The SNAPS Portfolio 2024 - selecting stocks when expecting the unexpected

What a shocking weekend in America. The full ramifications of the Trump assassination attempt are yet to unfold, but this is yet another illustration of increasing political turbulence and uncertainty on both sides of the pond. This creates a difficult environment for investors and one which I’ll be musing on later in this article. Nonetheless, in the short term, markets continue to have a positive frame of mind, with the US futures indicating strength at the open. At the end of last year, the UK stock markets flagged an extreme oversold indicator, followed by a strong change of trend. I’ve been fully invested since, and see no reason to change that stance.

The NAPS year to date

The NAPS Portfolio has outperformed all the major indices and continues its strong run of form since inception almost ten years ago. By June 30th, the portfolio had returned almost 14.8% (now 18%), versus the FTSE All Share at only 5.2% and a flat AIM market. Both the portfolio and the index have a more than 3% dividend yield which push these returns further. The NAPS has even continued its outperformance against the S&P 500 which had returned 10.8% by the same mark.

The NAPS Portfolio is a simple systematic investment process, that buys a portfolio of the 20 highest-ranked stocks distributed across ten sectors (read up on almost ten years of history here). It’s effectively a well constructed sample of high ranked stocks, so I always like to compare the portfolio against the average return of the 90+ StockRank set. While this year’s outperformance is down to luck, after a few difficult years for UK investing, it’s gratifying.

While the aggregate statistics have been strong, there’s no denying that 2024 has been a stock pickers market. Paul and Graham’s watchlists have trounced the NAPS Portfolio year to date, with 31% and 35% returns as of today. Their standout selection, CMC Markets (LON:CMCX) , has more than tripled. Congratulations to them, and to every investor in the community that has beaten the NAPS. It’s in markets like these that smart, discretionary stock pickers really can make a difference. Please do let me know how you are getting on in the comments below.

The underlying portfolio performance

Breaking down the NAPS by position, highlights the breadth and depth of the winners. Fifteen out of twenty positions have generated positive returns, with some standout winners in Metals Exploration (LON:MTL) ,Greencore (LON:GNC) , Renold (LON:RNO) and Seplat Energy (LON:SEPL) .

The list highlights some of the trials and tribulations of investing in popular stocks. Renold (LON:RNO) has been one of the more broadly held stocks among the community and has strongly rewarded the faithful. But at the start of the year, Good Energy (LON:GOOD) and Card Factory (LON:CARD) were in vogue, which have since struggled. Meanwhile, Ingenta (LON:ING) has pulled back, while seeing favour among much smarter investors than me. These stocks may come good, but it’s so important when constructing a portfolio to keep an independent mindset and not be too swayed by the actions of others. Develop your own rules, stay patient and stick to them.

The portfolio’s 75% win rate is fortuitous, and well beyond that of the 90+ StockRanks as a whole at 65%. This is a good sign, which suggests not only that the portfolio is behaving well, but that there’s increasing technical breadth behind the overall market.

On expecting the unexpected

I recently hosted a webinar about how to pick the best value stocks for the UK market recovery. While I don’t pretend to be a deep economic thinker, the introduction to the webinar went into a few key points about the UK equities markets. Not only are we seeing a new uptrend, but the UK is deeply undervalued relative to its peer group while the economy and interest rate environment are improving. Clarity on the political environment here should continue to bring more strategic international investment into the UK and perhaps, finally, we may start to see fund flows turn positive. Most of these factors remain positive for the UK, and do check out the slides if you don’t have time to watch the webinar. It also serves as a good reminder and primer about the StockRanks.

Given the above, I’m still hopeful that we’ll see a new all-time high for the NAPS this year. It’s been more than three years since the 2021 peak, and we’re well overdue.

Nonetheless, Trump’s assassination attempt highlights increased political risk around the world. We’re seeing a resurgence of far-right politics all over Europe and in the UK, while protectionism and deglobalisation all appear to be growing.

A few years ago, I came across Peter Turchin. He’s a statistician who cut his teeth in biology before applying his statistical prediction methods to social sciences. In 2010, he predicted we’d see a pandemic in the coming years, and a rise in political discord and violence. He’s gained a great deal of renown as a result, publishing his thoughts in books such as “Ages of Discord” and "End Times".

At the heart of his predictions are two multi-factor measures: Elite Overproduction (with too many qualified people seeking power who can’t get it) and Popular Well-Being (which is independent but trends counter-cyclically to Elite Overproduction). When there is high Elite Overproduction, and low Popular Well-Being (such as now) you see greater political violence and discord. That time is now.  

I don’t share the above to scare everyone out of their portfolios, but I do to reiterate that we’re in an age of uncertainty. While the macro environment still appears modestly bullish for the UK, there’s little doubt that investors are all at heightened risk of unknown political forces.

So what to do?

Well, to be frank, we’ve been in a very difficult UK equity environment ever since the Brexit vote in 2016, but intelligent UK investors have continued to prosper. At the end of the day, sane stock selection, sensible portfolio construction and good risk management should continue to benefit those that practice them.

I will continue to bang the drum for the benefits of factor investing for improving risk-adjusted returns. Ultimately, Black Swans and market panics do occur, so you can’t remove all the downside volatility from equity investments. But reducing your equity allocation in negatively trending markets can significantly reduce drawdowns, if not improving absolute returns. I’ll do my best to flag changes of trend as and when they do occur. Meanwhile, I stay fully invested.

The SNAPS Portfolio 2024

As has become the habit, I like to publish a half-year version of the NAPS Portfolio. I have to apologise for being late, as I’ve had a little time off to celebrate my father-in-law’s 80th birthday in Skye. The good news is that the portfolio that qualifies today, is identical to the portfolio that qualified on the 30th June.

The rules remain the same as those at the start of the year, when I decided to revert to basics. We used the core QVM StockRank, with the following rules:

1. 20 stocks from all 10 sectors.
2. No more than 1 utility and 1 telecom.  Maximum of three in any other sector.  (I select the top two in all other sectors, then fill the last 2 spots with the next two highest-ranked stocks in 2 sectors).  
3. Minimum £10m market cap. (Beware of 5%+ spread stocks).
4. Ranked by StockRank descending.

It's easy to build the above using a stock screen, or on the sector pages, but the portfolio diversification is also key to the approach. Yes, you could just buy the top 20 highest-ranked stocks, but it can lead to significant sector skews and drawdowns. Often, great stocks in sectors that tend to have lower StockRanks (like Healthcare and Technology) are missed if you don’t diversify. This all weather approach has always made the portfolio more robust to Black Swans like the pandemic, where utilities, healthcare and defensive stocks provided spine. Given the political environment, I do think this continues to make sense.

This year’s NAPS are a case in point. Strong returns to Basic Materials and Energy stocks were perhaps unexpected, and easily missed by investors who favour industrials and cyclicals.

We’ll close with this year’s SNAPS portfolio (The Semi-Year NAPS) according to the above rules. There are a few observations about the list:

1. There’s a stronger skew to small caps (11) in the below list. More cautious investors should adapt the rules to avoid this if implementing a similar process.
2. The average yield is 2.3%, which does cover the average bid-ask spread at 0.85%. Serabi Gold (LON:SRB) and IG Design (LON:IGR) have the widest spreads at 3% and 4% accordingly. Always be mindful when investing in higher spread stocks that there is a cost of entry. Limit orders can help.
3. These stocks are on average up about 75% over the last 12 months. As there’s a momentum component of the StockRank this will regularly be the case. I always need to remind myself that Value and Momentum are the two most powerful forces in investing. Do check out the webinar if you need a refresher.

Safe investing and do let me know your own thoughts in the comments below.