Replicate 90+SR with zero cost trading plans?
Evening all,
Having discovered Stockopedia 6 months ago, I’ve been devouring the blogs and unbelievably excellent system.
The chart showing the performance of a SR90+ portfolio is like discovering Alchemy.
The main issue for me is replicating the SR90+ performance while reducing the risk of filtering out the random winners.
The issue is number of shares vs trading costs.
Apologies if this has been discussed elsewhere, but my question to the group wisdom is, if companies such as ii.co.uk offer free trading costs, why not simply purchase the whole list?
For £29 a month, which I was told you can turn on/off, allows low cost trades.
Their “regular investing” option is £0 per trade.
I had been playing around with parameter after parameter to thin out the 90+SR lists or QM lists but as has been discussed on these forums, whatever you filter out, you could (negatively) affect the average result.
I’d much rather be a passive investor and have already 75% of my portfolio in these passive funds. vanguard built a vast empire based on it for a reason. It works
If the 90+ SR raises the average return when compared to passive funds then why try to pick/filter them out (of course unless this is of interest to you).
It’s simply like counting cards at the casino, you stack the deck in your favour.
Any reasons why a zero cost trading plan can’t just buy all the SR,+90 shares?
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33 comments
We've considered it. Have talked to ETF providers in the past about this. Reality is that to make an ETF commercial we'd need to raise a lot of money. You can get a UCITS fund to wash its face at £10-20m or so under management, but to do an ETF you need £100m or more - otherwise it has to be an ETN (which is a loan note from an investment services provider and not a genuine security).
Running £100m - at a 0.5% net fee to the investment manager (Stocko) - the revenues are likely to be £500k. Not to be sniffed at of course, but there would be a business imperative to drive up AUM to make the fund commercial. And that's where the issues really start.
Even running £100m - if you want a concentrated portfolio of (say) 50 stocks, you need to build a book of £2m in each of the stocks that you own. The liquidity required to run such large size pushes the fund's position requirements up the market cap scale. i.e. it knocks you out of a lot of small cap opportunities - which is where a lot of the enjoyment is as a private investor.
If you run your own portfolio - and (say) have £100k to manage, you can buy £5k in each of 20 stocks. You can trade almost all the shares in the market with minimal market impact. Given the returns to microcap high StockRank shares have been so strong, it's actually a much better outcome for long term investors to do the work themselves, rather than stick it in a fund that tries to do the same but can't due to scale.
I certainly wouldn't rule the idea of us launching a StockRanks fund at some point, but I do think it would be midcap and large cap focused.
On the other hand, running a discretionary closed end fund that's smaller with significant personal capital involved is quite an attractive proposition. I'm v. focused on the Stockopedia platform at the moment, so this is something for a later date!
Do XDEM and XDEQ do what you want? They look pretty close from a quick look.
hi Nick,
I read a lot of your comments from a few years back on the NAPs articles. Very informative.
I had a quick look at the XDEM momentum etf. It said it’s 5 yr return was 11.7%. Not quite what the NAPs or SR90 did.
For XDEM I make the five-year return 3327/1477 = 2.25 so +125% or 19% p.a.
Looking on the Stock Rank performance page, the 90-100 decile over five years is +50% or 8% p.a.
NAPS performance over five years is roughly +100% or +15% p.a.
Thanks. I checked again and from bloomberg.com, it came out at about 100% over 5 years. Still good though. Q for you, why then use NAPs vs XDEM?
Hi Nick,
Thanks for mentioning the very interesting XDEM and XDEQ ETFs.
However, I think comparing XDEM's performance with that of NAPS a bit like comparing apples with oranges. XDEM invests worldwide, with at present 71% in the US stock market, whereas NAPS invests solely in the UK stock market.
I think it would be more relevant to compare the performances of XDEM and XDEQ with that of a standard worldwide tracker fund or ETF.
The broader point is that there are already a lot of ETFs available if you want to find an ETF to replicate the NAPS approach (including multifactor ETFs).
Running a SR90+ tracker is a great idea in theory but in the real world you will never match the performance shown on the Ranks Performance page. The 135% gain since April 13 requires buying £10m+ Mcap companies and rebalancing quarterly. I make that 29 rebalances. Run a screener for SR90+ and Mcap £10m+ and check out the bid/offer spread of the bottom 20. Some of them are over 10%. Now imagine having to cross that type of spread on some of your holdings 29 times.
I suspect in the real world a portfolio of £50m+ rebalanced annually would probably outperform after costs.
Yes I’ve also run the screener to reduce the list excluding b/o spread to below 5% and 3%.
In the real world (my world) a smaller portfolio would of course be better.
how did you come to the £50m figure?
According to the Stockranks performance page the overall performance drops if you exclude less than £350m/£100m/£50m companies. I thought £50m minimum was probably a good balance between possible gains vs likely bid/offer spread
@Stefan - I'm the founder here and originator of the StockRanks system.
I think you should read through all my old NAPS articles on the site. And watch any videos available. See the articles here https://www.stockopedia.com/columns/the-naps-portfolio-43
You should take a sampling based approach as it can replicate the returns of the overall population fairly well - it's also much easier to manage.
I'll try and write more on this topic soon.
Hi Ed,
Thanks, I’ve been watching the videos since Dec. They are very well done and picked with info., thanks.
I read your articles and they do give a honest discussion as the years changed.
The sampling spreads do show a wide range of possible outcomes even up to your chart with 50 stocks picked vs the 20 in your NAP .
My question was more along the lines of if your SR performance charts are correct then the over all return is impressive
Any number of stocks picked from the list introduces an error spread.
You did say in one of your articles
“If I wanted to guarantee the same return as the 90-100 StockRank set - I'd need to own a lot of shares. There are 140 or so shares in the UK 90+ Ranked set above a market cap of £10m, and you just can't own all of them”
the question is why not own all of them ?
If the reason is trading costs then it’s simply a function of portfolio size and dealing fees.
Im not just talking about me buying all of them, but the performance blows away any tracker fund/ trust.
Thanks for your input, the videos and articles are excellent.
Interactive Investor were making £240 a year out of me. Then out of the blue they raised their Corporate fee to £480 a year.
It seemed "aspirational". There are other Brokers keen for the business.
yes they get £9.99 a month from me. But you do get one trading credit a month for that. £480 seems a tad “sporty”
How come you invest in stocks via a corporation, and not a sipp or isa?
Maybe just check on the number of times the components of a SR90 portfolio would change, I have no idea. but lets say it started at 120 and has 10 % churn a month and you invest £60,000, I'm ignoring the free trades as TBH they won't be material and am using the £3.99 figure you have quoted. Also I'm not sure on SR90 volatility and whether it whipsaws, I'm presuming not materially.
Day 1 - 120 buys = £797.80 ( £478.80 commission + £19 platform fee + 0.5% Stamp duty)
Month 2 12 buys & 12 sells = £144.76 (£95.76 commission + £19 platform fee + 0.5% stamp duty on buys)
Total annual cost is £2,534.92 (£797.80+(12*£144.76))
If the churn is higher than 10% it will cost more, if its less than 10% it will cost less.
£60,000 is a very small amount for a portfolio of 120 stocks as commission costs will be disproportionately high on each £500 holding,realistically for a portfolio of this size you would need significantly more capital to protect you from this. But again somewhat influenced by churn. I'm not sure how much money you intend to put into this but it is a consideration.
do you know how to run a screen for SRank changes to work out churn. I can’t seem to find the correct rule.
I’ll run some calcs today and report back
Ed’s charts don’t include the dividends or the dealing charges. I think he said the average Div was about 2-3% so your numbers would seem correct. With a portfolio of approx £100k.
Question has to be asked if the SR / QM tracker filters do so well how does a general member of the public set up an ETF......
Mike888's figures are very useful, but they don't take into account the significant effect of bid-offer spreads on trading costs.
A simple approach to keeping trading costs down would be to modify your Stockopedia screen so that it sorts the SR90+ stocks by ascending spread, and then select the first N in the list, where N is the number of stocks you've decided to have in your portfolio, e.g. 20. Possible downsides of this approach are that the stocks with lowest spreads might turn out to have lower average returns than those of the SR90+ group as a whole, and selecting stocks in this way might produce less diversified portfolios than those selected at random or selected using Ed Croft's NAPS rules.
you are quite right pka, I have excluded spread, which would be material on smaller caps, TBH I think Eds NAPS approach would make more sense than holding the lot.
I was just reading your comment from oct 2014 about your portfolio!
https://www.stockopedia.com/co...
How did that work out?
That comment tied in perfectly with this comment about eliminating certain bid/offer spreads.
Hi Bugsy9049, I did use the approach described in my comment from Oct 2014:
https://www.stockopedia.com/content/how-many-stocks-should-you-own-in-your-portfolio-86323/?comment=15#15
for a few months in my real SIPP portfolio. But I lost patience with it and decided it wasn't for me. It required a high (for me) turnover of stocks in my portfolio, and as I keep records of all the holdings in my family's portfolios in various places (in spreadsheets, online tools, etc) that was a lot of ongoing administrative effort. Also I like to have a geographic spread of my investments, whereas the approach described in my comment was for large UK stocks only. And I decided I don't like the volatility that comes with owning a portfolio of 20 or so individual company stocks.
So now my portfolios mainly consist of investment trusts that have investments around the world as well as in the UK. I use an approach to selecting them which combines share price momentum (using the %200 day moving average) with value (in the form of large discounts or small premiums to Net Asset Value) and which avoids selecting investment trusts with large bid-offer spreads. I'm not suggesting that this approach performs better than a high StockRanks or NAPs approach, but it suits me better at present.
at the moment your current approach is similar to where I am now. Over the years flip flopped from individual stocks back to trusts again.
I never had the time or skill to fully research individual companies fully. Ironically I came across Stockopedia after searching for a system to track portfolios with regard to % returns and calculating CGT. Spreadsheets were just getting to complicated and cumbersome across the family account.
I trailed out Stockopedia just for the portfolios system, but it didn’t make the cut for the reporting but other than that I think as a research tool it’s amazing. The blog/writing is also top quality.
Sharepads reporting system is excellent but the graphic and layout is horrible and not intuitive.
mike,
This spreadsheet is in one of the stockopedia articles from 2013. For calculating trading costs.
https://docs.google.com/spread...
I'd double check the web site, I can see no mention of a £29 per month offer and the other offers simply reduce their normal fee by a few pounds plus one or two free trades a month. The regular investor option is for topping up existing holdings and could be a limited universe. Also check the spreads.
mike,
My bad, it’s £19.99
https://www.ii.co.uk/super-inv...
What's included for £19.99 a month?
Charges that you pay to buy or sell investments:
Ive used the regular investment options previously. You type in what you want and how much per month. You can run it every month or just as a one off deal. You just can’t pick the exact date. They process the regular investments a few times a month. However I’ve not yet checked it with every one of the SR90 shares. Will do it tomorrow.
Just wanting for someone to tear holes in why this isn’t a good idea to see what I’m missing?
Interesting. I hadn't seen that ii offer but it looks similar to the Halifax Sharedealing offer (which may not even still exist).
Essentially I think aggregate your order with those of others and transact them when they have enough to make it worthwhile.
Obviously you then have no control over precisely when the trade is actioned or what price you get. Neither of those things should really matter to the approach you are looking at; you might buy some at a higher price than you would like but equally some at a lower price.
So I cannot at face value see anything wrong with the buy side of what you are proposing.
However presumably when you sell, you face full dealing costs (albeit you will have 2 free trades per month). If you are rotating the portfolio on a three monthly basis this could be very costly if say 40 of your 80 holdings drop out each quarter and you have very small position sizes to achieved the required diversification.
So I would suggest looking at that a little more closely, but it could well be that you are still on to something here.
hi Gromley,
Yes I think your description of how they aggregate the trades is correct. Extra trades £3.99 to sell. The Halifax “regular investing” is £2 per buy, but their account is £11 to sell
There are various other systems that do offer “free” trades but we have to weigh up unknown companies holding significant portfolios.
Reading stockopedia Ed’s musings gives great food for thought. Rebalancing annually, semi, or quarterly will need some calculations vs extra return.
Hi Stefan
I guess if it costs £29 per month it is not a zero cost trading option but cheap especially if you are buying a large number of shares. Does it also cover selling holdings - important for re-balancing the portfolio from time to time?
If you do go for all the shares with a 90+ rating this is currently over 120 picks.
Depending on your wealth each holding may well be relatively small.
You might want to filter out those with a very small MC as being a 'safer' option.
Choosing a MC over £50m and only SR 97 and above still gives 34 candidates.
Of course there are other 'safety' filters you could apply relating to the level of debt, free cash flow, a regular dividend etc
It might be worth considering some of these as well.
Other factors to consider are how often you will re-balance the portfolio with those that drop out of your criteria range and those that move in. Also there is the factor that holding sizes will become unbalanced as some go up and some down in value. How will you address this?
Trading costs are important but all these other factors equally so if you hope to outperform a simple tracker.
Good luck with whatever you decide.
Regards
Iron
Hi Iron,
Yes all valid thoughts, its been driving me nuts thinking about it,
The ii account, from what Ive been told, you could pay the £19 or 29 one month, buy all the shares you need ( 80+). Then reduce the plan level.
I already pay £10 for their trading account and ISAs ( flat rate). So for an extra £10 a month, get free “regular investments” and 2 free trades to rebalance per month.
Eliminating Highly Speculative and only MC over 25m gets the list down to 80, but this again comes down to the discussion and article.
https://www.stockopedia.com/co...
If you start eliminating stocks you do increase the risk of not getting the true SR90 return.
Eds article ( link above) does suggest 50 shares narrow the error band significantly.
The standard Trackers ( Vanguard / FTSE trackers etc) do OK. But no where near as well as this SR90 style tracker.
Some comments above did talk about a SR90 ETF. This is a no brainer really. If the SR90 works as illustrated in the home page graph then setting up an ETF SR tracker out performing the FTSE All share by 135% over 5 year would even put Vanguard out of business!
Hi Stefan
If you talk to Ed (with all his money) to set up an ETF 90SR Tracker. Then I would definitely invest. Sounds good to me.
Terry,
That’s my point. It can’t be that hard for someone with a few million to set up an investment trust.
Just curious why no one has created their own version of this “tracker” I know our host Ed, is not a fan of trackers as such, but in a way the NAPs and SR90 are “active” trackers.
Good question, Stefan. Why wouldn't Stocko do this either on their own or as a tie-in with a big fund provider? It would appear to be a match made in heaven.
Ed, What's your thoughts on setting up such an SR90 tracker, it would be very interesting to hear them.