Mechanical Bull's StockRank Portfolio - 2016 Performance Review

Following Ed’s New Years update on his NAPs strategy, I will give an update on my own version of a high Stockranks based strategy. I have been applying this now for over 3.5 years, more or less from the time that the Stockranks were first launched. So quite possibly I have been using a rules based Stockranks strategy longer than anyone.

The basic strategy is pretty simple. Buy stocks with the very highest Stockranks (which also score highly on the Screen of Screens) and sell them when they go below a certain level. There has been a bit of tinkering with the rules over time. The most important change has been the lowering of the sell threshold from 90 to 80, which means that stocks tend to be held for longer with less churn overall. This year I have gone a stage further and if it drops below 80 but the stock is showing signs of momentum I will top slice and maintain a position until the momentum peters out. 

Other tweaks include incorporating PEG by creating a rank from to low to high and combining with the Stockrank based score so selections are weighted to low PEG stocks. I have also taken inspiration from one element of the NAPs approach, namely the bid spread, and similarly weight selections towards tighter spreads. Unlike NAPs, I am not overly concerned about diversifying across all sectors, although I do try to avoid having more than two stocks in the same industry peer group. Finally, I make reasonable attempts to avoid suspected fraudulent listings. Maybe all these tweaks make for a secret sauce with a more complicated recipe, but the main ingredient is a high Stockrank, which remains unchanged.

So how is it all working out? I am no longer maintaining my blog's fantasy portfolio, but what I can show is the indexed change in the total valuation of my (and my wife’s) UK trading accounts for every week since 26 October 2013 (index = 100).

This chart includes dividends and all trading and other costs, so this is a good reflection of what kind of returns are achievable in the real world. However, there has been some movement of cash into my accounts, mainly over the first couple of years, as well as a couple of big cash withdrawals over the last year. I don’t think these have had a major impact on the underlying performance, but I have included this above for the purposes of transparency. The annual underlying performance figures look like this:

I don’t have a precise figure for 2013, but I estimate it to be at least 28% between May to December 2013. Therefore, in just over 3.5 years I have comfortably averaged 25% per year. Remember, these include dividends and all trading costs. However, these figures also include cash holdings in the trading accounts and I am never fully invested - the cash level has been anywhere from about 10% to 30%. This will dampen overall returns but offers a certain amount of safety and makes it easier to sleep at night.

2016 was a bit down on previous years. Performance was certainly not helped by a lot of silly ad-hoc trades I made around the time of the EU referendum. When the polls suggested we would remain in the EU day before the vote, I bought in with the idea of beating the rush. When it turned out that we were leaving, I was convinced that markets were going to tank and I took some heavy losses on cyclical stocks, such as house builders and retailers. Of course, many of these rebounded quite quickly so I bailed out at exactly the wrong time. Fortunately, my system also picked up a numbers of stocks around this time that performed very strongly in the second half of 2016 including Ferrexpo (a 3 bagger), Beximco Pharma and Avesco (that both doubled), thus sparing my blushes. Indeed the overall performance over the last six months has been staggering – up over 30 per cent.

My take on all this is that factor based investing seems to get quite “hot” at particular and unpredictable times. I also suspect (although I have no firm evidence) that new entrants into the higher echelons of the Stockranks tend to perform a bit better than ones that have been highly ranked for some time. Therefore, I think it is better to have a strategy where you are rotating into potential “hot” positions on a fairly regular basis rather than rebalancing once a year. This may partly explain the big difference in the performance of Ed’s NAPs portfolios for 2015 (where the beginning of the year was a very “hot” period) and 2016 (which was not).

The experience of 2016 suggests that trying to predict the direction of markets is pretty futile. However, I cannot escape the feeling that there is a collective hubris around the increasing likelihood of a hard Brexit in March 2019, and that the markets are not pricing the disruption that this would entail.

For this reason I have sought to further diversify my investments abroad, specifically to Australia and New Zealand. I am now 30% invested in Australian and NZ denominated trading accounts, hence the big cash withdrawals in my UK trading accounts. This offers a hedge in case of either a fall in UK stocks and/or further currency falls. I have extended by Stockopedia subscription and I am already applying the Mechanical Bull system in Australasian markets. Although the performance to date has been flat, I have no regrets. Again, it is all about being able to sleep at night …. and dreaming of early retirement!