Share-trading discipline brings 59% return for Nifty Thrifty
21st March 2014 17:16
by Richard Beddard from interactive investor
Share on
After three years and nine months, and on the eve of its 16th quarterly update, the Nifty Thrifty portfolio continues its strong run. It's up 59% since the first companies joined in the summer of 2010. A dodgy start is becoming a less painful memory, and the subsequent change of fortune shows the system can pay, if we stick with it.
The Nifty Thrifty is an algorithmic trading system, rebalanced every quarter, that picks from a list of the biggest, strongest candidates listed on the stock market. Only companies in the FTSE 350 index, the London-listed companies with the highest market capitalisations, are included - and then only if they have F_Scores of 5 out of 9 or more. The F_Score is a measure of financial strength.
To view the Nifty Thrifty's holdings and trading chronology, click here.
The algorithm ranks the candidates according to two factors: return on capital and earnings yield. These are proxies for quality and value: statistically, good companies at cheap prices.
Every quarter we schedule approximately one quarter of the companies - those the algorithm selected a year or more previously - for ejection and replace them with the highest-ranked companies available, employing simple rules to maintain the number and diversity of shares in the portfolio.
We excluded - a company that runs business events - from the portfolio this update, even though it was highly ranked, because the Nifty Thrifty already contains four businesses in the professional and commercial services industry group.
, and also oil and gas company , are special cases in another way. They are existing constituents of the Nifty Thrifty portfolio, scheduled for ejection but still ranked highly enough to join the portfolio. We retain them for another year.
Many investors compare their performance to popular indices such as the FTSE All-Share, but this makes for a flattering comparison. The most commonly-quoted indices only measure the rising share prices of the companies within them, and disregard the compounding effect when reinvesting dividends.
The FTSE All-Share index has risen 62% over the past decade, which, without the aid of dividends, would have turned, say, £10,000 into £16,200. But the value of £10,000 invested in a typical FTSE All-Share index-tracking fund designed to mimic the performance of the index, with dividends reinvested in the fund, would have risen 116% to £21,600.
ETF reality check
The Nifty Thrifty's benchmark is an exchange traded fund (ETF). Using an investment as a benchmark, instead of an index, enables comparison with a real alternative. But investing in an index-tracking fund and reinvesting the dividend is much easier than trading 30 companies a year, even when a computer chooses the shares.
An algorithmic trading strategy like the Nifty Thrifty therefore needs to be more profitable than a tracker in the long run, or it's not worth the additional effort and cost.
Additionally, since ETFs do not attract stamp duty, and reinvesting the dividend requires only one trade a year (for which we charge the benchmark portfolio a £10 broker commission), costs are much less of a drag on performance than they are on our portfolio. In total, an investor slavishly following the Nifty Thrifty would have paid out £2,142 in commission and stamp duty since the first buys in 2010. An investor in the benchmark would have paid out just £80.
However, despite the mounting cost of active trading - which is deducted from portfolio returns - £30,000 invested in the Nifty Thrifty in 2010 would be worth £47,634 today. The same amount invested in the benchmark index tracker with dividends reinvested would be worth almost £5,000 less.
The portfolio has risen 25% over the past year, but it was not the six companies scheduled for ejection that did the work. Thanks to the disappointing performance of Hochschild Mining, this group returned just 14%.
Hopefully new additions , a construction company; consumer product giant ; cigarette manufacturer ; retailer Debenhams; miner ; and , a telecommunications company, will serve the Nifty Thrifty well over the next year.
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.