Education & Insights: A portfolio greater than the sum of its parts

There has been a lot of talk in recent weeks about the attractiveness of the UK stock market. On the one hand we have market statistics which illustrate the diminishing presence of the London Stock Exchange in Europe and beyond. AIM is struggling to attract new companies and losing many of its current companies to takeover or delisting. And then there is the economic data which is, well… bleak.

But on the other hand we’ve recently seen luminaries such as Gervais Williams (head of equities at Premier Miton) and Ken Fisher (the US wealth manager) speaking with optimism about the outlook for British stocks. They cite new economic trends which will make it more beneficial to be a listed company and the current political environment as reasons for a potential upswing in UK company fortunes in the second half of 2023.

I must admit that I fall into the former camp. Like many private investors right now, I read headlines about UK market recovery with a heavy pinch of scepticism. I’m not saying that I dislike UK companies, there are many fantastic businesses on AIM and in the FTSE. My problem is that I am currently struggling to find many British businesses which look like they will make fantastic investments.

I have a quality investment mindset - I like to hunt for stocks that are leaders in their market, with an operating model which can drive reliable earnings and impressive returns to their shareholders over the long term. The trouble is that right now any business which fits that profile comes with an exorbitant valuation. And in economically turbulent times, it feels slightly foolhardy to be buying really expensive stocks.

Of course, there is the old saying that the best time to buy is when there is blood in the streets. But shutting down my inner scepticism about the outlook for UK stocks in order to look for good value opportunities is proving immensely challenging. Identifying stocks which tick all the boxes for what makes a good investment currently feels almost impossible.

But don’t despair - a poor environment for picking individual stocks is not necessarily a poor environment for building a portfolio. And this is where this week’s topic - QVM investing - comes in.

In this article, Ed described the process of screening the market for stocks which have enough individual positive traits that they can together create a perfect portfolio. Take any one constituent of that portfolio on its own and it would have a fault, but as part of the collective, these stocks can create something special.

Now this investment approach is not something that I had really considered before joining Stockopedia. I had used screens to whittle down my investment universe before, but had never used them to build an entire portfolio. The method is also helpful for overcoming the demons of behavioural finance. That inner voice which is telling me that the UK market starved of investment opportunities right now doesn’t apply when you build your portfolio solely with stocks that the screen has picked for you.

It can also be a wonderful time saver. Portfolio construction in this way doesn’t require in-depth analysis of each individual stock. It simply requires a few hours every year to buy the companies which emerge as the top ranked from your screen (and sell the ones that are no longer top ranked).

But portfolio construction doesn’t have to purely discretionary or purely systematic. Using the data of the former to help complement the qualitative analysis of the latter can be an excellent way to identify companies.

Read more: Core QVM - the strategy for the rational investor