Semi Year SNAPS - stocks, knocks, and shocks at half year 2016

Friday, Jul 08 2016 by
49
Semi Year SNAPS  stocks knocks and shocks at half year 2016

Well, what a few weeks we’ve had with Britain choosing to exit from just about everything European. Maybe the one major positive we can take is that England were kicked out of the European Championships by Iceland - a non-EU European country. It’s a spurious relationship but if our team spirit improves Icelandically outside of the EU then perhaps we can look forwards to our football team winning again, even if we can’t afford the tickets. Regardless, Brexit negativity has hammered our savings, and we’re all feeling worse off as a result. As we’ll see the New Year NAPS portfolio has not been immune with a considerably worse showing in H1 2016 versus H1 2015.

Before we assess the NAPS, let’s consider the wider market result. Unless you’ve been on another planet in the last few weeks you’ll probably have heard the following, even from the mainstream news outlets:

  • Large caps have risen above the level they were at pre-Brexit (FTSE 100)
  • Mid and Small Caps have slumped (FTSE 250, FTSE Small Cap)
  • Cyclical, domestic stocks have been hammered - banks, housebuilders, airlines
  • Defensive, foreign earning stocks have risen - e.g. Glaxo, Unilever, Miner

In economic upswings, savvy investors know you want to own small cap cyclical stocks, but in a downswing they underperform which is why the recent cull has been so brutal for many. Markets tend to climb a wall of worry, in a calm fashion, lulling investors into a false sense of security. Novice investors who haven’t lived through downward or bear markets can sometimes be shocked at how fast things move in the other direction when conditions change. 

Good diversification always helps soften the blow of these sector and size specific reversals. The plans we’d put in place have helped the NAPS portfolio minimise its losses in a tough environment, but broader market selection and timing ideas could have put the returns year to date in the black. As we’ll be exploring these ideas, this will be a lengthy post - you’ve been warned!

A NAP Refresher

For those that are newbies to the NAPS portfolio, it’s worth a quick refresher. It was designed as a portfolio selection process to avoid discretionary stock picking. Just as pilots and surgeons improve their success rate and reduce catastrophic risk using checklist driven processes, we hoped to do the same. The NAPS put their faith in a rule-based process based around an…

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As per our Terms of Use, Stockopedia is a financial news & data site, discussion forum and content aggregator. Our site should be used for educational & informational purposes only. We do not provide investment advice, recommendations or views as to whether an investment or strategy is suited to the investment needs of a specific individual. You should make your own decisions and seek independent professional advice before doing so. Remember: Shares can go down as well as up. Past performance is not a guide to future performance & investors may not get back the amount invested. ?>


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7 Comments on this Article show/hide all

PhilH 8th Jul '16 1 of 7
12

Hi Ed,


It's interesting to consider one's own approach in relation to the data provided by NAPS.


Firstly what I'm noticing is that of course the NAPS portfolios are designed to be low maintenance portfolios and as such it makes sense to diversify across Industries & Sectors. My style of investing, (high Quality & high Momentum) which requires me to be active, i.e. monitoring my positions, has meant that I'm actually not as diversified. In fact, there have been times where I've held multiple companies in the same 'hot' sector/industry, e.g. I held several European Salmon farmers two years ago as the price of Salmon climbed and in 2015 I held several housebuilders as they found momentum.


What this has also meant is that my portfolio diversification responds to rather than defends against market shifts. For example, the post Brexit market has taken me completely out of the UK market and I only have a couple of foreign Consumer Cyclical stocks left in my portfolio as the chills run around the global markets. It's also taken me into sectors where I might well have feared to tread, e.g. an Australian gold mine has done really well post-Brexit. Interestingly I've just noticed that I've never owned a Utility.

Here's a graph showing Stock Style performance over the last 3 years.

577f93e4c83f6Stock_Style.png

I've been and continue to be heavily focused on Sensitives and Cyclicals. Here's a sector analysis over the same period.

577f93b6c1a75sector.png

I've always been heavily invested in Industrials and Technology.

Given that I was so heavily biased towards Sensitives & Cyclicals I haven't actually felt the devestating chill that you alluded to in your report and I think that there are two reasons for that:

1) I'm hevaily diversified across markets with stocks in the US, Europe and more recently Australasia

2) All of the stocks I select have cheap growth and I think that can help to protect them over and above other cyclical/sensitive stocks.

I think the NAPS is a great initiative, particularly for time poor investors and I'd love to see a Euro NAPS or a Worldwide NAPS to see if that can help to smooth out these localised events.

Warm regards
Phil

Professional Services: Sunflower Counselling
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PhilH 8th Jul '16 2 of 7
3

blimey, editing that was fun!

Professional Services: Sunflower Counselling
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Howard Adams 8th Jul '16 3 of 7
5

Ed (et al.)

Many thanks for this insightful NAPS update, I read your NAPS pieces with great interest.

A question I have about your approach of investing equally in two stocks within each sector, but in different industries within each sector refers to Stockopedia's Sector Valuations statistics.

I understand that part of the SNAPS approach is about simplicity to construct, monitor and re-balance. I am curious however, as to why you might not also draw upon the StockRankings (SR) in the Sector Valuations and employ these to influence your investment allocations?

For example (at time of writing), at the low end of Sector Valuation SRs, Healthcare and Energy are 33 & 36 respectively. Whereas, Telecoms & Utilities SR's are 61 & 67 respectively. The other eight sectors fall in between these extremes. This might suggest that, if you were to invest a portfolio today, it would be sensible to assign more funds to the >60 SR sectors and fewer funds to the <40 SR sectors.

Did you consider diversifying the SNAPS based on weightings suggested by these Sector Valuations at all?

If you did, what considerations moved you towards an equally weighted investment allocation?

Further, what are your views, based on your experiences with Stockopedia so far, about using the Sector Valuations as a guide to utilise biased investment allocation weightings?

Regards
Howard

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cathey 11th Jul '16 4 of 7
3

All good but I too would like to see a worldwide naps portfolio option. I'm not interested in taking a sector by sector approach, just the top 20 naps worldwide would do me

All good
Marvin

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Funnymoney 12th Jul '16 5 of 7

Ed,

Re. "Absolute momentum" It would be really good if the landing page on Stockopedia had an indicator showing if the Stockranks were negative or positive . I can see how to work it out but it is easy to forget to check and thus be late in considering buying or selling as per the indicator.

Regards
FM

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Edward Croft 13th Jul '16 6 of 7
1

In reply to post #142334

Funnymoney - it's a long standing goal of mine to put a general market timing indicator together. Ideally it should include a checklist driven approach that incorporates valuation, momentum, monetary and sentiment factors.

The perfect scenario for market timing is a cheap overall market (vs long term indicators like the CAPE), positive 1 year and 6 month momentum, an easy or easing monetary environment and fairly skeptical or negative public sentiment.

Unfortunately the development list is quite long at the moment, but we'll get round to it eventually.

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Techno Trousers 14th Jul '16 7 of 7
2

Hi

I am surprised not to see more comments on this thread, and would simply like to endorse your proposal above, Ed, regarding the general market timing indicator. However, one question. When considering timing, of course, this really depends on the time frame you are considering for your investment decision. Will you look to accommodate this too? A day traders timing needs to be somewhat different to say, someone following Coppock signals, which always tend to be a little bit too late and much longer term.

Also, just to add that I too am following a NAPS portfolio approach for one of my SIPS. I invested 40K into 20 stocks, and unfortunately have to report that so far it has not been very successful, although I am fully aware that this is a very tough environment. I also added a few extra criteria to my selection process, as I did not wish to invest in stocks below a certain Market Cap, or stocks that exhibited or did not exhibit certain criteria. However, over and above this, it was fairly true to the overall principle and approach. One of my criteria was to not invest in foreign small caps, but maybe that was a bad move in this period! Anyway, virtually from day one, the portfolio value has declined, with small flips back up. At its worst, after Brexit, I was showing a loss of about 5.5K which in % terms is probably something around 13-14% which was not great. However, a few decent results since and a general market upswing has now improved the position, so the loss is back to around 3.5K, so below 10%. The only two companies that have shown any propensity to deliver a result for me are BPI and SOM. All others are flat, negative or very negative!
However, I also take on board the comments from Ed above, and understand that the basic principle here is correct. Companies with either good value or displaying quality characteristics, potentially with momentum / growth, are sound principles to build any portfolio on, so I am here for the longer term, although I am of course always open to other suggestions or improvements. I like the unemotional manner of this investing, and it works for me, albeit not so far in the manner that matters most of all.

TT

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