SIF Folio first half review: laying foundations for a recovery?

It’s been a tough six months for UK investors. While the FTSE 100 has been propped up by a handful of its largest members, the majority of the UK market has fallen sharply.

My rules-based SIF portfolio hasn’t escaped this sell off, but a hefty cash balance has provided some padding. In this quarterly report, I’ll look at SIF’s performance so far this year and review the trades that took place in the portfolio during the second quarter.

SIF folio performance

SIF’s performance during the first half of 2022 has left it slightly behind the FTSE All-Share index (grey line), which I use as the portfolio’s benchmark.

The decline we’ve seen over the last six months has taken the value of the portfolio back to where it was one year ago.

I’m not too concerned about this; such reversals are a normal part of investing life. The drawdown on the portfolio this year has been pretty limited, so far.

Taking a longer-term view, SIF has held on to most of its outperformance versus the FTSE All-Share index. The portfolio is up by 64% since April 2016, or 8.5% annualised (excluding dividends):

Cash weighting: A shortage of new buying opportunities has left SIF with a stubbornly high cash weighting this year.

Holding lots of cash in a falling market dilutes the impact of falling share prices, reducing portfolio drawdown. This hefty cash balance has probably had a positive impact on performance so far this year.

SIF’s big (virtual) cash pile also means that I have plenty of dry powder to deploy when my screen starts to provide a greater number of new buying opportunities. Hopefully this will coincide with a wider market recovery.

SIF trades in Q2

I sold three shares from SIF during the second quarter and added three new companies. This one-to-one matching isn’t part of my system. It’s just the way things turned out.

Here’s a brief review of each of these changes.

New stocks

Regular readers will know that I select stocks for the SIF folio from the results of my buying screen. This has been through something of a dry spell recently. Very often I would have added more than three shares in three months.

The three shares I added to the portfolio in Q2 were:

• A G Barr (LON:BAG) - this FTSE 250 soft drinks group is best-known for making Irn-Bru but has a portfolio of other brands. I’ve long been a fan of this business, so I was pleased to have the chance to add it to the portfolio. You can read my buy report here.
• Standard Chartered (LON:STAN) - this FTSE 100 bank is focused on Asian and African markets. As I explained in my buy report, I think StanChart’s long-running turnaround may finally be bearing fruit, aided by rising interest rates.
• Target Healthcare Reit (LON:THRL) - this care home property specialist benefits from very long leases, a defensive occupier profile and structural demand growth. Rising finance costs and tenant failures are potential risks, but I think Target Healthcare’s 6% dividend yield looks fairly safe.

Sold stocks

The default holding period for SIF stocks is nine months. After this, they’re tested against my selling screen to see if they qualify for an extended stay in the portfolio.

I sold the following stocks from SIF during the second quarter:

Vertu Motors (LON:VTU) - car dealership groups have been enjoying bumper profits due to a shortage of new vehicles and soaring used vehicle prices. I think the party is probably over, although the shares still look decent value to me.

I sold Vertu in April when forecasts for falling earnings disqualified it from my screen.

Bought: June 2021

Sold: April 2022

Total return: 45%

Headlam (LON:HEAD) - this floor covering distributor seems to have been a casualty of the wider sell-off in consumer stocks. No serious bad news has emerged from the company, but the stock’s 30% year-to-date share price slump triggered my stop-loss rule in May.

Bought: October 2021

Sold: May 2022

Total return: -28%

Drax (LON:DRX) - electricity generator Drax soared following the invasion of Ukraine, but the shares have now returned to pre-war levels.

I’ve reservations about the long-term future of this business. But on a near-term view, the outlook still seems pretty positive to me and the danger of a windfall tax on generators looks to have receded.

However, Drax’s weakened price momentum meant that it no longer satisfied all of my rules and was sold in early June.

Bought: July 2021

Sold: June 2021

Total return: 88%

SIF portfolio update - heading into Q3

To wrap up this review, here’s a snapshot of the SIF portfolio as it was on 1 July 2022.

As we head into the third quarter, I’ll continue to monitor my screens for new stocks and possible disposals. I’m hopeful that when market conditions stabilise, I’ll be able to add some good businesses at reasonable prices – as I have done following previous market slumps.

Time will tell. I’m conscious that the SIF system (like many others) has never previously had to operate against a backdrop of high inflation and rising interest rates. I think it will be interesting to see if this makes any difference to stock selection and future performance.

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