Equity markets in the UK generally had a poor December as they fretted about the first US rate rise in years and FTSE 100, with its heavy weightings in oil and commodity stocks, produced a total return of -1.71%, on the back of on going price weakness in those sectors. While continuing the trend from recent months the more domestically exposed and diversified Mid 250 and Small Cap Indices continued to edge ahead with positive total returns of +0.23% and +1.49% respectively.
Given the large weighting of FTSE 100 in the FTSE All Share & FTSE 350 indices, this caused them to have negative total returns of -1.27% and -1.37% respectively, although there were positive total returns across the board for the quarter. For 2015 as a whole this meant positive total returns in the main, with FTSE Fledgeling, Mid 250 and Small Cap indices leading the way, while if you have been in a FTSE tracker you will be likely to have seen a negative total return as FTSE 100 produced -1.32% for the year, as shown in the table below.
Monthly Timing Indicators for UK Indices
Last time I looked at these the main indices were in a bearish trend below their 10 month moving averages while the Mid and Small Cap indices were just about hanging onto bullish trends. These patterns were maintained given the performance of the various indices discussed above. Consequently the broader and larger FTSE All Share , FTSE 350 & FTSE 100 Indices remain in their bearish trends some 2 to 3% below their moving averages, a trend which has been in place since the end of August 2015 and suggests a note of caution as we enter 2016. However against that the Mid 250 and Small Cap indices remain in bullish territory around 2% above their moving averages. So it will be interesting to see if this can be maintained, especially as some of the smallest stocks, represented by the Fledgling index, seemed to succumb to some profit taking in December or perhaps this was becasue there are lots of rubbish resource stocks down there?
It seems to me that, as ever, markets are climbing a wall of worry as the old saying goes. There are always things to worry about like interest rates, economic growth rates, Chinese slow down, US valuations, deflation, inflation etc. etc. Against that the UK market does look quite good value, although some of that apparent cheapness is probably accounted for by the large weightings in commodity stocks which have been de-rated as commodity prices have collapsed this year. The other element of cheapness which may also be a bit misleading is the yield as the main indices are again dominated by a few large stocks in this respect, with the likes of Royal Dutch Shell, BP, Glaxo SmithKline for example, all making up a large proportion of the income and all of these plus the miners have a question mark over the sustainability of their dividends. Indeed researchers have pointed out that the overall level of cover in the market has come down to levels not seen since 2008/9, which does call into question the prospects for dividend sustainability and the prospects for growth if economic growth should disappoint.
As individual investors though we have an advantage over institutions as we do not have to own the index, unless you want to as part of a low cost index tracking approach. Thus although there can be concerns surrounding individual shares and sectors it is possible to avoid these and construct a winning portfolio despite difficulties elsewhere. However, clearly if we get into an protracted bear market with a serious decline of 20% or more then it is likely that most stocks and portfolios would get dragged down by that to varying degrees. So having said all that this brings me nicely onto to have a look at how the Compound Income Scores portfolio has performed in the mixed market conditions since it was started in April 2015.
Compound Income Scores Portfolio
As mentioned above and as regular readers may recall, this was set up in April last year to test the efficacy of the Compound Income Scores. It was also designed to be a fairly mechanical or automated process to select from top scoring stocks to avoid human biases as much as possible as research has suggested that quantitative models tend to be a ceiling on performance which human intervention then detracts from. Having said that no process can be completely automated as I am still required to run the screens and implement the resulting trades, but I try and make sure that I don't allow any biases to creep in during that process. This is also why I have allowed the CIS Portfolio to go where it finds good quality growing dividends rather than enforcing a sector neutral approach, but this can lead to some sector concentration which needs to be controlled and monitored. As a result having nothing in energy and basic materials has probably helped, as has exposure to Consumer cyclicals and industrials but would leave the current portfolio exposed in the event of an economic downturn.
December turned out to be another winning month for the CIS Portfolio as it produced a total return of +2.4% which put it ahead of the FTSE All share by 3.7% on a relative basis. The biggest winners this month which helped to deliver this out performance were:
Utilitywise (UTW) + 16.8% - in response to a positive AGM statement and a further major supplier agreeing new payment terms.
32 Red (TTR) +14.2% - a further re-rating as they continued their winning streak.
Bellway (BWY) +8.3% - continued gains as a beneficiary of government backing for a strong housing market.
On the downside the losers were:
Next (NXT) -8.3% - fell on the back of other retailers warning about the effects of the incredibly mild weather so far this winter and some small down grades.
Paypoint (PAY) - 5% - fell further as the market digested the disappointment from their updated on the progress, or lack of it, on the disposal of the on line business.
Jupiter Fund Management (JUP) - Seems to reflect some profit taking on no news in a nervous market.
Since inception in early April 2015 the biggest gains from stocks still in the portfolio have come from 32Red & Rank Group which are both up by over 50% suggesting that the on line and traditional gambling markets have been a lucrative hunting ground for investors recently. While along the way the portfolio also realised a profit in excess of 50% on Alliance Pharma too. On the downside the biggest losses since inception on those stocks still held are -23.7% and -19.2% on Renishaw and Utilitywise respectively. While on realised losses the biggest loss were -46.2% and -15% on Plus500 and A.G.Barr respectively.
Summary & Conclusions
Another good month meant another positive quarter in both absolute and relative terms and this has left the portfolio up by 16% since inception in April 2015 which is more than 20% ahead of the FTSE All Share which produced -4.4% over the same time frame. It is also around £1,000 or 3% or so ahead of the original annually rebalanced portfolio suggesting that thus far the quarterly re-screening has be worth while and made up for the extra costs involved so far.
While my own portfolios have performed well this calendar year with total returns of around 15% it is noticeable to me that they have not kept pace with Scores portfolio since it was launched. This seems to be in line with the research that I mentioned at the start of this piece which suggests that quantitative investment models tend to outperform humans as they tend to bring their biases and weed out some top performers as they are unpalatable. I know myself that I missed out on Rank Group as I was too greedy or penny wise and pound poor when trying to finesse an entry point. I still even failed to buy it even when I put it in the CIS portfolio too! 32 Red was another one that got away from me as I had an aversion to it as it was on line gambling related, which seems to reinforce the point about humans stripping the winners from Quantitative models. Having said that though I should add that I have also been able to trade Utilitywise more successfully, held Bellway and EMIS and avoided losses in Plus 500. I also participated in the gains from Alliance Pharma and have had my own share of big winners outside of those stocks held by the CIS so I don't feel too hard done by being beaten by my model portfolio.
Personally I prefer to run a broader more diversified portfolio, which probably accounts for the lower returns, but it is thought provoking that such a relaxed and emotionally detached process has done so well, so far. Thus this year I'll certainly be paying closer attention to the Scores and the stocks which enter the portfolio and I'll be looking to improve my returns and the process further this year. So stay tuned for that and for this quarter's re-screening which will be up next. Happy New Year and good luck with your investing this year.