SIF Folio 2020 review: beating the market in a testing year

The events of 2020 provided an unexpected but thrilling test of my rules-based SIF folio system. Looking back on a year like no other, I think it’s fair to say that the experience has reinforced my faith in the value of a quantitative framework for picking stocks.

How did my SIF portfolio perform? Not too badly, as it turned out. The portfolio beat its FTSE All Share index benchmark comfortably and ended the year within a whisker of breaking even. 

However, while I think that capital preservation was a respectable achievement last year, I can’t deny that SIF’s performance lagged well behind that achieved by some other rules-based systems. Notable among these was Ed Croft’s 2020 NAPS portfolio.

I reckon that one of the main reasons for this was the NAPS’ greater exposure to momentum factors. Momentum stocks outperformed massively last year, as investors piled into sectors such as gold, pharmaceuticals and tech. SIF lacked exposure to these sectors as the portfolio’s remit has always been to focus on affordable growth. Although momentum plays a part, it’s impact is often capped by my more restrictive rules on valuation. This prevents me buying shares which already look expensive – a key element of momentum investing!

I’m not changing my buying rules for 2021, but I have made significant changes to my selling rules. In the main, this has involved relaxing my valuation criteria so that I can continue holding shares which show continued growth and technical momentum. I hope that my new approach to selecting which shares to sell will allow me to benefit from momentum while still ensuring I don’t overpay for new shares. We’ll see how things pan out over the coming months.

SIF 2020 performance

There were two main elements to the portfolio’s outperformance in 2020. Firstly, SIF went into the market crash with a cash weighting of nearly 40%. This unusually high figure was the result of the portfolio being a net seller between October 2019 and February 2020. 

I should point out that this shift to cash wasn’t down to any deliberate planning on my part. Instead, it was an example of my rules in action. Relatively few stocks met my buying criteria, while many of those in the portfolio no longer satisfied my requirements for continued holding. As a result, the number of stocks in the portfolio fell.

Holding a lot of cash meant that the impact of the crash was diluted. It also gave me plenty of dry powder for buying. Sure enough, my buying screen came back to life in March. I added four new stocks to the portfolio that month and continued buying selectively throughout the year. 

In parallel, I culled some of the biggest losers from the portfolio. These shares no longer satisfied my rules, even after making allowances for the impact of the pandemic. 

My focus on value meant that many of the shares I added to SIF were cyclicals at depressed valuations. After an initial rebound in the spring, I had to wait until November for a more powerful rally:

SIF (blue) vs FTSE All Share index (grey)

Naturally I’m disappointed to have missed out on some of the more spectacular gains generated by momentum stocks last year. But I’m still comfortable with the methodology I’ve used and I’m happy that I managed to preserve the portfolio’s capital (and my own) in a very difficult year.

Since the SIF folio’s inception in April 2016, the portfolio has now delivered a capital gain of 38% and a total return (including dividends) of 52%. This compares very well with the annualised performance of the benchmark FTSE All Share index over the same period:

I was excited to be able to buy new shares for SIF (and my real-money portfolio) during 2020, as I felt the post-crash market environment offered some great opportunities. In total, I added 19 shares to SIF last year. The majority of these holdings have performed well so far:

As is often the case, most of the gains have come from a few stocks – notably SCVR favourite Volex and German commercial property group Sirius Real Estate. Similarly, last year’s performance would have been stronger if I’d obeyed my instinct to hold onto Finsbury Food, which has rallied since I sold the shares in October.

What comes next?

I feel some trepidation about the current state of the markets and the outlook that’s implied. There are a couple of reasons for this. 

Firstly, my SIF buying screen (which you can see here) currently shows just one qualifying stock from the whole UK market (over £50m):

Historically, such sparse results have sometimes preceded a period of market weakness or stagnation. 

More broadly, I feel that the rally we saw last year priced in much of the potential value from a return to normality. So far, only Asia-Pacific nations can really claim to have achieved this. There’s certainly a long way to go in much of Europe and the US. 

My new rules on selling will also affect SIF’s performance this year in a way I can’t yet predict. I hope that they will allow me to run winners for longer while still selling shares that are faltering. But if I’ve made the rules too loose, there’s also a risk that I’ll end up holding onto indifferent stocks for too long. That could erode future returns.

Right now, that’s all in the future. Vaccines and a Brexit deal appear to offer some prospect of stability on a mid-term view, but what will happen along the way remains a mystery. 

I look forward to documenting the progress of my portfolio as events unfold in 2021. For now, I’d like to thank you all for following my musings each week and commenting so generously. Good luck in the markets this year.

Disclosure: Roland owns all the shares listed in the SIF folio except those marked as sold.

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