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How My Quality Portfolio Stacks Up Against The Chaos In The FTSE 100

To say that the last few months has seen a spot of volatility in the FTSE 100 would be a contender for understatement of the year. The main index has well and truly fallen from the 7,000+ highs seen in the first half of the year to a less impressive 6,300 (as I type).

Indeed, we’ve seen sub-6,000 on several occasions as investors worry about a depressed oil price and a hard landing in China, not to mention the impact of these factors on global growth.

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When I wrote about my quality portfolio back in July, I had no idea of the pain that was about to unfold on investors as the market took a turn for the worse. However, when I selected the basket of 10 shares that qualified for the screen, I was quite clear that I was in it for the long term.

This screen tries to work out whether the qualifying stocks are reasonably valued for the expected growth in earnings. The strategy forecast:

  • Sustainable earnings growth — the higher that growth rate is, the more likely it is that the company has a durable competitive advantage; and
  • Low debt and a growing earnings yieldreturn on equity and return on capital employed.

The thesis being that this should highlight businesses that show consistently high returns — not a flash in the pan

Being a portfolio for beginners, I decided not to go into vast amounts of research on each share and let the screen do the work. To date, the basket of shares has risen by 0.68% (dividends not included) while the FTSE 100 has fallen by 2.53% (from 8/7/15 – close of play 6/10/15) – that’s outperformance of 3.21%!

The laggards

As with everything in the stock market, nothing moves in a straight line. As will be the case with most investors’ portfolios, there will be stocks with exposure to sectors under pressure — and my quality portfolio has been no exception, with poor performances from both Elementis (LSE: ELM) and Rotork (LSE: ROR), both of whom have a fair exposure to the ongoing troubles in the oil and gas sector.

While Elementis has a more diversified mix of markets to deal with, Rotork does not have these more defensive markets to fall back on. This resulted in management issuing a profit warning on 17 September after orders were delayed until 2016.

Interestingly, though, management have not been frightened off by the oil price weakness; indeed, they have been on the acquisition trail, with purchases of M&M International Srl — a subsidiary of Spirax-Sarco — and in a separate announcement, Roto Hammer Industries Inc and Servo Moteurs Service. It will be interesting to see how these purchases play out over time.

As the chart below depicts, we have also seen Shire, Brooks Macdonald and ITV all underperforming the index to varying degrees.

The winners

On the flip side, we have seen the other half of the portfolio outperform the main index, most notably Abcam (LSE: ABC), the producer and distributor of antibodies (plus 20%), and Avon Rubber (LSE: AVON), the UK-based design and engineering company (plus 23%).

The market reacted positively to results from Abcam in September and a trading update from Avon, advising that results would be significantly above market expectations for the year ending 30 September 2015.

Even retailers Dunelm and Next have managed to turn in a market-beating performance, though it will be interesting to see how trading has been following a rather wet August and a rather warm September.

Finally, Telecom Plus has recovered from its first-half profit warning, management soothing any fears investors had by advising that the company remained on track to meet market expectations for adjusted pre-tax profits of between £54m and £58m for the current financial year, and to deliver a 15% increase in the dividend to 46p per share.

In it for the long term

As we can see from a quick glance at the above chart, there are some sectors doing better than others. However, when I selected these shares, I was clear that these were to be long-term holdings. I won’t be considering a sale unless I start to see a deterioration in quality or key management leaving for pastures new – and I certainly won’t be trading based on what the FTSE 100 is doing.

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Dave Sullivan has no position in any shares mentioned. The Motley Fool UK has recommended Elementis and Rotork. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.