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Bargain shares 2016

Our portfolios are based on the investment ideas of Benjamin Graham (see box ‘Rules of Engagement’) and they have beaten the FTSE All-Share index in 14 out of the 17 years in which we have run them. During that time, they’ve generated an average return of 21.3 per cent in the first 12-month holding period compared with an average increase of 3.3 per cent for the FTSE All-Share.

That’s not to say this investment strategy is a one-way bet. Investing rarely is. Indeed, last year’s motley crew of bargain shares put in a relatively flat performance, albeit that was markedly better than the 7.4 per cent negative return on the FTSE All-Share, the index against which we benchmark our annual performance. As usual, the hidden gems we uncovered in the stock market were largely found among the under-researched small- and micro-cap segment. Targeting small-cap companies has reaped handsome rewards over the years, thereby justifying our bias towards them, but it works both ways as any companies that disappoint can be punished severely given the less liquid nature of these shares. This explains why three of last year’s constituents underperformed badly and wiped out the gains made on the winners. The flip-side is that when we get it right we can expect substantial outperformance as our track record shows.

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