SIF Folio 2022 performance review

2022 was the year when gravity finally reasserted itself on the stock market. Rising interest rates and inflation introduced new variables to equity valuations. The impact wasn’t pretty.

The FTSE 100 was propped up by a motley crew of mega-cap stocks including Shell, Glencore and BAE Systems. But elsewhere, double-digit declines were the norm, rather than the exception.

Against this uncertain backdrop, how did my systematic SIF portfolio perform? Let’s take a look.

SIF 2022 performance

The SIF “Stock in Focus” portfolio is a rules-based virtual portfolio I’ve been running here since April 2016. Shares are selected from a stock-buying screen and then subjected to additional manual screening to ensure a basic level of diversification.

My screen seeks to identify stocks that offer affordable growth with near-term upside. In other words, the emphasis is on value and momentum.

Stocks are held in SIF for a default period of nine months, before being screened again. If they still pass, then they’re kept in the portfolio on a rolling one-month basis.

The only exceptions to this are if a company issues a profit warning, or if its shares fall by more than 25%. In either of these cases, I sell immediately.

The value of the SIF model portfolio fell by 6.1% in 2022. This includes notional costs, but excludes dividends. The portfolio’s benchmark, the FTSE All-Share index, fell by 3.4%.

Taking a long-term view

Last year’s results saw a partial reversal of the 29% gain SIF delivered in 2021. But one year is a short time. The portfolio’s long-term performance trend is still very positive.

SIF has outperformed the FTSE All-Share in four of the seven years since its inception in April 2016. In total, the portfolio has outperformed the FTSE All-Share index by around 50% over this period:

This performance translates into an annualised return (excluding dividends) of 8.0% per year since inception.

Including dividends, my records suggest the annualised total return has been 10.6%.

As I’ve said many times before, my experience with SIF has reinforced my view that for me, systematic investing is the best way to approach the market. The other big lesson I’ve learned is that consistency is key.

My SIF rules are not especially complex or clever. But I’ve followed them slavishly for nearly seven years, with very few changes. So far, it’s worked.

Of course, the SIF rules have never been tested in an era of rising borrowing costs, high inflation and sluggish economic growth.

I don’t see any reason why my focus on affordable growth won’t remain relevant. But SIF is certainly struggling to find new opportunities at the moment – more on that shortly.

2022 winners and losers

Before I delve into the portfolio’s current situation, let’s take a look at the stocks that were bought and sold last year.

In total, I sold 23 stocks from SIF last year. Of these, 10 generated a profit and 13 resulted in a loss. Over the same period, I added 20 new shares to the portfolio, resulting in a net reduction of three positions.

(You can see a spreadsheet with details of all the portfolio’s historic positions here.)

Here’s a snapshot of the total return (including dividends) from each stock sold in 2022:

In my 2021 performance review at the start of last year, I commented that many of the stocks I’d sold during the year had carried on rising. Did the same thing happen in 2022? Not so much.

A quick check of my SIF completed trades spreadsheet suggests that if I’d held onto the stocks I sold last year, the portfolio’s losses would probably have been larger.

2023: SIF portfolio holdings

Here’s how the SIF portfolio looked at the start of 2023:

All of the current holdings are in profit or very close to breaking even, as the majority of loss-making positions were closed during the final quarter of last year.

However, the market’s upbeat start to 2023 has highlighted a potential problem.

Too much cash? There are only nine stocks in the portfolio at the moment, well short of my target maximum of 20. One consequence of this is that the portfolio’s cash position is even larger than it was one year ago.

I wrote about this issue at the start of 2022, when the portfolio’s cash weighting was 45%. By the start of 2023, this had risen to 61%:

I increased the standard position sizing for stocks in the portfolio last year to reflect the portfolio’s increased value. But my screen just isn’t providing any stocks to buy.

If the market slumps again, this will work in my favour. Cash outperforms a falling market. However, if the early gains we’ve seen this year are extended, then SIF will lag the market by virtue of its low level of equity exposure.

For what it’s worth, I don’t think the market has bottomed out yet. My feeling is that we could yet see another leg down. I’m just not convinced that things are as rosy as the market’s performance is suggesting.

This view is supported by the paucity of results from my buying screen, which currently returns just three stocks, two of which I already hold.

My reading of these results is that there aren’t currently many attractively-valued businesses with a positive outlook for earnings.

Of course, I’m aware that market forecasts are like weather forecasts. They may be based on good science, but very often they’re still wrong.

Regardless of what actually happens, I’m going to do what I normally do. Keep following the system and see what happens.

As always, thank you for reading. Please share your thoughts about SIF and the outlook for the UK markets in the comments below, I really value your feedback on this ongoing experiment.

Disclosure: At the time of publication, Roland owned shares in all the SIF portfolio holdings listed above.