SIF Folio H1 review: ahead of the market, but have I over committed?

The old stock market adage suggests we should “Sell in May and go away, don’t come back until St Leger’s Day. The St Leger’s Stakes is a horse racing meeting that takes place at Doncaster in mid-September.

The idea harks back to a time when stock trading mostly took place in person on exchange floors, and market participants liked to take an extended summer break.

This notion should be archaic in today’s always-on world of electronic trading and global financial networks. But we have indeed seen a mild market slowdown since mid-May:

This prompted me to look back and see whether I could recognise any seasonal pattern in the performance of my rules-based SIF Folio.

I reckon SIF has fallen between mid-May and mid-September in four of the eight years since the model portfolio’s launch in April 2016.

This even split suggests to me that I can probably dismiss the idea of selling up for the summer as a trading strategy. As usual, I plan to continue following my trading rules. But there’s no doubt that SIF’s ninth summer has begun with a marked sell off.

Since hitting a record high on 20 May, the portfolio has fallen by around 6%. The FTSE All-Share index fell by 3.3% over the same period.

One reason for SIF’s underperformance versus its benchmark index is the share price of portfolio’s largest holding, Zotefoams (LON:ZTF):

This £200m small cap has pulled back sharply after a bout of investor euphoria related to launch plans for its innovative ReZorce beverage carton product. This recyclable product appears to have the potential to replace Liquid Packaging Board (e.g. Tetra Pak), which is near-impossible to recycle efficiently.

Of course, six weeks is a short period in the markets. SIF may regain some of the ground lost in recent weeks by the time the gates open at Doncaster in September.

In the remainder of this piece, I’ll review the portfolio’s half-year performance and summarise the trades I made during the second quarter.

For additional background, you can read my Q1 2024 review here.

SIF H1 2024 performance review

As a quick recap for newer subscribers, the SIF Folio is a rules-based portfolio. I select shares to buy from the results of this stock screen. The SIF folio tracked here is a model portfolio, but I also make all the same trades in a portion of my own personal portfolio.

The overall focus of the screen is on value and momentum; said differently, it’s growth at a reasonable price. Typical holding time is nine or ten months – this is a trading strategy, not a long-term buy and hold approach.

You can find a more detailed explanation of the SIF system here and a full archive of past coverage here.

Performance

The second quarter got off to a roaring start, but performance cooled somewhat during the latter part of May and throughout June.

SIF gained rose by 7.6% during the first half of 2024, excluding dividends and including estimated costs, but only 1% of this gain was achieved in Q2.

Despite this, the portfolio remained modestly ahead of the FTSE All-Share index at the end of June:

Taking a longer view, here’s how SIF has performed since its inception in April 2016:

Apologies for the obvious glitch in 2021 - I have not yet found the cause of this recent apparition, but it didn’t happen in reality. Please ignore this and assume a smoother trend.

A total gain (ex-dividends) of 89% translates into an annualised return of 8.0% since April 2016. My records suggest dividends have added about 2% per year to this figure.

In contrast, the FTSE All-Share index has risen by 27%, or 2.9% annualised over the same period. The dividend yield from an index tracker would have been a bit higher, though.

SIF portfolio review

In Q2 2024, I added six new shares to SIF and sold three stocks. This left SIF with 18 holdings. (You can see my Q1 trades here.)

Here’s a snapshot of the portfolio on 1 July 2024, after my June trades were completed:

Stocks sold in Q1

As a reminder, I sell shares from SIF by following a set of rules, not by making a discretionary decision.

After an initial holding period of nine months, stocks must pass all of the rules in my selling screen in order to stay in the portfolio. In other words, they must appear in the results of the screen.

Stocks will also be sold if they fall more than 25% below my purchase price or issue a profit warning.

Here’s a review of the stocks I sold during the second quarter, including the profit or loss achieved on each holding.

Ultimate Products (LON:ULTP)

I added Ultimate Products to SIF when it qualified for my screen in November, having been reassured by solid results in October and an outlook statement that seemed broadly positive to me.

May’s profit warning (covered in the SCVR) was unexpected, with management blaming softer consumer demand. However, commentary on forward orders suggest that FY25 should be stronger.

Stockopedia’s consensus trend chart shows that earnings estimates have been cut for FY25, but by a smaller amount than the FY24 cuts.

I continue to have a positive view of this business, which I think is well run and highly profitable. However, with container freight rates rising and consumer demand still uncertain, I would prefer to wait for an in-line trading update before considering another purchase.

Bought ULTP: 152p on 21 Nov 23

Sold ULTP: 144p on 14 May 24 (profit warning)

Total return (inc. dividends & costs): -2.2%

Bodycote (LON:BOY)

FTSE 250 industrial Bodycote provides heat treatment services which add strength and corrosion resistance to parts used in aircraft and road vehicles. I’m a long-term fan of this business, which has an unbroken dividend record stretching back more than 30 years.

However, SIF is a trading portfolio, not a long-term strategy. Bodycote’s recent share price weakness means that it fails several of my momentum rules, albeit by a small margin.

The group’s cyclical customer base means I can’t rule out the risk of further weakness. But on a long-term view, I suspect Bodycote shares are probably reasonably valued at current levels.

Bought BOY: 692p on 1 Aug 23

Sold BOY: 682p on 28 Jun 24

Total return (inc. dividends & costs): +1.3%

CRH (LON:CRH)

When I added building materials group CRH to SIF in September, I almost broke my own rules.

When the shares qualified for my screen, CRH had just moved its primary stock market listing to New York. My research suggested that US peers traded on higher multiples, so I hoped that CRH might benefit from a corresponding re-rating.

I don’t normally make this kind of special situation/relative value trade in SIF. But I got lucky in this case, and the shares have performed well.

I think there could be more to come from this well-run but cyclical exposed business. However, as with Bodycote, CRH’s momentum indicators have weakened recently.

CRH now fails some of my screening tests, albeit by a small margin, so I’ve sold the stock in line with my rules.

Bought CRH: 4,496p on 5 Sep 23

Sold CRH: 5.896p on 28 Jun 24

Total return (inc. dividends & costs): +33.6%

Note: You can see a spreadsheet showing all completed SIF trades since inception here. E&OE.

New stocks

My buying screen provided ample opportunities in Q2, during which I added six new shares to SIF.

Serco (LON:SRP)

I am not generally a fan of low-margin outsourcing and contracting companies such as Serco. But the company performed well during the pandemic and has maintained this momentum since.

Cash generation has been strong and the business is maintaining double-digit returns on capital employed.

Recent trading has been positive, with a number of guidance upgrades over the last year – most recently in June.

This isn’t a stock I’d expect to trade on a high P/E multiple, but the current rating of 11x forecast earnings doesn’t seem excessive to me.

Perhaps one risk worth considering is that a lot of Serco’s work comes from delivering UK public services. If Labour forms the next government, there seems to be some possibility that we could see a wave of ‘insourcing’. I’m not sure how likely this is, or how it might affect Serco, but I wouldn’t rule out the possibility.

I added SRP to SIF at 184p on 9 April 24

Luceco (LON:LUCE)

Wiring accessory and lighting supplier Luceco has delivered steady sales growth over the last six years.

Profit margins now seem to be recovering, after a feast/famine situation caused by the 2022 supply chain crisis. Forecasts suggest double-digit earnings growth in both 2024 and 2025.

I would not describe this as a high conviction position for me, but I can see some potential. In any case, SIF is a rules-based portfolio – Luceco passed my tests and was a suitable addition to the portfolio in April.

I added LUCE at 156p on 16 April 24

Harbour Energy (LON:HBR)

Harbour Energy is now the largest London-listed independent oil and gas producer. I took an in-depth look at the stock in January. In May the shares entered my screening results as a possible buy.

Broker forecasts suggest that the 6.4% dividend yield should remain comfortably covered by earnings:

However, brokers’ 2025 forecasts are of limited value in my view, as they do not yet reflect the expected impact of Harbour’s ongoing acquisition of Wintershall Dea assets. This is expected to complete in Q4 2024, according to an update in May.

In particular, I would argue the free cash flow performance of the combined business has not yet been proven.

With a new UK government seemingly on the horizon, there may also be some risk that the tax framework for North Sea operators could change.

I added HBR to SIF at 322p on 21 May 24

Marks and Spencer (LON:MKS)

I reckon the recovery of Marks and Spencer may be one of the most notable turnarounds in recent times.

In a Stock Pitch in March 2023, I suggested that the story might finally be coming good and that the shares could offer value.

However, M&S didn’t qualify for my screen until earlier this year, by which time the share price had almost doubled from the time of my original piece.

Have I missed the boat by buying this year? I think the big gains may be in the bank, but the stock’s forward P/E of 11 does not seem excessive to me.

If consumer demand remains stable and M&S can continue to deliver on its plans, I think further progress is possible. Encouragingly, earnings forecasts have been upgraded several times over the last year:

I added MKS to SIF at 306p on 4 June 24

Vesuvius (LON:VSVS)

This metal flow engineering specialist is another market-leading UK industrial business, in the same vein as Bodycote. Vesuvius’s main activity is providing solutions to help handle molten metal in iron and steel foundries.

Indeed, Bodycote and Vesuvius’s shares have shown some correlation over the last decade, albeit Bodycote has performed a little better:

However, it’s Vesuvius that qualifies for my screen now, so I added the stock following the sale of Bodycote at the end of June.

The group’s exposure to global construction and heavy industry means I can’t rule out a period of cyclical weakness. But on a medium-term view, I think Vesuvius is probably reasonably valued at current levels:

I added VSVS to SIF at 462p on 28 June 24

XPS Pensions (LON:XPS)

This high-flying corporate pension consultancy specialist has performed very strongly since its IPO and has received regular positive coverage in the SCVR, most recently on 20 June.

I have admired XPS’s progress, although I can’t help feeling a little cautious about the stock’s valuation, which is starting to look quite full to me.

The StockRanks suggest we need to see this as a a Quality-Momentum play, as the value score is low:

Quality metrics are indeed excellent:

Earnings estimates have also been regularly upgraded over the last 12 months, suggesting strong momentum:

Changing conditions in the pension sector appear to be generating strong demand for XPS’s services and the business seems to be well managed. If this continues, then perhaps there’s scope for further gains – I certainly hope so!

I added XPS to SIF at 299p on 28 June 24

Cash weighting/position sizing

In my Q3 2023 review, I grew frustrated by the portfolio’s continued high cash weighting and decided to cut the target number of holdings from 20 to 16.

The portfolio has rarely ever exceeded 16 holdings, so this seemed a reasonable choice to me at the time. I hoped that the increased position sizing resulting from this change would allow me to reduce the portfolio’s 50%+ cash weighting to a more reasonable level.

As it turns out, this change has been a little more successful than I expected. SIF’s cash weighting fell from 31% to just 14% during Q2:

I think things have reached the point where I have to consider the risk of becoming fully invested and unable to fund new positions. This has never happened before.

For now, I’m going to see how the number of holdings in the portfolio evolves during the third quarter. Depending on what happens, I may decide to reverse last year’s change and return to a target portfolio size of 20 holdings, with a corresponding reduction in position sizing.

Final thoughts

I tend to avoid taking any view on macroeconomic or geopolitical factors with SIF, instead simply following the rules.

However, I continue to think the UK stock market is offering plenty of opportunities for private investors. I hope that some of these opportunities are sitting in the SIF folio and will continue to make progress as the year unfolds.

This rules-based portfolio is an ongoing and evolving experiment. I am a little surprised it has worked as well as it has for so long, but I’m looking forward to seeing what happens next and sharing it with you in future quarterly updates.

As always, please feel free to share your thoughts in the comments below.

Disclosure: at the time of publication, Roland owned all of the shares listed in the SIF Folio.