Interactive Investor

Halfords rides high with re-selection - Nifty Thrifty Sept 15 update

7th September 2015 09:21

Richard Beddard from interactive investor

The bad news in this, the 21st quarterly review of the Nifty Thrifty portfolio, is that summer turmoil in the stockmarket has hit performance. The good news is that the portfolio, which slavishly follows the recommendations of a computer, has done less badly than the stockmarket in general.

Over one year, the Nifty Thrifty portfolio has increased 6% in value, while its benchmark has declined in value by 4%.

An investment of £30,000 in the Nifty Thrifty just over five years ago would be worth £48,926 today, a gain of 63%.

To view the Nifty Thrifty's holdings and trading chronology, click here.

Selective

£30,000 invested over the same period in the accumulation units of a FTSE 350 index-tracking fund would be worth £42,857, a gain of 43%. Both the Nifty Thrifty and the tracker fund select shares from the same index, the biggest 350 companies listed on the main market in London, but the Nifty Thrifty's algorithm is more selective.

It only invests in 30 of the 350 companies, selecting those non-financial companies that are financially strongest according to the F_Score - a nine-criteria rating designed by accounting professor Joseph Piotroski - and that have the highest combined profitability and valuation rankings according to a system devised by value investor Joel Greenblatt.

The F_Score was designed to weed out the companies most likely to fail by identifying those that are becoming less profitable, less efficient and more dependent on outside sources of finance (either by using more bank debt or by issuing more shares).

Greenblatt called his system the Magic Formula - the idea being to select good companies, those that are highly profitable, at cheap prices. The measure of profitability is return on capital. The measure of value is the earnings yield.

These statistics are not foolproof but they improve the odds of picking good companies at cheap prices, which is why the system only works reliably on large baskets of stocks over long periods of time.

When I started the portfolio, I staggered the share-buying as equally as possible over the four quarters of the first year, adding eight shares in June 2010, eight more the following September and then seven shares in December and seven more in March 2011.

Each share is replaced after one year unless it requalifies for the portfolio because it is still in the FTSE 350 index, it still has an F_Score of five or more out of nine, and it is still one of the most highly ranked candidates according to Greenblatt's Magic Formula.

This time, only one of the eight shares selected one year ago has been reselected by the algorithm. It's Halfords, the nationwide chain of motor, bike and camping stores and auto repair centres.

Ejections

The algorithm has given seven shares the heave-ho (see the Nifty Thrifty ejections table, click to enlarge). Antofagasta, the Chilean copper miner, has lost 27% of the portfolio's investment after accounting for dividends, stamp duty and trading costs.

UBM has also lost the portfolio money. It organises trade shows and operates PR Newswire, which distributes press releases to journalists.

Otherwise, the algorithm has been busy offloading star performers. Having selected Micro Focus International in four successive years, it's finally passed on the software house which earned the portfolio a 345% profit, including £478 in dividends.

In some ways more impressive, because it was only selected a year ago, is the 185% profit from an investment in Betfair. The sum of £1,375 invested in the online sports betting company a year ago has returned a clear profit of £2,547.

Scientific, technical and legal publisher RELX, known until earlier this year as Reed Elsevier, has earned the portfolio an 85% profit in its two-year sojourn, and industrial printhead manufacturer Xaar has turned initial steep losses into a 22% profit for the portfolio over one year.

Domino Printing Sciences is leaving the portfolio, probably never to return. The industrial printer manufacturer has been bought by US giant Brother, giving the portfolio a short but sweet 56% profit.

Additions

Dividends paid in the past six months and the proceeds from the seven ejections leaves about £2,370 to invest in each of the seven new additions (see the screen table to the left, click to enlarge).

They are IT reseller Computacenter, housebuilder and land regenerator St Modwen, broadcaster and TV production company ITV, advertising agency WPP, and two manufacturers, Rotork and Renishaw.

Rotork makes actuators (motors) and other equipment for controlling fluids in oil and gas pipelines and many other applications. Renishaw specialises in probes, sensors, gauges and fixtures to calibrate, test, control and automate the performance of machine tools.

In addition to the normal roster of new additions and ejections, one other company sits uneasily in the portfolio. Afren, an oil exploration company with interests in Nigeria, went into administration in August, undone by low oil prices, mismanagement and, reportedly, venality.

The shares are currently included in the portfolio at their value immediately before they delisted. They are almost certainly worthless though, and I shall probably write them off when I update the portfolio in December.

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

Disclosure

We use a combination of fundamental and technical analysis in forming our view as to the valuation and prospects of an investment. Where relevant we have set out those particular matters we think are important in the above article, but further detail can be found here.

Please note that our article on this investment should not be considered to be a regular publication.

Details of all recommendations issued by ii during the previous 12-month period can be found here.

ii adheres to a strict code of conduct.  Contributors may hold shares or have other interests in companies included in these portfolios, which could create a conflict of interests. Contributors intending to write about any financial instruments in which they have an interest are required to disclose such interest to ii and in the article itself. ii will at all times consider whether such interest impairs the objectivity of the recommendation.

In addition, individuals involved in the production of investment articles are subject to a personal account dealing restriction, which prevents them from placing a transaction in the specified instrument(s) for a period before and for five working days after such publication. This is to avoid personal interests conflicting with the interests of the recipients of those investment articles.

Related Categories

    UK shares
    Technology
    Commodities
    Industrials
    Telecoms
    Europe
    Consumer goods and services
    Value Investor