SIF Portfolio: What would happen if I changed the rules for 2017?

Wednesday, Feb 01 2017 by
SIF Portfolio What would happen if I changed the rules for 2017

The criteria I’ve used for my Stock in Focus screen fall into two categories. A small number are essential characteristics which characterise the majority of stocks in the portfolio. The remainder are safeguards to avoid ‘outliers’ carrying specific risks.

This week I’m going to highlight some of these key criteria and explain how they work against each other to restrict my choice of stock. Would it make sense to target a broader range of stocks?

Am I too focused on one type of stock?

The SIF portfolio was designed to target affordable growth stocks. The screening criteria include a number of rules whose purpose is specifically to reduce downside risk. This approach reflects my belief in the Warren Buffett rule that avoiding losses is as important as identifying winners.

This conservative approach has often resulted in a restricted choice of stocks. At the time of writing, just four stocks qualify for the screen. I’ve still had some big winners, such as IG Design (+49.5%), Avesco (+132%) and Beximco Pharmaceuticals (currently +60%). But serious growth picks such as Paul Scott success story (up 255% in one year) have never qualified.

Nor have highly-ranked big cap income stocks such as housebuilders and insurance stocks, even though they’ve performed well since the referendum.

The portfolio will be one year old in April. This will give me a chance to tweak the rules if I want to. Would it make sense to relax certain criteria to capture a broader range of stocks? Or will any gains be offset by an increase in the number of losers?

The key screening criteria

There are four rules which have a huge impact on the number of stocks which qualify for the screen:

That’s only four out of 14 rules. You may wonder what the purpose the other 10 rules serve. I’ll come back to this in a moment, but first I want to explain how the four rules above combine to set a fairly high bar for potential buys.

Value, Quality, Growth & Momentum

You may already have spotted that the four rules I’ve listed above are each classic characteristics of a style of investing:

  • Earnings yield (EBIT/EV) = Value
  • Piotroski F-Score = Quality
  • Low PEG ratio = Affordable growth

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Numis Corporation PLC is a United Kingdom-based independent institutional stockbrokers and corporate advisors. The Company offers a range of research, execution, corporate broking and advisory services to companies quoted in the United Kingdom and its investors. The Company's services include research, sales and trading, investment companies, corporate finance, corporate broking, principle capital fund managers limited (PCFM), Numis indices and asset management. The investment company's research-driven approach focuses on specialist or differentiated mandates, including quoted equity, private equity, infrastructure, property, debt and other alternative assets. The corporate finance services include advice and transaction execution in relation to mergers and acquisitions, secondary equity issuance, convertible securities and bonds. The Company serves corporate clients and institutional clients. It is managed as an integrated corporate advisory and stockbroking business. more »

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Pan African Resources PLC is a precious metals producer engaged in mining. The Company operates through six segments: Barberton Mines, located in Barberton South Africa, derives revenue from sale of gold to South African financial institutions; Evander Gold Mining Proprietary Limited and Evander Gold Mines Limited (collectively known as Evander Mines), located in Evander South Africa, derives revenue from sale of gold to South African financial institutions; Phoenix Platinum, located in North West province in South Africa, derives revenue from sale of platinum group element concentrate to Western Platinum Limited; Uitkomst Colliery, located in Newcastle, KwaZulu-Natal, derives revenue from sale of coal to local and export markets; Corporate office and growth projects, including PAR Gold Proprietary Limited, derives revenue from management fee from providing management and administration services to other group companies, and Funding Company, which provides treasury function activities. more »

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8 Comments on this Article show/hide all

gus 1065 1st Feb 1 of 8

Morning Roland.

Thanks for the write up - good to get "under the bonnet" and have an insight as to how you formulated the original rules and how they fit together to form the whole investment strategy.

I guess the temptation to relax the rules to allow more stocks through the filter is always there, especially when you see stocks that have missed the cut doing really well. If you have a very short, short-list from your filter, do you change the rules and move to the market or wait for the market to come to you? Most private investors (me included) are rarely that patient.

In effect there is a trade off between having a long list of objectively filtered stocks to then screen subjectively or a short list of stocks that have to clear higher hurdles perhaps requiring less subjective input. Which of the two approaches to take is presumably a function of how much time you have available to do the subjective analysis as well as your own self confidence in the ability to assess a stock. I probably err on the side of starting with a long list and whittling it down - too much of the "monkey brain" for my own good most of the time.

One Stocko feature I regularly use is the [RUN A CHECKLIST] under the [TOOLS] feature which allows me to assess a stock against my primary screening tool. This allows me to see which, if any, of my particular rules is being broken and provides the information to allow me to dig down into the specific reasons for failure and then make a call on whether to buy/hold a stock or not. I'll often use this if I see a "hot stock" being discussed on the board to see whether it is worth following up on and have made a few decent purchases (and avoided a couple of with hindsight howlers) along the way.



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JohnEustace 1st Feb 2 of 8

I saw a comment from the late Jim Slater when his Zulu screens were not showing many candidates that he would be prepared to relax his criteria on the price he was willing to pay but never on the quality of the business.

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Roland Head 1st Feb 3 of 8

In reply to JohnEustace, post #2

Hi John,

Re. Jim Slater -- that makes sense. Focusing on quality should limit the downside risk, even if you have paid slightly too much. And the returns from investing could still exceed those from sitting on the sidelines.



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Roland Head 1st Feb 4 of 8

In reply to gus 1065, post #1

Hi Gus,

Thanks for your feedback.

You're right about the temptation to trade, but what I don't want to do is to introduce too much additional subjective judgement. As I've discussed in recent weeks, the evidence so far suggests that this isn't enhancing the portfolio's returns.

If I do loosen the rules, it will only be slightly. And I'm not yet convinced I will.

I use the Checklist tool a lot as well -- it's a great feature IMO.



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FundManagementHobbit 1st Feb 5 of 8

Your screen at the moment means that you will either be mainly in cash, or, have a highly concentrated portfolio foregoing the benefits of diversification. As your article outlines, the opportunity cost of having so many rules is that potentially good stocks don't qualify. On the other hand, the behavioural instinct to change the rules is what often makes it hard for investors to match the returns they could achieve if they stuck to their rules. How much backtesting did you do on your set of rules? If you did quite a lot and there were positive returns then maybe it is best to be patient. However, I'm not sure what everyone else thinks but it seems to me like 14 is quite a lot of rules. Most of the Guru screens don't have nearly that many. Clearly a lot of thought has gone into your rules so it would be a shame to ditch some of them altogether. Sticking to the 4 key rules seems to be important for the integrity of this screen with a possible slight adjustment of the thresholds, as you suggest, to get a few more stocks to qualify. The other rules are each there for a reason but in aggregate they do seem to be pretty restrictive. The case of Numis is a good example. Why not consider an approach where the 4 key rules are met then perhaps as long as a certain number of the other rules are met, e.g. 7 of the 10, then a stock could be considered to have qualified? Using the RUN A CHECKLIST feature Gus mentioned would be one way to check this on an initial list of stocks that meet the top 4 rules. There was an article that Ed wrote a while ago talking about looking not for the perfect stock but instead aiming for a portfolio that would have the characteristics of a perfect stock. Perhaps your rules as they currently stand are aiming a bit too much for a set of perfect stocks?

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Howard Adams 1st Feb 6 of 8


I great read as always.

My experiences for what its worth is that a tight rule-set as you have had, run for a period offers good base to build a good portfolio. As I did.

What I found however, was that I was not achieving quite the returns other Stockopedia people were reporting. In reaction I have made a conscious step to run twp portfolios side by side (methodology the sames, screens are different).

One screen is very like yours (we share several of the same stocks). The second however, is much more akin to a Paul Scott portfolio. This second still employs the disciples about screening, testing, and so on, but I accept it is picking very different stocks for a very different reason.

Reading Ben Graham recently, encouraged me to understand that he in fact encourages the 'enterprising investor' to mix types of stocks. Thus have sub-portfolios within the overall portfolio. This approach is really beginning to show positive results.

In short, I am suggesting not necessarily relaxing your rules (they are serving you well). Rather replicate your methodology with a different screen for different types of stocks.


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mercury61 1st Feb 7 of 8

Very interesting to read absorb and learn from others more experienced than I!
Thank you all for your positive information flows and debate.

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shine66 2nd Feb 8 of 8

Your SIF portfolio has done very well so far and I think it would be interesting to see if it maintains that over a longer period. Who knows, it may even out-perform its rivals over the next 12 months.

I'd also be interested in seeing how a bare-bones SIF might do, with minimal or nil subjective decision-making. If a share fits your key criteria just bung it in. I have banged on about that before, but this is the last time I'll mention it!

Having said that using a new regime with relaxed criteria as the basis for SIF 2.0 would be worthwhile, too, if only to see how it performs against the original. 

I suppose if you were to conduct your research as a pure scientific experiment then there would be a hundred portfolios running alongside each other, each having just one variable.  Might be a bit time consuming, though!

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About Roland Head

Roland Head

Private investor & writer on stock markets with a particular fondness for free cash flow, dividends and value, plus an interest in resource stocks.In earlier life, I worked as an engineer in telecoms and IT. The quantitative, rule-based mindset required for this type of work is probably reflected in my investment style. Another factor that affects my investment choices is my experience working for a large telecoms company at the turn of the century, when tech stocks were booming. Watching this bubble inflate and then implode from the inside was very educational. more »


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