Slump in oil price skews selections in Nifty Thrifty Portfolio

Share this Although the Nifty Thrifty is up 6% since the last quarterly update, beating the benchmark investment in a FTSE All-Share index tracker fund, it has lost 2% in value over the past year compared to a 6% rise in the benchmark.

This is the 19th quarterly update since we started the portfolio in June 2010. Since then it has risen 56%, 5% more than the tracker. Thus £30,000 invested in the Nifty Thrifty, with costs deducted and dividends reinvested, would be worth £46,802 today; £30,000 invested in an index-tracking fund on the same basis would be worth £45,553.

The difference is not impressive, but my council remains that the portfolio will do badly from time to time, and it will do well from time to time. Over the long term it should prevail if it is generally discovering good companies at cheap prices.

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

How the algorithm works

The Nifty Thrifty is a quantitative trading system. Every quarter, without any human input, the computer ranks 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 an F_Score of 5 out of 9 or more. The F_Score is a measure of financial strength.

The algorithm ranks the list according to two factors: return on capital and earnings yield. These are proxies for quality and value, so they identify statistically good companies at cheap prices.

Roughly one quarter of the shares, those the algorithm selected a year or more previously, are ejected from the portfolio and replaced with the highest-ranked companies in the list that are not already in the portfolio.

If the algorithm selects a share from an industry group that is already fully represented (the rules allow for a maximum of four shares in companies from the same industry), it rejects that candidate and selects the next in line.

This quarter, eight shares were due for ejection. Carillion remains because it is sufficiently highly ranked to be selected again. Seven shares departed, two of them with losses that all but wipe out the profits from the other five.

The miscreants were mining giant BHP Billiton (BLT), which lost 14% of the Nifty Thrifty’s investment, and oil and gas field developer EnQuest, which lost 71%.

Profit makers

Cigarette manufacturer British American Tobacco (BATS), department store chain Debenhams (DEB), Interserve (IRV), a construction and support services conglomerate, and consumer goods giant Unilever (ULVR) all profited the portfolio.

Dividends from networking and telecommunications provider KCOM (KCOM) made good its falling share price, just saving it from joining the list of losers. Nevertheless, with a 1% total gain it was hardly a great pick.

Sales of the seven and dividends received since the last update released about £1,150 to invest in each of seven new shares, less £10 in lieu of broker fees and just under £6 in lieu of stamp duty. Of the newcomers, Indivior (INDV), PayPoint (PAY), and John Wood (WG.) are entirely new to the portfolio.

Indivior supplies Suboxone, a drug for the treatment of heroin addiction. In December, it demerged from Reckitt Benckiser (RB.). Payment processor PayPoint supplies terminals and services to a network of over 26,700 shops, as well as handling card payments for online merchants. Engineer John Wood services the oil and gas industry.

Three of the other four joiners are old friends: retailer WH Smith (SMWH), set-top box manufacturer Pace (PIC) and civil engineering consultancy WS Atkins (ATK).

The fourth, Afren (AFR), could hardly be described as a friend, as its share price declined 63% during its two-year stint in the portfolio between 2012 and 2014. The Nifty Thrifty first identified Afren as a buy at 134p and ejected it at 52p, and it has now added the shares again for just 10p.

Low oil prices are a major factor in recent selections. They reduce the viability of oil exploration, the profitability of oil drilling, and the demand for products and services used by the industry.

Pessimism about their prospects means the algorithm may have picked them up at low prices, and their past profitability means they look like good companies. Now we’ll find out if they really are.

The next portfolio reshuffle runs in the July issue (on the website in June), when seven companies are scheduled for replacement. It will be the Nifty Thrifty’s fifth anniversary.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. 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.

Nifty Futures

niftyfutures.org@imediaone.com

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