How A Decade Of NAPS Portfolios Beat Every Fund Manager In The UK

17th Dec '24 by Edward Croft

96 comments 4798 reads

I can hardly believe it, but it’s about to be ten years since the inception of the NAPS Portfolio at Stockopedia. And what a decade it’s been for UK stocks. We’ve had Brexit, six Prime Ministers, a pandemic, FTSE indices that have gone nowhere, an AIM index that’s gone backwards, and a torrent of delistings as company executives up sticks and move to the USA where everything is going gang busters.

So it’s rather surprising to find that the humble NAPS Portfolio has done rather well. This model portfolio that I run based on the StockRanks only invests in UK stocks. It’s so simple, it takes barely an hour every year to put together. Minutes really. The writing and thinking take far more time.

But these few minutes of work each year have yielded a more than a tripling of the starting capital. Compounding at a 13% annualised rate, the NAPS have beaten every UK fund manager, all the UK indices, and even the S&P 500. Yes, just by investing in UK stocks.

Playing a winning hand

Picture sitting at a card table, and being dealt a hand so strong you know it's almost certain to win. That's called a "nap hand” and it’s where the NAPS portfolio got its name. The difference is that instead of relying on the luck of the draw, we stacked the deck with data.

In starting the NAPS, we weren’t 100% confident, but we wanted to prove something. Could a methodical, data-driven approach to investing beat the traditional “share tips" approach of the financial press that so often underperform. So we designed some simple stock selection rules, based on the StockRanks, that anyone can apply in as long as it takes to make breakfast:

Sort the UK stock market by StockRank descending.
Exclude small and hard to trade shares (sub £20m market cap).
Select the top 2 stocks from each of the 10 sectors.
Buy the list, and hold for one year.
After each year, sell and repeat.

Occasionally, I've tweaked the formula here and there - sometimes picking just one stock from smaller sectors like telecoms, sometimes leaning more into value plays. But the core approach hasn't changed. I figured it’s much less harmful to fiddle with the rules once per year, than fiddle with the portfolio daily. And a major benefit is not having to worry over every…

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gmtrader

26th Dec '24

https://www.stockopedia.com/ac...*1mi6cqw*_gcl_au*NDk4MDY1MjcuMTczNDAyMzQ3Mi43OTMyNjI4MTUuMTczNTA3NDg4Mi4xNzM1MDc0ODg1

Barbara

Many thx

Rusty2

You won't change all the stocks each quarter, some will still qualify again. However a bigger cost could be the spread. Smaller stocks tend to have wider spreads. There is also stamp duty when buying. Costs are more likely to be around 2-3%, each time you buy and sell.

Stamp duty isn’t paid in sipps or isa. Yes you would need to watch out for the spreads.

Yes it is.

Maybe you mean AIM stocks?

All mine are in ISAs or SIPPs, l'm paying stamp duty on all apart from AIM shares.

john2

'Are there any exemptions for stamp duty on shares?

Your UK share purchase will be exempt from stamp duty if your trade is valued at £1,000 or below and you’ve bought privately, without a broker.

Shares bought in eligible companies on the Alternative Investment Market (AIM shares) are also exempt from stamp duty.

Other stamp duty exemptions include UK gilts, corporate bonds, shares in an IPO, and ETFs'

Stamp Duty on Shares Explained | Stamp Duty at ii - ii

No mention of SIPPs or ISAs.

The real benefit to this is if you have a large fund where you want to preserve your holding to then be able to live off the profits each year. Or if you can start it in your 20’s when you have the time to see it compound. An example of this would be to setup a 20k sipp for an 18 yo so that after 37 years they can retire at 55. Even just £20k invested would return over £800k in 37 years

Probably just me that seems to but only aim shares

Too late, l've already retired.

Lucky you. I’m thinking further ahead though for daughter and granddaughter.

Edward Croft

@gmtrader - it's not just broker costs you pay. The issue with quarterly (or semi-annual) rebalancing is that you have to pay the bid-ask spread on every transaction, and stamp duty on buys. These costs completely dominate any additional return you get from quarterly rebalancing over annual.

I made the huge mistake of attempting quarterly rebalancing in my first systematic portfolio in US stocks. The spreads and costs completely ate it up. I gave up after 2 quarters.

The UK NAPS (right now) have an average bid-ask spread of 1.2%.

If you traded that 4x per year - that's a 4.8% return you are giving up, plus up to another 2% on stamp duty plus more on commission etc. Call it 7% costs.

So that's more than 50% of your return gobbled up by costs.

Quarterly rebalancing in a NAPS approach doesn't work for this reason !

A quarter of the portfolio quarterly - that's fine, but the whole portfolio quarterly - not a good idea.

27th Dec '24

Ahh that explains then. Thanks for the reply.

'I made the huge mistake of attempting quarterly rebalancing in my first systematic portfolio in US stocks'

Of course, for US stocks currency conversion costs were probably an additional drag on performance.

Yes - that didn't help !

DWit199

Ed,

A factor that you haven't discussed here but was included in your selection process in the past is Market Cap. I would expect the market to shift fairly slowly between presently favouring large cap to the established long term position of favouring small cap. Is there any way to anticipate that change and incorporate it in a NAPS selection process?

For a period in the middle of the NAPS history, I experimented with not only adding constraints across sectors, but also size group buckets, I even added in risk rating buckets.

All these constraints do is reduce the average ranking. They sort of reduce the degrees of freedom - and I felt those constraints were smothering return potential.

I eventually became comfortable that the sector diversity created enough size diversity - normally a third small, third mid and third large cap.

You can of course add whatever exclusions you like to your own rules (eg no large caps) - if you want to target small caps.

I do feel the current rules overweight large caps at the bottom of down markets, and small caps at the top of bull markets - so there may be a timing overlay that can counter this.

Kieranj077

Yes, unfortunately to do the timing analysis properly, access to StockRanks data based on a specific date is needed, so the Stockopedia team would need to do this. Using the folios approach isn't really feasible, as it would take a VERY long time (many years) and a lot of effort to try and get valid results.

The alternative could be for a feature where the user (us) can select a date on the screens page. The StockRanks would then be visible for companies as they were on that specific date. This could be as simple as just including StockRanks, or extended to other data points. The feature would be interesting as it would start to open a form of back-testing for subscribers, which could then help the overall community.

That depends where you are located, the broker and whether you buy in an lSA or SIPPs or not.

Some accounts you don't need to do any conversion, it is all in US$s. In an ISA yes everything needs converting into £. I pay 0.5% forex fee but there are cheaper platforms. US shares have much narrower spreads, most of my trades are around 0.1%. No stamp duty. But you do lose 15% tax on dividends.

Often my US trades are cheaper than UK ones.

European trades are far more expensive, even on large caps.

I wonder why I said probably, Rusty.

Why are you talking about spreads and stamp duty? I only mentioned currency conversion.

Because it is all about the costs.

How a decade of NAPS portfolios beat every fund manager in the UK

Playing a winning hand

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Edward Croft

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