The world of investing is full of excuses. For proof, just thumb through any fund’s back catalogue of newsletters. You’ll find lots of neatly argued ex post facto explanations for why things didn’t go to plan.
Although investors should always try to practice humility, we are all primed to deflect, to argue we were wrong for the right reasons, a bit too early in our judgements, or victims of market irrationality, oversight, or myopia. Professionals may be especially prone to this tendency. When your career relies on projecting credibility and authority, it can be hard to acknowledge overconfidence or the times when you simply messed up.
Since taking on our quarterly No-Thought Portfolio last year, I have not tried to make excuses for its mediocre performance. In truth, lots of the stock screens that appear in these pages have struggled since markets turned at the end of 2021. And when lined up against the benchmark from which it draws its picks, the FTSE 350, the No-Thought isn’t miles off the pace. Over two years, it is even ahead by 3.6 percentage points.
But what I have done is talked a lot about the screen’s odd design, apparent flaws, and what I see as its likely inability to add alpha. Although our screens are meant as sources of idea generation, rather than off-the-shelf portfolios, I still think it’s important that they could be replicated. In this sense, the No-Thought’s requirement to rejig 120 positions (including 40 shorts) every three months fails the real-world common-sense check.
The portfolio itself comprises six separate 20-stock screens that take long positions in the FTSE 350 constituents with the best one-year momentum, dividend yields, lowest five-year volatility and largest market values, and shorts in both the worst one-year performers and the most volatile.
In deciding whether to can this experiment, my biggest reluctance has been to abandon a strategy that we have loosely followed for just under 20 years. I have felt uncertain about dispensing with its accumulated insights, even though I am not sure what these insights mean any more.
Take the positive momentum screen, which is the only part of the No-Thought to have held its own. As the evidence shows, there are good reasons to pay attention to the biggest price swings in the FTSE 350, especially when stocks pass from FTSE 250 to FTSE 100 and vice versa. But the greater success of our quarterly momentum screen (which draws its selections from the FTSE 100, and is based on three- rather than 12-month performance) suggests to me that momentum signals are more effective over shorter windows of time. A year, after all, is a long time in markets.
This quarter, momentum strategies were the only ones to generate a positive return, as the value, beta and large-cap screens all reverted to type and lost value.
| Simple returns | Momentum | Neg Momentum (short) | Value | High beta (short) | Low risk | Mega caps | No-thought* | FTSE 350 |
| 5-yr | 8.9 | -32.7 | -53.9 | -16.1 | -20.6 | -7.8 | -2.5 | 2.1 |
| 3-yr | 35.5 | -36.9 | -23.0 | -23.0 | -11.9 | 14.2 | -0.1 | 14.9 |
| 2-yr | -13.5 | 63.7 | -34.0 | 36.9 | -29.4 | 4.2 | 2.0 | -1.6 |
| 1-yr | 7.3 | 5.9 | -14.4 | -6.6 | -8.6 | -2.3 | -2.2 | 0.1 |
| Q2 2023 (simple) | 3.5 | 8.1 | -10.5 | -4.4 | -6.7 | -2.7 | -2.1 | -1.9 |
| Q2 2023 (total) | 5.2 | 7.0 | -9.1 | -5.4 | -5.6 | -1.6 | -1.6 | -0.9 |
| Source: Investors' Chronicle, Refinitiv. *Whole portfolio equally re-balanced each quarter. | ||||||||
On the face of it, this might seem unfair. Looking back over recent years, some of these more esoteric single-metric filters have a habit of offsetting weak returns elsewhere in the portfolio, which has reduced overall volatility, relative to the benchmark.
But its contradictions have served to cancel out any positives, and produced a portfolio with a worse five-year return than all but one of the 33 screens tracked by our IC Screens Dashboard. Although the comparison is inexact – given that most of our annual screens factor in dividends – the costs of shorting 40 stocks at once while moving in and out of dozens of positions each quarter mean the real-world returns would probably be much worse.
As such, no more excuses or explanations are needed. Having banged on about its many impracticalities long enough, I no longer plan to give any more thought to the No-Thought portfolio. In its stead, I’ll aim to build a better screen.
