The events of 2020 provided an unexpected but thrilling test of my rules-based SIF folio system. Looking back on a year like no other, I think it’s fair to say that the experience has reinforced my faith in the value of a quantitative framework for picking stocks.
How did my SIF portfolio perform? Not too badly, as it turned out. The portfolio beat its FTSE All Share index benchmark comfortably and ended the year within a whisker of breaking even.
However, while I think that capital preservation was a respectable achievement last year, I can’t deny that SIF’s performance lagged well behind that achieved by some other rules-based systems. Notable among these was Ed Croft’s 2020 NAPS portfolio.
I reckon that one of the main reasons for this was the NAPS’ greater exposure to momentum factors. Momentum stocks outperformed massively last year, as investors piled into sectors such as gold, pharmaceuticals and tech. SIF lacked exposure to these sectors as the portfolio’s remit has always been to focus on affordable growth. Although momentum plays a part, it’s impact is often capped by my more restrictive rules on valuation. This prevents me buying shares which already look expensive - a key element of momentum investing!
I’m not changing my buying rules for 2021, but I have made significant changes to my selling rules. In the main, this has involved relaxing my valuation criteria so that I can continue holding shares which show continued growth and technical momentum. I hope that my new approach to selecting which shares to sell will allow me to benefit from momentum while still ensuring I don’t overpay for new shares. We’ll see how things pan out over the coming months.
SIF 2020 performance
There were two main elements to the portfolio’s outperformance in 2020. Firstly, SIF went into the market crash with a cash weighting of nearly 40%. This unusually high figure was the result of the portfolio being a net seller between October 2019 and February 2020.
I should point out that this shift to cash wasn’t down to any deliberate planning on my part. Instead, it was an example of my rules in action. Relatively few stocks met my buying criteria, while many of those in the portfolio no longer satisfied my requirements for continued holding. As a result, the number of stocks in the portfolio fell.
Holding a…
