Our portfolios continue to be based on the investment ideas of Benjamin Graham (see box ‘Rules of Engagement’), and they have withstood the test of time, beating the FTSE All-Share index in 20 out of 25 years. During that time, they’ve generated an average return of 20.6 per cent in the first 12-month holding period, compared with an average increase of 4.4 per cent for the FTSE All-Share index.
Our long-term bias to small-cap companies is justified by the fact that the strategy has reaped handsome rewards over the years. However, this can work both ways: companies that disappoint can be punished more heavily given the less liquid nature of these shares. The flipside is that when we get it right, our track record indicates that substantial long-term outperformance is to be expected.
My 2023 selections failed to shine in what was a savage year for micro and small-cap companies. The FTSE Aim All-Share Total Return index shed 12.6 per cent of its value in the 12-month holding period, so it was a case of running up a down escalator. This largely explains why the 2023 Bargain Shares Portfolio delivered a loss of 5.5 per cent against our recommended buying price, and a loss of 9.8 per cent using the opening offer prices on the day of publication, as used in our performance table. But it's worth pointing out that this is the first time in the past seven years that the portfolio has failed to outperform the FTSE All-Share handsomely in the first 12-month holding period.
If history is any guide, the 2023 portfolio (which will be reviewed next week) should recover its losses. And prospects look promising for the 2024 portfolio, too. In fact, for the first time in years, more than half the constituents of this year’s portfolio have a bargain share rating above 1, as defined by the exacting stock selection methodology outlined by Benjamin Graham. That highlights the deep value on offer.
Also, with UK small-cap equities as a whole trading on a price/earnings (PE) ratio below 10, implying an earnings yield above 10 per cent, they offer a massive yield premium over the 3.9 per cent on UK 10-year gilts, even before you consider the fact that corporate earnings can be expected to grow, too. The equity risk premium embedded in current valuations is extreme, and it wouldn’t take much in the way of an improvement in sentiment to drive a material rerating of small and micro-cap companies.
Merger and acquisition (M&A) activity continues to be a regular feature of all my portfolios, as predators, attracted by the asset backing on offer, make their assessments of the numbers. This year, as was the case in 2023, in some instances valuations are so depressed that all the fixed assets are in the price for free. That creates the substantial “margin of safety” Graham was aiming for. As I highlighted at the end of 2023 (‘Four small-cap takeover targets to exploit’, 8 December 2023), there are again good reasons to expect increased M&A activity in the smaller end of the market this year.
For the 2024 portfolio, as in previous years, I have run the rule over 1,500 listed companies on Aim and the main market of the London Stock Exchange. That produces a selection of companies where the asset backing should be strong enough to overcome any short-term trading difficulties that may occur and, in time, reward our loyal following of long-term value investors – click the links below to read more.
Bargain Shares Portfolio: 25-year track record | ||
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Year | Bargain Portfolio 1-year performance (%) | FTSE All-Share index 1-year performance (%) |
1999 | 59.0 | 17.3 |
2000 | 28.1 | -4.5 |
2001 | 2.5 | -17.2 |
2002 | -29.0 | -31.0 |
2003 | 146.0 | 29.0 |
2004 | 17.1 | 11.0 |
2005 | 50.0 | 16.1 |
2006 | 16.9 | 11.3 |
2007 | -0.9 | -6.0 |
2008 | -60.1 | -30.9 |
2009 | 53.4 | 25.6 |
2010 | 46.1 | 18.6 |
2011 | -18.4 | -2.7 |
2012 | 31.9 | 8.9 |
2013 | 36.4 | 10.4 |
2014 | -16.0 | 6.8 |
2015 | -0.8 | -7.4 |
2016 | 11.0 | 19.4 |
2017 | 30.4 | 10.7 |
2018 | 12.5 | -4.9 |
2019 | 33.1 | 13.4 |
2020 | 30.2 | -8.6 |
2021 | 24.9 | 18.7 |
2022 | 20.0 | 4.4 |
2023 | -9.8 | 0.4 |
Average one-year return | 20.6 | 4.4 |
Source: Investors' Chronicle |
2024 Bargain Shares Portfolio | ||||||
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Company name | TIDM | Market | Activity | Mid-price | Market value | Bargain rating |
Anexo | ANX | Aim | Credit hire and legal services | 65p | £76.7mn | 1.86 |
Triple Point Energy Transition | TENT | Main | Energy transition focused investment company | 58p | £58mn | 1.64 |
Naked Wines | WINE | Aim | Online wine retailer | 63.9p | £47.3mn | 1.29 |
Alpha Real Trust | ARTL | Main | High-yield property investment company | 118p | £69.0mn | 1.02 |
eEnergy | EAAS | Aim | Net zero energy services provider | 7.1p | £27.5mn | 0.80 |
BP Marsh & Partners | BPM | Aim | Insurance focused investment company | 416p | £154.8mn | 0.78 |
Nexteq | NXQ | Aim | Software services to gaming, broadcast, medical and industrial markets | 119p | £79.1mn | 0.61 |
Oxford Metrics | OMG | Aim | Smart sensoring technology | 99p | £130.2mn | 0.50 |
Source: London Stock Exchange RNS and company accounts. |