Interactive Investor

Shares for the future: how I would set up a new portfolio step by step

28th April 2023 13:54

by Richard Beddard from interactive investor

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Ever wondered how our columnist Richard Beddard runs his portfolio? Here, he reveals not just which shares he would select but how much he would invest in each of them.

Shares portfolio construction 600

This article is powered by a reader request, the most frequent question readers ask about the Share Sleuth portfolio, the model portfolio powered by my Decision Engine.

This time it is Paul, who has asked: “What would be interesting to know is which of the current stocks within the portfolio you would buy if you were starting this week.”

I invented the Decision Engine to automate trading so I could spend more of my time researching shares, and also to answer the question Paul and many other people have asked.

Before we reveal this month’s Decision Engine table, I will go through how I would set up a new portfolio step by step: not just which shares I would select but how much I would invest in each of them.

Scoring shares

A quick recap: I score shares and use the scores to rank the shares in my Decision Engine table. The latest table is at the end of this article.

The score also determines the ideal size of each holding in my Share Sleuth portfolio. The bigger the score, the bigger the ideal holding size.

The scores, and consequently the ideal holding sizes are in constant flux as share prices change. I can also change my view on shares when I re-score them once a year soon after each company has published its annual report. This too will impact the ideal holding size of each share.

If the actual holding size deviates enough from the ideal holding size, my Decision Engine prompts me to add more shares, or sell some of them, so that the portfolio generally holds bigger stakes in high-scoring shares and smaller stakes in low scoring shares.

Because the Decision Engine nudges me to trade shares in the Share Sleuth portfolio, the portfolio itself is a very rough approximation of what a new portfolio might look like. The next Share Sleuth portfolio update will be published on interactive investor in less than a week’s time.

Rolling a new portfolio is easy, but before I explain, a quick disclaimer: I am not advising you to do this. Only you can decide what you should do. I am showing how I use scores to ensure my portfolios are invested in what I think are the best long-term investments.

Roll your own portfolio

If I were starting again, I would put the highest-ranking shares in the Decision Engine. I would start with the share at the top of the list, Focusrite (LSE:TUNE), and invest the most money in it, and then invest progressively less until I had used up all my money.

I might take my time over this process. It took me a year to allocate all the money in the original Share Sleuth portfolio, which I was happy about, because putting all our money at risk in one go feels like a risky thing to do.

Me being me, I might also make some tweaks. Even though I try to keep you, the reader, up to date as my opinions shift, it is not possible to communicate every gut instinct or doubt. While I try hard to be rigorous, I am also a naturally exuberant fellow who occasionally overrides his own scores.

But I would be guided by the Decision Engine, and in particular the ideal holding size column in the Decision Engine table.

Normally we do not share this column when we publish the Decision Engine table because I prefer to keep the table simple, but we have included it this month (scroll to the bottom of the page to see).

The ideal holding size is calculated using the following formula: ideal holding size (% of total portfolio value) = score- (9-score)

So a score of 9 evaluates to an ideal size of 9% of the portfolio’s total value, a score of 8 evaluates to 7%, a score of 7 to 5%, a score of 6 to 3% and a score of 5 evaluates to 1%.

Assuming we allocate our funds starting at the top of this month’s Decision Engine table, we would run out of money after investing in share number 15, Anpario.

If a 15-share portfolio is too big or too small, we would need to use a different formula to achieve the desired result.

25 shares for the future

I re-score each share in the Decision Engine once a year, after the publication of the annual report.

Since the last update a month ago, Anpario (LSE:ANP), Porvair (LSE:PRV) and XP Power (LSE:XPP) have gone through the process. To see how I scored them, or any share, please click on the share’s name in the table below.

My to do list is overspilling because Bunzl (LSE:BNZL), Judges Scientific (LSE:JDG), Garmin (NYSE:GRMN)Howden Joinery Group (LSE:HWDN, Macfarlane Group (LSE:MACF), Next (LSE:NXT), and 4imprint Group (LSE:FOUR) have all published annual reports and are due to be updated.

Experience tells me shares that score 7 or more out of 9 are probably good value. This month there are 25 (last month there were 25 too). Shares that score 5 or 6 out of nine are probably fairly priced.

Shares marked with an asterisk score less than 5 out of 6 for Risks, Strategy and Fairness, the three forward looking categories of the five I score. These shares are more speculative.

The ihs% column shows the ideal size of each holding as a percentage of the total value of the portfolio, and the cmltve% column shows which shares we would own if we held each at its ideal size (note: we get to almost 100% allocation once we’ve bought number 15, as explained above).

These columns guide trades in the Share Sleuth portfolio and my own portfolio, and are not an inducement to trade.

0

Company

Description

Score

ih%

cmltve%

1

Focusrite

Designs recording equipment, loudspeakers, and instruments for musicians

9

9.0%

9.0%

2

Howden Joinery

Supplies kitchens to small builders

9

8.6%

17.6%

3

Dewhurst

Manufactures pushbuttons and other components for lifts and ATMs

8

7.0%

24.6%

4

RWS

Translates documents and localises software and content for businesses

8

7.0%

31.6%

5

Porvair

Manufactures filters and filtration systems for fluids and molten metals

8

6.9%

38.5%

6

James Latham

Imports and distributes timber and timber products

8

6.8%

45.3%

7

Churchill China

Manufactures tableware for restaurants and eateries

8

6.3%

51.6%

8

Next

Retails clothes and homewares

8

6.1%

57.8%

9

Goodwin

Casts and machines steel. Processes minerals for casting jewellery, tyres

7

5.9%

63.7%

10

Quartix

Supplies vehicle tracking systems to small fleets and insurers

7

5.8%

69.5%

11

Renishaw

Whiz bang manufacturer of automated machine tools and robots

7

5.7%

75.1%

12

FW Thorpe

Makes light fittings for commercial and public buildings, roads, and tunnels

7

5.6%

80.7%

13

Auto Trader

Online marketplace for motor vehicles

7

5.6%

86.4%

14

Garmin

Manufactures sports watches and instrumentation

7

5.2%

91.6%

15

Anpario*

Manufactures natural animal feed additives

7

5.0%

96.6%

16

XP Power*

Manufactures power adapters for industrial and healthcare equipment

7

5.0%

101.5%

17

Games Workshop

Manufactures/retails Warhammer models, licenses stories/characters

7

4.9%

106.4%

18

Macfarlane*

Distributor of protective packaging

7

4.9%

111.3%

19

Cohort*

Manufactures military technology, does research and consultancy

7

4.9%

116.2%

20

4Imprint

Sells promotional materials like branded mugs and tee shirts direct

7

4.8%

121.0%

21

Treatt

Sources, processes and develops flavours esp. for soft drinks

7

4.7%

125.7%

22

Victrex*

Manufactures PEEK, a tough, light and easy to manipulate polymer

7

4.6%

130.4%

23

Softcat

Sells hardware and software to businesses and the public sector

7

4.6%

135.0%

24

PZ Cussons

Manufactures personal care and beauty brands

7

4.0%

139.0%

25

Advanced Medical Solutions

Manufactures surgical adhesives, sutures, fixation devices and dressings

7

4.0%

143.0%

26

James Cropper

Manufactures specialist paper, packaging and high-tech materials

6

3.8%

146.8%

27

YouGov

Manufactures power adapters for industrial and healthcare equipment

6

3.8%

150.6%

28

Bunzl

Distributes essential everyday items consumed by organisations

6

3.7%

154.3%

29

Bloomsbury Publishing

Publishes books, and digital collections for academics and professionals

6

3.4%

157.8%

30

Hollywood Bowl

Operates tenpin bowling and indoor crazy golf centres

6

3.1%

160.9%

31

D4t4*

Develops and integrates Customer Data Platforms

6

3.0%

163.8%

32

Tristel

Manufactures disinfectants for simple medical instruments and surfaces

6

2.8%

166.6%

33

Marks Electrical

Online retailer of domestic appliances and TVs

6

2.7%

169.2%

34

Oxford Instruments

Manufacturer of scientific equipment for industry and academia

6

2.6%

171.9%

35

James Halstead*

Manufactures vinyl flooring for commercial and public spaces

6

2.5%

174.4%

36

Solid State

Manuf's rugged computers, battery packs, radios. Distributes electronics

5

2.0%

176.4%

37

Tracsis

Supplies software and services to the transport industry

5

1.8%

178.2%

38

Judges Scientific*

Acquires and operates small scientific instrument manufacturers

4

39

Jet2

Flies holidaymakers to Europe, sells package holidays

4

40

Hotel Chocolat*

Chocolate maker and retailer

4

Richard Beddard is a freelance contributor and not a direct employee of interactive investor.  

Richard owns shares in 29 of the shares in the Decision Engine. He weights his portfolios so that he owns more of the high-scoring shares and less or none of the lower-scoring ones.

More information about Richard’s investment philosophy and how he implements it.

Contact Richard Beddard by email: richard@beddard.net or on Twitter: @RichardBeddard

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

Disclosure

We use a combination of fundamental and technical analysis in forming our view as to the valuation and prospects of an investment. Where relevant we have set out those particular matters we think are important in the above article, but further detail can be found here.

Please note that our article on this investment should not be considered to be a regular publication.

Details of all recommendations issued by ii during the previous 12-month period can be found here.

ii adheres to a strict code of conduct.  Contributors may hold shares or have other interests in companies included in these portfolios, which could create a conflict of interests. Contributors intending to write about any financial instruments in which they have an interest are required to disclose such interest to ii and in the article itself. ii will at all times consider whether such interest impairs the objectivity of the recommendation.

In addition, individuals involved in the production of investment articles are subject to a personal account dealing restriction, which prevents them from placing a transaction in the specified instrument(s) for a period before and for five working days after such publication. This is to avoid personal interests conflicting with the interests of the recipients of those investment articles.

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