The idea behind our annual Bargain Shares Portfolio is very simple. It’s to invest in companies where the true worth of the assets is not reflected in the share price, usually for some temporary reason, but where we can reasonably expect that it will be in due course.
Our portfolios are based on the investment ideas of Benjamin Graham (see box ‘Rules of Engagement’) and they have beaten the FTSE All-Share index in 13 out of the 16 years in which we have run them. During that time, they’ve generated an average return of 22.7 per cent in the first 12-month holding period compared with an average increase of 4 per cent for the FTSE All-Share.
That’s not to say this investment strategy is a one-way bet. Investing rarely is. Indeed, last year’s motley crew of bargain shares failed to deliver, mainly due to the fact that the portfolio was choc full of small-cap companies, the segment of the market that has consistently delivered bumper gains over the years. However, small-caps and Aim-traded shares, in particular, suffered from extreme risk aversion and a major sell-off last year: the FTSE Aim index has declined by over 19 per cent in the past 12 months. But as the experience of 2011 highlights, another year when small-caps underperformed the general market, the resolute nature of the balance sheets of the companies selected in our Bargain Shares Portfolios means that they will be around to fight another day. Indeed, if you are still holding the 2011 portfolio you are now showing a total return of 51 per cent, reversing the painful 18 per cent loss in the first 12-month holding period.