A year ago, I agreed to take over the Investors’ Chronicle’s stock screens, which for more than a decade had been patiently and creatively curated by Algy Hall.
I used to sit next to Algy and gawp at the computer-crashing spreadsheets he tended from his standing-height desk. Even with that desk, he didn’t rise far above my lanky frame, meaning his have only been metaphorically large shoes to fill (though given his prodigious messiness, he likely left several pairs of actual shoes around here somewhere).
But the challenge of assuming the task hasn’t been helped by a dreadful year for most investing strategies. Complicating matters, we have seen a shift to what several big investors have termed a ‘new market regime’. Inflation is back, forcing central banks to aggressively raise interest rates and crashing not just long-term forecasts, but the belief that in a low-growth world, growth stocks are the biggest game in town.
What follows is my take on how this has affected the stock screens in the past year: what has worked, what has come badly unstuck, and what (if anything) might need to change. Like the screens, these thoughts are evolving, and probably will have changed by this time next year.
But to counterbalance the tendency to tinker and modify too much – and keeping with the tradition started by Algy – my overarching commitment is to the ideas behind the screens. Each is a sort of experiment, and experiments require persistence and repetition, even when they fail to produce the results you were hoping for.
Screenshot
In simple terms, our screens are filters to find shares that reflect a set of investing preferences. These preferences might focus on stocks’ cheapness, quality, income generation, growth – or some combination of the above. But their overarching aim is to beat the market.
On a one-year basis, the market – or more specifically the UK market indices that act as benchmarks – won, hands down. The screens’ benchmarks vary depending on constituents and style, though the most frequently used is the FTSE All-Share, which aggregates the FTSE 100, FTSE 250 and the next 250 or so largest stocks. And the strong relative performance of the blue-chip index in 2022 meant our screens’ benchmarks posted a 1.2 per cent total return, on average, in the year to 6 December.
By contrast, the average loss from our screens was 12.6 per cent, even with dividends re-invested (see large table).
| SCREEN | Index | Years run | All-time CAGR alpha | All-time CAGR | Since inception | 10yr | 5yr | 3yr | 1yr |
| Small caps on steroids | FTSE Small/Aim | 4.2 | 10.0% | 10.1% vs 0.1% | 49% vs 1% | - | - | 13% vs 9% | 24% vs -19% |
| Slater small cap - PEG | FTSE Small Cap/Aim | 9.5 | 9.0% | 15% vs 5.8% | 267% vs 70% | - | 49% vs 6% | 22% vs 8% | -2% vs -19% |
| High quality RoE Large Cap | FTSE All Share | 11.3 | 8.5% | 16% vs 8% | 443% vs 130% | 281% vs 92% | 58% vs 22% | 19% vs 14% | -13% vs 5% |
| High Yield Low Risk | FTSE All Share | 11.7 | 7.7% | 14% vs 6% | 364% vs 104% | 261% vs 91% | 46% vs 22% | 26% vs 14% | -7% vs 3% |
| Great Expectations | FTSE 350 | 11.0 | 7.5% | 15% vs 7% | 359% vs 119% | 269% vs 89% | 21% vs 22% | 1% vs 13% | -1% vs 6% |
| Monsters of momentum | FTSE All Share | 12.1 | 6.6% | 13% vs 6.3% | 331% vs 109% | 239% vs 92% | 49% vs 22% | 36% vs 14% | -11% vs 5% |
| High yield small caps | FTSE Small Cap/Aim All Share | 10.1 | 6.4% | 13% vs 7% | 253% vs 98% | 244% vs -12% | 16% vs 10% | 15% vs 11% | -23% vs -18% |
| Cash Magic | FTSE All Share | 9.6 | 5.7% | 11% vs 5.6% | 179% vs 68% | - | 15% vs 22% | 16% vs 13.7% | -18% vs 5% |
| Strategy Screen | FTSE All Share | 9.8 | 4.4% | 10% vs 6.0% | 164% vs 77% | - | 25% vs 22% | 15% vs 14% | 0.2% vs 5% |
| Screen for all seasons | FTSE All Share/Aim | 5.6 | 4.3% | 6% vs 2% | 37% vs 9% | - | 36% vs 6% | 28% vs 6% | -6% vs -12% |
| O'Shaughnessy Growth | FTSE All Share | 10.8 | 3.9% | 10% vs 6.6% | 193% vs 99% | 154% vs 73% | 9% vs 22% | 3% vs 14% | -18% vs 5% |
| Genuine Growth | FTSE All Share/Aim 100 | 10.1 | 3.8% | 9.3% vs 5.5% | 145% vs 72% | 131% vs 69% | 10% vs 1% | -7% vs 2% | -26% vs -13% |
| Best of British | FTSE 350 | 11.2 | 3.7% | 11% vs 7% | 216% vs 118% | 158% vs 90% | 7% vs 22% | -21% vs 13% | -30% vs 6% |
| Contrarian PSR | FTSE All Share | 11.4 | 3.6% | 10% vs 6% | 200% vs 104% | 93% vs 93% | -1% vs 23% | -8% vs 15% | -22% vs 6% |
| Greenblatt | FTSE All Share | 11.9 | 3.5% | 10% vs 6.2% | 202% vs 105% | 130% vs 92% | 0% vs 22% | 10% vs 14% | -11% vs 5% |
| Cheap Small Caps | FTSE Small Cap/Aim All Share blend | 9.7 | 3.4% | 9% vs 6% | 139% vs 100% | - | 36% vs 26% | 26% vs 28% | -18% vs -5% |
| Peter Lynch | FTSE All Share | 10.6 | 3.3% | 10% vs 7.0% | 182% vs 105% | 170% vs 93% | 30% vs 22% | 40% vs 14% | 3% vs 5% |
| Safe yields | FTSE All Share | 11.4 | 2.9% | 9% vs 6% | 175% vs 102% | 146% vs 92% | 11% vs 22% | 3% vs 14% | -11% vs 5% |
| O'Shaughnessy Value | FTSE350 | 11.8 | 2.7% | 9% vs 6% | 167% vs 98% | 160% vs 89% | 33% vs 22% | 32% vs 13% | 3% vs 6% |
| High Quality RoE Small Caps | FTSE Small Cap/Aim | 10.3 | 2.3% | 8% vs 5% | 113% vs 70% | 79% vs 61% | -19% vs -10% | -14% vs -8% | -28% vs -32% |
| Big Reliable shares | FTSE 350 | 11.6 | 2.0% | 8% vs 6% | 150% vs 101% | 120% vs 92% | 38% vs 23% | 3% vs 14% | -10% vs 6% |
| Inflation beaters | FTSE 350 | 10.9 | 1.5% | 8% vs 6.7% | 136% vs 102% | 96% vs 89% | 20% vs 22% | 8% vs 13% | -3% vs 6% |
| Have-it-all shares | FTSE All Share | 11.0 | 1.4% | 9% vs 7% | 150% vs 116% | 94% vs 90% | -10% vs 22% | -13% vs 14% | -23% vs 5% |
| John Neff | FTSE All Share | 10.9 | -1.0% | 6% vs 7% | 87% vs 108% | 53% vs 90% | -40% vs 22% | -37% vs 14% | -30% vs 5% |
| Dreman | FTSE All Share | 9.6 | -1.4% | 4.4% vs 5.7% | 51% vs 70% | - | -9% vs 22% | -11% vs 14% | -22% vs 5% |
| Late Bloomers | FTSE All Share | 8.6 | -2.7% | 2% vs 5% | 23% vs 53% | 0% vs 22% | -8% vs 14% | -12% vs 5% | |
| Source: Refinitiv Eikon Datastream, S&P Capital IQ. Long-term screens. Returns to 6 December 2022, total return. | |||||||||
There are two ways to make sense of this. One concerns weighting: because many of this year’s best-performing FTSE All-Share constituents are among its largest, equal-weighted portfolios of stocks drawn from the index have naturally struggled to match the performance. Another concerns style: ‘value’ worked well as an investment strategy in 2022, if it went big on several specific cyclical sectors such as commodities producers, defence companies or banks.
That was the picture in the UK at least. In the US, the S&P 500’s heavy weighting to gigantic, expensive and growth-oriented technology stocks means screens with a value or mid-cap bent would have had an easier time of achieving outperformance.
But any investor who stuck with one of the dominant themes of post-Lehman stock markets this year will likely have been burned.
This is certainly true of the worst-performing screen in our stable, our Neff screen. Inspired by the legendary US growth investor John Neff, it looks for lots of sensible ingredients like strong projected and historic profits growth, positive free cash flow and a reasonable valuation. To date its four 2022 selections are down 36 per cent in simple price terms, erasing what was left of the screen’s track record of outperformance. Clearly, valuations for these companies weren’t reasonable enough.
There has been one glaring exception to UK indices’ collective trouncing of our screens, however. Last year, we suggested our Small Caps on Steroids screen might be one to watch, and so it proved: over the 12 months, the screen has smashed the admittedly horrid average performance of the FTSE Small and Aim benchmarks by roughly 43 percentage points on a total return basis.
The screen, which looks for smaller stocks with lots of debt, was conceived by Algy as a ‘value’ lens. But it can only work when the companies it screens for can quickly convert excessive debt into explosive growth, thereby creating a virtuous cycle in which its selections re-rate, de-leverage and quickly become more profitable. Its success in finding companies that did exactly this in 2022 explain why the screen has gone from the bottom to the top of the leader board for compound annual growth rate outperformance of its benchmark, in the space of a year.
Highly leveraged small caps weren’t the only place to hide, either. Eagle-eyed readers might notice the absence of the quarterly Momentum Classics and the No-Thought Portfolio screens, the latter of which I inherited from another IC veteran whose shirt number was retired on his departure from the team this year, Chris Dillow. In 2022, both screens have shown the occasional use of following trends like the 200-day moving average, and the gains that can come from betting on recent winners (in the case of the Momentum screen) and against recent losers (in the No-Thought).
The failure of our Monsters of Momentum screen to replicate this recent success has, I would venture, been down to the long lag-time between its reshuffles.
Screen time
This, then, has been a rocky year for our screens. But as is the case regardless of your investing strategy, it’s important not to over-scrutinise the impact of one bad year on long-term returns.
Though there has been an element of pruning over the years, a clear majority of our screens have been in service for more than a decade now, and most have beaten their benchmarks on a headline basis. “Time in the market, rather than timing the market” is usually meant as a warning against over-trading, but its wisdom largely lies in the value it places on staying invested for the long-term. For most investors, this is their best chance to reap as much of markets’ upside as possible.
The upside on several of our screens has been especially strong. Six of them – the Jim Slater-inspired Small Caps PEG, High Quality Large Caps, High Yield Low Risk, Great Expectations, Monsters of Momentum and High-Yield Small Caps screens – have each been in service for at least a decade, and each has posted a compound annual growth rate (CAGR) of at least 13 per cent.
Of these, the most successful remains the High-Quality Large Caps screen. Despite underperforming its benchmark by 18 percentage points over the last year, its stunning long-term run means its headline CAGR of 16.2 per cent is more than double that of the FTSE All-Share since its inception.
Of course, these figures come with one big caveat: although the screens in these pages are not intended as off-the-shelf portfolios, their real-world performance would be less impressive (sometimes markedly so) once trading costs and other fees are factored in. If a screen’s compound annual outperformance falls below 1.5 percentage points, it has likely struggled to match its index.
Screen stars of tomorrow
This year, I have introduced four new screens. These have been designed partly in recognition of the growing pool of readers interested in overseas shares, partly to fill gaps in our existing investing style coverage of the UK market, and partly out of experimentation.
So far two are up on their benchmarks, and two are down, which is roughly as you’d expect. Because they have only been in commission for a few months I’m not going to draw too many conclusions. Only with time should it be more obvious if the screens’ performance is down to poor design or market movements.
For example, it stands to reason that the stocks which my Intangible Edge screen likes have suffered this year, given their significant crossover with highly rated out-of-vogue growth stocks. My value-focused US Cash Magic screen may have worked for precisely the opposite reason: by insisting on stocks with high forecast free cash flow yields and cash returns on capital, it may be chasing companies whose cash-generation is only momentarily high relative to their capital spending. It’s easy to imagine a market regime in which those qualities are less well valued.
My fear is that the strong evidence that might exist for introducing any stock screen is a kind of recency bias, that anchors expectations in how markets have performed lately rather than how they might perform tomorrow. The five-year performance of our screens inspired by Neff and David Dreman – two US-focused investors whose success occurred in a different age – could be testament to this.
| 2022 New Screens | Index | Years run | All-time CAGR alpha | All-time CAGR | All-time |
| US Cash Magic (momentum) | S&P 500 | 0.7 | 24.2% | 10% vs -14.6% | 6% vs -10% |
| Geico stocks | MSCI World (£) | 0.2 | 20.5% | 11% vs -9.2% | 3% vs -2% |
| Dogs of the FTSE 100 | FTSE 100 | 0.7 | -9.6% | -7% vs 3.0% | -4% vs 2% |
| Intangible Edge | FTSE All-Share | 0.8 | -18.0% | -14% vs 4.5% | -11% vs 3% |
| Source: Refinitiv Eikon Datastream. Returns to 6 December 2022, total return. | |||||
Screen grab
In 2023, I may weed out one or two whose methodologies contain a degree of duplication. Most I will persist with. But neither am I short of ideas for new screens, including more international versions of our long-running staples and screens that look at valuation or momentum signals across assets, sectors and geographies. In theory, the proliferation of exchange-traded fund (ETF) building blocks should make the latter type of screen doable, though it would represent a bit of a departure for this company-focused page.
Are there any screens or stockpicking styles you’d like to see automated next year? Please write to me at alex.newman@ft.com if you have any suggestions.
