After An Eventful Two Years, Has My Quality Screen Beaten The Market?

Mon 7:10pm by Roland Head

4 comments 1310 reads

Two years ago I created a screen to look for potential quality compounders – those rare high-quality companies that can generate consistently high returns for many years, reinvesting their profits successfully and potentially delivering long runs of market-beating growth.

The intervening period has seen periods of elevated volatility and some unexpected events. In this piece I want to look at the performance of my original selection and consider how this might be improved.

A quality compounding approach to investing requires fairly long timeframes. Two years isn’t really enough to see the benefits of true compounding. But I think it is enough to check which stocks from my original list are still performing and to look for some new contenders to consider.

Compounding Quality screen revisited

Before we go any further, here are the links to my original article and to the compounding quality screen itself.

As a quick refresher, here’s a snapshot of the screening rules I used to try and identify companies with the potential to be quality compounders:

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When I originally looked at this screen in May 2023, it generated 35 stocks.

At the time of writing (16 July 2025), there are only 20 stocks in the results.

Of these, 12 remain from the original May ‘23 selection and eight are new.

How did the 2023 vintage perform?

I’ll return to the latest screen results shortly, but first I want to take a look at how my original selection has performed over the last two years or so.

To model the aggregate performance of the whole selection, I created a model portfolio with equally-sized starting positions.

The results are pretty underwhelming. My selection has largely just tracked the FTSE All Share index since May 23, with both achieving a capital gain of around 16%:

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The reason for this humdrum performance becomes clear when we look at the range of share price performance from the 35 stocks in the portfolio. While there were some big winners, there were some notable losers as well, including a near-total loss with Argentex:

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One selection of stocks over a two-year period isn’t a scientifically rigorous test of an investment method. But this clearly…

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Mark Carter

Tue 10:38am

Interesting article, Roland. Many thanks.

I too have been contemplating quality compounders.

I actually cribbed the essence of a screen that I saw on Youtube. It's pretty straightforward. I require Q> 70, 2% < Yield TTM < 6%, Mkt cap > £300m, Interest Cover > 7. I sort by descending quality.

I also look for revenues and EPS doubling over a 10y period.

A lot of high-quality candidates come up. I like the screen because it combines value, growth, safety and quality.

Like you say, there can be much noise over 2 years, and maybe you need longer. Five years, I think. I've had a share like IG group (LON:IGG) for example that traded sideways for a couple of years, then had a nice pop.

Of course, random events happen to companies that no-one can predict, so it's a game of numbers.

If I were to look at compounding ability, for example, let's take the case of VCT. Well, it's revenues have been relatively static over those 10 years. EPS has actually gone down. So I would have excluded it.

Your screening process seems pretty sensible though. I guess not everything can work all the time.

I look future to subsequent updates, so please don't abandon the project.

FREng

Tue 11:08am

Roland,

Have you looked to see whether the DSMR/SCVR colour rating at the time of purchase would have distinguished at all between the winners and the losers?

Tue 11:27am

By way of illustration, I looked through my notes. I bought IGG in Feb 2018 at 766p when the ASX (All-Share) was trading at 3959. As of today, IGG is up 38.8%, and the ASX up 23.8%. Not astounding, but a useful outperformance (spread over a number of years, mind).

But, IGG was trading at 766p as late as May 2024, so the whole thing traded sideways on me for a number of years.

There's more. It fell to 512p around April 201, so you would have been stopped out if you have implemented a 25% stop-loss. If you had topped-up at 575p (at your notional stop-loss) instead of selling, you would have done even better than just buying.

Difficult, isn't it?

What my current thinking is is to deploy dividends appropriately. Something like at ISA top-up season buy one new share that matches the screen, and top up on shares that still meet the screen requirements. That way, volatility is working for you rather than against you. At least in theory (although whether that theory will play out is another matter, of course).

ISAallowance

2:24pm

I guess you're bench-marking against the FTSE all-share since all your stocks are selected from that universe, and hence you can judge whether your selection criteria is adding value.

However, personally I would want to benchmark against my alternative to active stock selection, and realistically that would be an MSCI world tracker or an S&P500 tracker (an MSCI world tracker is basically what my previous workplace pension offered as the equity option). Since any world tracker is dominated by the S&P500 and stocko doesn't have an all-world I'll use the S&P500 - that's up about 50% since May '23. So over that time frame all your work has underperformed the most likely alternative (even accounting for currency movements).

That's possibly unfair since the S&P is arguably in bubble territory, and I certainly wouldn't be buying it now even if I was a passive investor, but over the longer term, despite selecting predominately UK stocks, I now benchmark against the S&P500 since the FTSE100-dominated FTSE all-share is simply too weak compared to a global alternative.

After an eventful two years, has my quality screen beaten the market?

Compounding Quality screen revisited

How did the 2023 vintage perform?

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Roland Head

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