Less than a year after reviving our quarterly No-Thought portfolio, I am starting to lose patience with it. The six-part screen, which has been in service in some form since 2004, again lagged its benchmark in the first three months of the year. On its own, short-term underperformance is not a reason to get fed up. But it is the nature of the underperformance, which I’m increasingly convinced is due to its odd construction, that irks me. Whether the portfolio needs to be tweaked, reinvented or abandoned, I haven’t yet decided.
What then, is going wrong? In a word, focus. Although the No-Thought comprises six separate 20-stock screens – longs on the FTSE 350 constituents with the best one-year momentum, dividend yields, lowest five-year volatility and largest market values, and shorts on the worst one-year performers and most volatile – its long-time steward tended to see the whole portfolio as a shorthand for momentum investing.
Even on that score, I am not sure it does the job. The ongoing success of our quarterly Momentum Classics screen (which draws its selections from the FTSE 100) is, I believe, down to its focus on three-month share price appreciation. By extending the momentum window to one year, the No-Thought increases the risk of picking stocks whose rallies peaked months ago (and vice versa for the negative momentum shorts).