only NAPS portfolio.
A nice performance, but it shows a significantly reduced return versus a more broadly diversified 20 stock portfolio and a lot more volatility. Concentration hasn’t paid.
3. Microcaps - is there an edge in hard to trade shares?
All the above tests have a minimum £50m market cap cutoff - i.e. they are excluding the microcaps. If we drop that to a £10m cutoff to let in the top ranking microcap shares how would it have done ?
It’s squeezed a bit more performance, but I’d argue that the additional transaction costs and volatility may not warrant the extra effort required to trade them. Microcaps appear to pay… but at what cost?
4. Large Caps - can you beat the FTSE…