SIF Folio Q3 Review: Fully Invested Despite Uncertain Outlook

8th Oct '24 by Roland Head

11 comments 3694 reads

As we head into the final quarter of the year, it is perhaps harder than usual to ignore the external factors that could affect the market over the coming months – and in some cases already are affecting investors’ behaviour.

Close to home, investment news headlines are being dominated by talk of potential tax changes in this month’s Autumn Budget. UK consumer spending and economic growth also seem a little uncertain.

Further afield, November’s US presidential election and the growing geopolitical risks in the Middle East and Ukraine may be relevant.

We don’t yet know how these factors (and others) might affect corporate results. So far, the combination of stable earnings forecasts and weaker share prices has meant that my rules-based SIF portfolio has remained well populated with new stocks, especially small caps.

I haven’t seen a repeat of the shift to cash that my rules-based system has enforced in the past.

That might still happen. Or I could instead find myself long and wrong on UK equity.

For now, however, let’s take a look at the state of the portfolio after the third quarter, when SIF comfortably outperformed the wider UK market.

SIF Q3 performance review

As a quick recap for recent 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, alternatively described as growth at a reasonable price. Typical holding time is nine 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 portfolio’s performance has recovered from the decline in May/June that I discussed in my half-year update.

SIF was up by 12% for the year-to-date at the end of September, versus a gain of 6.6% for its FTSE All-Share index benchmark.

This is a satisfactory result, in my view, but much could still change in the final quarter of 2024.

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Howard Adams

8th Oct '24

Hi Roland

An interesting read as usual. Thank you for doing it. Congratulations on such a steady and highly acceptable annualised gain from the inception.

I would be interested to hear from you as to which of your rules (or processes) do you feel might have played a strong part in your positive performance, and which might have been weaker contributors.

Obviously you embedded these type of thoughts into your design before implementation, but have any turned out to be quite surprising to you?

Regards

Howard

The Ox 2906

Very interesting and good to see your methods and hear your thinking. It’s not the buying and selling it’s the sitting which makes the money, to loosely paraphrase Charlie Munger!

Roland Head

Hi Howard,

Thank you for your kind words.

You ask an interesting question. What I would say is that one reason for the portfolio's relative success is simply that I've followed a consistent process and resisted the temptation to deviate from this or chase short-term trends.

What this has meant (I think) is that when conditions have been right for this strategy, I've done well. When conditions have been poor and few stocks have qualified for my screen, the downside has been limited by my willingness to hold more cash and wait for opportunities to return.

In terms of which rules have had the most impact, I think it's hard to separate the different factors and attribute success to them individually.

However, when I think about the stocks that have delivered the best returns (e.g. c.50% and above), I would say that in general it's the combination of strong value and momentum that has delivered these relatively quick gains.

As a value investor by nature it pains me to say this, but where growth/momentum has failed to deliver, a cheap valuation has often made no difference during the relatively short periods I hold in SIF.

In addition, what's probably surprised me the most is probably the way in which momentum can drive strong price gains in relatively short periods. I have probably underestimated this in the past.

Of course, past performance is no guarantee of future returns.

Now that interest rates and the cost of capital have risen significantly, I think we could be entering a slightly different period for the markets. Company boards may decide to allocate capital differently and this could have an as-yet unknown knock-on effect on investment returns.

I don't know whether my rules will continue to work as well as they have done. But I'm looking forward to finding out!

Regards,

Roland

Thanks for a thoughtful response. As I have read your pieces from the outset, I also think that your dedication to follow a systematic process has paid off. But what I applaud you for are your initial rules set. Without your intelligent selection of those I am not sure you would have achieved the results you have.

I look forward to others to comment on the thread and see what they have to say.

PastPerformance

9th Oct '24

Hi Roland,

Congratulations on your results to date, and thank for the excellent concise commentary. One question I have is whether the selections are fully ‘automated’ based on your screen results, or is there still an element of ‘selection’ / manual filtering from the screen results? I ask because you mention somewhere selecting from the screener.

I also agree with your comments on momentum. I like both value and growth, but find anecdotally that both perform best where the momentum backdrop is favourable.
thx

Jonny

10th Oct '24

Hi Jonny,

Thanks for commenting. It's probably fair to say that my selections are semi-automated, rather than fully automated.

In short, the process I use is to sort the screen results by StockRank and then scan down the list, looking for a suitable buy.

In doing this I will manually filter out any obvious sector duplicates of existing SIF shares (e.g. I would not have two oil producers).

I'll also filter out most overseas-based or dual-listed companies, although I'll sometimes make an exception for US or Irish stocks.

Beyond this, I don't apply too much discretion. I regularly add stocks I would not choose to buy. For example, I am not a fan of outsourcers but do currently hold Serco (LON:SRP).

I don't do any in-depth research prior to making a decision, but I do take a quick look at the StockReport and consider my existing knowledge (if any) of a company before buying.

Excess debt might cause me to pass on a stock, as would a special situation that doesn't show up in the numbers, such as the company being involved in a major acquisition or takeover.

In general, I only want to buy middle-of-the-road companies that are operating normally.

However, the point of the system is to overcome prejudice and bias and select stocks consistently, based on fundamentals and QVM factors alone. For me, it's important to stay close to this and I think I do, on the whole.

I hope this is some help!

Velo

11th Oct '24

As always, fascinating content in your updates. Well done on the continuing returns and success from the SIF screens.

Hope I’m not too late in asking you a couple of queries on the ‘enabled/disabled’ SIF screening metrics. Over the years I have collected a couple of your screens and saved 4 of them in my screen lists ie., Currently -

SIF BUY SCREEN

SIF HOLD SCREEN

SIF RELAXED SCREEN

SIF SELL SCREEN.

When accessed they display the same stocks, as clicking your latest updates where you’ve highlighted: “click here” when referring to buy and sell screens. So all good.

However, I noticed on your ‘click here’ links within your update that some of them have a couple of your chosen metrics unticked, thus displaying ‘disabled’ when hovering over them.

For instance there are two disabled metrics in the SIFF Buy screen:

- Index includes FTSE250 has been disabled/unticked

And -

- Net Debt has been disabled/unticked too.

When I open my saved SIF Buy screen it displays the same 16 selections as your latest links to the linked screener in your update - So all good.

However, thinking I must have meddled once too often with the settings I ticked ‘INDEX includes FTSE250’ and suddenly the screen now only displays 9 stocks.

- Then I also enabled the ‘Net Debt’ metric with a tick, and the screen reduced the selection yet again, down to 6 stocks.

Does that mean you have left those two metrics disabled to garner a higher amount of selections,and perhaps only enable them in say, a bear market?

(Apologies if perhaps you’ve touched on them in previous updates, that I’ve maybe missed?)

PS. Can’t count the number of times I’ve been fortunate to have the odd well performing stock (and sold too soon) - ONLY to discover they are still performing well in the latest SIF screen! The latest being Cairn Homes (LON:CRN)

- So taking more notice of the SIF screens for the commencement of my next new folio build, to commence closer to this month-end.

14th Oct '24

Hi Velo,

Many thanks for your comment. In answer to your questions:

Net debt rule: I stopped using the net debt rule several years ago now. This was mostly due to the impact of IFRS 16 rules (2019/20 onwards) that include lease obligations in statutory net debt, but also to various other anomalies that can affect this comparison with profits.

I find it more appropriate to check borrowings manually when considering a company, but my broad rule of thumb that net financial debt (ex leases) should be less than four times net profit remains unchanged.

I should have deleted this rule from the screen when I decided to stop using it - I have now done so.

FTSE 250: I can't find a FTSE 250 rule in any of my current live screens, so I'm not sure how this has come about. I don't remember including it at any point in the past either, as the SIF approach has always been an all-cap approach with only a minimum (£50m) size limit.

SIF Hold screen - I am not 100% certain, but I think this was a previous name for the SIF Sell screen (see below).

Screen list: for clarity, the screens I use are:

- SIF Buy screen - this is the original screen I use to select stocks to buy for SIF. It has been largely unchanged since 2016

- Stock in Focus screen (relaxed) - this is a modified version of the buy screen with less demanding valuation metrics. I use it during extended dry spells - i.e. typically during strong growth markets. I haven't used it for quite a while!

- SIF Sell screen - this is the screen I use to consider whether to sell after the standard nine month holding period. To remain in the portfolio for a further month,, a share must pass all of these test and appear in the screen's results.

I hope this helps to clear up any confusion. Let me know in the comments if you have any other questions.

Finally, I should point out that these screens are not intended as recommendations or any kind of advice to trade in stocks. Please DYOR!

Thanks for replying.

When accessing the SELL screen in your reply, it actually comes up on screen titled instead as: Stock In Focus Screen (Relaxed) - and displays 25 stocks.

The designated ‘Relaxed’ screen in your reply actually displays 55 stocks.

Went back into the Q3 SIF update article, and clicked the Sell link within the body of the text, and it lists the Sell screen there with 55 stocks showing.

So is the Sell screen link in your reply correct, and simply mis-titled when it opens, or an error?

- - - - - - -

Think I recall messing about experimenting with the FTSE250 Index. So that issue may well have been my self-imposed error.

Dumped the old Hold screen - then found another screen I’ve failed to monitor, called SIF International. Left that as is, though :)

19th Oct '24

Sorry Velo, it looks like my copy and paste efforts went rogue.

The correct links are:

Stock in Focus Screen (relaxed)

and

SELL - Stock in Focus (SIF)

The relaxed screen has easier valuation criteria but is otherwise the same. I use it when the main buy screen has not provided any opportunities for at least four weeks (e.g. during strong bull markets).

The number of stocks you mention for each screen sounds about right at the moment.

The international screen is a discontinued effort - I did try running a version of SIF with international stocks for a while, but it didn't seem to work very well and wasn't as popular, so I decided to focus on the UK.

Thanks for the clarification Roland.

Had to be sure my personal preferences/ prejudices weren't the direct cause as for instance I had increased the F-Score from 4 to 5 on the Sell screen as I've never had much luck with F-Score 4 stocks, so 6 is my preferred all purpose minimum rating.

Love the sheer number of S/Ranked 90+ stocks that show up on this methodology, without the need to insert a rule to select only S/R 90+ stocks.

SIF Folio Q3 review: fully invested despite uncertain outlook

SIF Q3 performance review

Performance

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Roland Head

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