QUALIPORT
How The Qualiport Has Improved Its Performance

By Maynard Paton (TMFMayn)
October 24, 2002

Marks & Spencer (LSE: MKS), Rentokil Initial (LSE: RTO), Unilever (LSE: ULVR), Dell Computer Corporation (Nasdaq: DELL), Misys (LSE: MSY), Independent Insurance, PizzaExpress (LSE: PIZ), Emap (LSE: EMA), Lloyds TSB (LLOY).

The connection? They were all founder members of the Qualiport.

Of those nine shares, three still remain in the portfolio. The other six were sold for a variety of reasons:

* Poor competitive advantage (M&S);
* Racy valuation (Dell, Misys);
* Poor cash flow, opaque business (Independent Insurance), and;
* Acquisitive nature, poor returns on capital (Rentokil, Unilever, Misys again)

At the time, many a critic expressed their disapproval of the sales. This post from DemonSlayer is a good example:

"So, Unilever has been dropped from the portfolio. You see, I find it hypocritical that companies like Rentokil Initial and Unilever get such tremendous recommendations as long-term buy and holds in TMF books like the UK Investment Guide, but are soon sold off. Boy, that book is getting outdated really fast. Anyone buying it now and reads it and then comes to the TMF website and sees that these stocks have been written off, will be disillusioned to say the least. So much for Foolish education!"

As a rebuttal, this article gives the portfolio's defence to the 'Obviously Great Investment' U-turn.

But what would have happened if the Qualiport had stuck to its original holdings? Would the portfolio have been better off had it remained passive? Let's see.

Go passive

The Qualiport sold its first share (for fundamental reasons) during May 1999 -- it was M&S. Here's the portfolio just before the sale:

Company            Number       Price        Value
                 of shares       (p)          (£)

PizzaExpress        245          945       2,315.25       
Emap                202        1,304       2,634.08       
Independent Ins     755          287       2,166.85       
Dell                 37       $34.40       1,542.79       
Rentokil            783          248       1,941.84       
Misys               347          531       1,842.57     
Unilever            298          547       1,630.06      
M & S               368          387       1,424.16
                                          15,497.60

Cash                                       1,729.59
Total                                     17,227.19

However, to judge correctly how this 'passive Qualiport' would have performed subsequently, Lloyds TSB must enter the equation. This is where things get tricky, as the Qualiport used part of the proceeds from the M&S disposal to buy the bank's shares in September 1999.

So let's assume M&S wasn't sold. In addition, let's assume the passive Qualiport's £1,729.59 cash balance, plus the £278.15 accumulated between May and September 1999 (from various dividends), giving £2,007.74, was all invested in Lloyds TSB (as opposed to the £2,723.20 that was in reality).

At the 755.5p buy price then, the passive Qualiport would have bought 265 Lloyds TSB shares in September 1999 (as opposed to the 356 acquired in reality).

Fast forward to 2002 and here's how the passive Qualiport would have stood last night:

Company         Number     Price     Value   Dividends     Total
               of shares    (p)       (£)    Accumulated    (£)
                                                 (£)

PizzaExpress      245       291      712.95     53.17      766.12
Emap              202       710    1,434.20    115.75    1,549.95
Independent Ins   755         0        0.00     79.65       79.65
Dell               74*   $27.41    1,310.31      0.00    1,310.31
Rentokil          783       212    1,659.96    119.17    1,779.13
Misys             347       197      683.59     51.98      735.57
Unilever          266**     598    1,590.68    106.69    1,697.37
M & S             289**     350      999.22    387.00    1,386.22
Lloyds TSB        265       559    1,481.35    247.78    1,729.13

Total                              9,872.26  1,161.18   11,033.44

(* Adjusted for 1-for-1 split)
(** Adjusted for capital restructure)

And so, would the passive Qualiport have performed better than an index tracker? Er, not quite:

Date            Amount      FTSE 100        Tracker value
                 (£)       TRI Index           (£)

26/05/99      15,497.60     2793.42          11,129.63      
29/09/99       2,007.74     2719.51           1,481.05

                                     Total:  12,610.68

(FTSE 100 TRI index 2006.10 at 23/10/02)

At yesterday's close, the passive Qualiport would have been worth £11,033.44. Had we shoved it all into an index tracker instead, the portfolio would have been worth £12,610.68.

So three years on, the portfolio was right in taking action on some of its original holdings. But did the Qualiport take the correct action and improve its performance? To be able judge that, we have to consider some additional cash injections.

Today's comparison

Now things get even trickier. Following the final 'founder member' purchase (of Lloyds TSB in September 1999), the portfolio subsequently added £6,000 to its coffers.

Judging how the passive Qualiport would have invested that £6,000 throws up all sorts of possibilities. So to keep things simple, let's say it was kept as cash in the bank -- a generous assumption given the stock market's performance since 1999! That would give the passive Qualiport a value of £17,033.44 (£11,033.44 + £6,000).

Now compare that to how the Qualiport stood last night:

Company                Number       Price       Value  
                     of shares       (p)         (£)   

PizzaExpress             644         291       1,874.04
Emap                     372         710       2,641.20
Lloyds TSB               510         559       2,850.90
Johnston Press         1,608         350       5,628.00
Carpetright              675         660       4,455.00
DFS Furniture            236         436.5     1,030.14
                                              18,479.28

Cash                                             337.91
Total                                         18,817.19 

Currently worth £18,817.19, the Qualiport's real life performance has -- three years on -- outrun its passive counterpart by about £1,800.

Conclusion

So what does all this prove?

So far at least, the Qualiport was right to sell the six initial holdings. (Granted, some disposal decisions (e.g. Independent Insurance) were better than others (e.g. Unilever)).

Had the Qualiport held on rigidly to the nine founder member shares, it would almost certainly be lagging behind an index tracker and the current real life portfolio.

The simple conclusion from this study is the Qualiport has improved its share selection over time. We've learnt from past mistakes.

We've learnt that successful long term investing must involve companies that, alongside many other characteristics, have a durable competitive advantage (unlike M&S), are easy to understand (unlike Independent Insurance), are not acquisition driven (unlike Misys) and are valued with a decent margin of safety (unlike Dell).

More: Whatever Happened To Those Obviously Great Investments?

The author owns shares in Carpetright, DFS Furniture, Johnston Press and PizzaExpress