Value Portfolio Sees Some Changes

Published in Investing on 29 March 2012

A quarterly update on the value portfolio.

Here's my quarterly update on the value portfolio (VP). There have been some changes to the portfolio since my last review in January as mentioned on the Value Board at the time of the transactions, which I'll repeat here for anyone who has not seen that.

 Cost £Value £
Aviva (LSE: AV)56,25748,032
BP (LSE: BP)7,5216,643
Molins (LSE: MLIN)2,2272,786
RBS (LSE: RBS)19,27916,197
Sub-total 73,658
Cash 0
Current value 73,658
Originally invested 60,000
Gain/(Loss) since May 2009 13,658


Buy big value, sell small value

Persimmon (LSE: PSN) was sold in February for £8,145, delivering a profit of £2,838, which is 53% over its cost price of £5,307 after all expenses plus whatever dividends it paid over the period since purchase in August 2010. Not a bad trade.

My principal reason to dump the share was because it had risen above net tangible book value. Since that was the main value reason to buy it, it follows that it was also my main value reason to sell it, because that it is the way to play value investing. It has nothing to do with cost or how much profit or loss is being made. Instead, the idea is to buy at big value and then sell at small value, whatever has happened to the price. The exact degree of reduction in value that signals a sale will vary due to the circumstances of each share and the opinion of the investor.

But at least one Fool criticised my decision to sell Persimmon on the ludicrous basis that the share shot up a little later when it announced a weird but generous new future dividend policy. As if I could have known in advance that this would happen. Anyway, the market liked it and the share rose strongly after I sold. But I sold when the value was blown, that was the correct view and therefore the trade had to be terminated.

Backing the bank

I used those proceeds plus the bit of cash available to buy immediately a further tranche of RBS, investing £8,268 which bought me 30,999 shares at 26.5p plus expenses. This brings the total holding in RBS to 57,558 shares at a new average price of about 33.5p. That new average is considerably lower than the cost of the first tranche bought in June 2011 when the price was much higher.

The reasoning behind my increasing the RBS holding is the fact that the share price, having fallen a lot since my earlier purchase, remains well under the net tangible book value figure. Banks always have high debt, this one makes losses and there are no dividends, so my value case rests wholly on assets really. But I see nothing wrong with a pure asset value play.

But more than that, the very interesting fact is that the company actually quotes the NTBV per share in the accounts -- and somewhere near the front too, not buried. That is almost unheard of. Those companies that do quote book value per share are normally those in asset-based businesses, like property or housebuilders, and so on -- not banks or normal trading concerns. But those that do this will nearly always show the total net book value per share which therefore includes intangibles.

So for RBS to publicise its NTBV per share is extremely unusual and suggests strongly that they see it as one measure of performance. And that makes it an even more encouraging value feature than it already is, bearing in mind that I see P/TBV as the king of the value ratios.

Bottom line

Overall, the portfolio at £73,658 is down £2,824 from the £76,482 recorded in January. The main culprit is Aviva, worth about £4,300 less than then. BP is little changed, but Molins has risen strongly, though because the holding is small, the gain there was only about £600. Another gain of around £500 has ensued in my most recent tranche of RBS, as mentioned above.

The current bottom line is a gain of £13,658 or 22.8% on the £60,000 original capital. That's not great right now but this isn't the end, just a snapshot at this moment. The portfolio is subject to substantial fluctuation due principally to my decision to overweight it so much in favour of Aviva. A decision that at present doesn't look too good in view of the fall in price, though it does produce handsome amounts of dividend cash. More important than the fall in price, however, is that in my view Aviva continues to offer very good value, whatever the market thinks.

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More from Stephen Bland:

> Stephen owns shares in Aviva, BP and Persimmon.

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SteveMarkus 29 Mar 2012 , 3:55pm

Aviva is now ex-dividend so the dividend will go some way to making up for the reduction in value in the portfolio. In fact I think the dividend must be about £2200.


QuantumDealer 29 Mar 2012 , 4:19pm

This portfolio is a joke and should be avoided at all cost. More than 80% in insurance / banking stocks. Overly concentrated by stock and sector. The 'beta' of the portfolio must also be around 1.5 given that Aviva alone is 1.68...but it could be much higher given that RBS features heavily in this portfolio too.

This isn't a value portfolio...more like a UK financial special sits. portfolio...if you want that you should invest in one with global exposure, at least.

No place for IMT, AZN, GSK, MTO, ULVR, RDSB, VOD? Or even Abbey Protection (ABB.L) for a low-beta specialist insurance name?

Glad it isn't my portfolio sleep at nights with this baby!

CunningCliff 29 Mar 2012 , 5:00pm

Hi QuantumDealer,

"This portfolio is a joke and should be avoided at all cost."

You don't pull your punches, do you?

You're entitled to your opinion, but that's all it is: an opinion. Sure, the value portfolio is concentrated in AV and RBS, but Stephen sees these as 'deep value' plays worth taking large positions in.

And since when did value investors give a hoot about 'beta'? For us, above-average volatility often allows us to buy bargains from Mr Market!


PS: For the record, and from a value/dividends perspective, I like almost all of the other stocks you recommended (IMT, AZN, GSK, ULVR, RDSB, VOD).

QuantumDealer 29 Mar 2012 , 6:34pm

The market's opinion on RBS & Aviva has been pretty damning for a while now, don't you think?

'Deep value', getting deeper by the day...make sure you wear thick gloves to catch all the falling knives.

Beta is important whatever portfolio you are managing. To igore beta puts you in positions like the portfolio above...a disaster.

...and finally, why should I pull any punches? This site regularly touts diversification of any portfolio by stock, industry, sector, asset class, geographical region etc. etc. but when it comes to this guy he believes that the best 2 return generators in the entire market on a risk-adjusted return basis is Aviva and RBS? The man needs a lobotomy!

longtermbuynhold 29 Mar 2012 , 9:29pm

Hello QuantumDealer:

"This site regularly touts diversification of any portfolio by stock, industry, sector, asset class, geographical region etc. etc."

Whilst that may be a good idea for a defensive type of investor and one that I on the whole follow (diversification etc adding to the margin of safety) I believe that TMF is a wider tent.

Stephen is writing about a particular approach in this series which does not consider diversification but hones in on value. I think your comments are a little unfair. Stephen advocates another approach elsewhere ( HYP ) which is equally valid but not relevant to the remit he has here on TMF. He writes about value investing . In its extreme form you may put everything into one stock if you want to. He gives you his views on value stocks and you take it or leave it. Sometimes I do , sometimes I dont!


goodlifer 29 Mar 2012 , 9:31pm


What have you got against a nice high beta?
If Charlie Munger is to be believed, measuring risk by volatility is nuts, and it looks like a glimpse of the obvious to me.

Why do you think we're both wrong?

MAACPRIME 29 Mar 2012 , 9:59pm

I'm not sure I would call RBS a value play unless I knew a lot more about the quality of their assets. Maybe they advertise NTBV per share because all their performance ratios look pretty poor.

I was an Aviva holder for a good while and sold, coming out about even after taking dividends into account. The company's got too many headwinds to contend with for value to out for a good long while yet. Income-seekers are probably keeping the share price up higher than is warranted by its prospects, same as Astra Zeneca.

BigJC1 29 Mar 2012 , 10:58pm

At some point the value of UK banks must rebound. The nation is still addicted to debt, the government has shown it will not let a major bank fail, all of us need to use banking services and RBS have an enormous market share and valuable customer base.

QuantumDealer may not sleep nights but sometimes sleepy portfolios only deliver sleepy returns. Going against the flow in search of value is not always wrong, if timed right the returns can be good. My Barclays shares are already up 25%, they bounce about a bit but my expectation is that the gain will smooth and accelerate. No doubt at that point all the sleepers will wake up and try to grab some value.

UncleEbenezer 30 Mar 2012 , 1:34am

22.8% since May 2009?

FTSE 100 is up by about twice that much over the same period. 'Nuff said?

QuantumDealer 30 Mar 2012 , 12:10pm

BIGJC1 - "At some point the value of UK banks must rebound." - tell that to Northern Rock, Bear Stearns, Merrill Lynch, Lehman Bros., Bank of America, Citigroup, Fortis, Lloyds shareholders....granted not all went under but the remainder came very, very close and still could to be fair.

Goodlifer - Munger talks about VaR as a nonsensical risk management tool, not beta. And I agree with him on that point. However, he only buys into banks when HE can structure the deal, like the high interest rate loans with upside linkage through call warrants which he negotiated with Goldman Sachs amongst others. His equity exposure to financials is extremely low so if you cannot tempt the worlds longest-term investors to believe they can extract real value from the financials trade then wy do you think you are correct again?! Steep price declines DOES NOT EQUAL VALUE - sometimes it just means steep price declines. And what do I have against beta? Nothing if the market goes up, but wait for a correction and watch what happens whilst you are holding this portfolio...I bet his wife doesn't know about how volatile this portfolio is, as a starter!

jaizan 30 Mar 2012 , 9:25pm

This should be renamed as the "Highly Speculative Value Portfolio".

goodlifer 31 Mar 2012 , 5:08pm

Thank you, QuantumDealer

I have to admit that I thought beta was an assessment of volatility.
What's the difference between beta and VaR?

Why should Mrs Bland be worried if the paper value of her husband's portfolio goes down with the market - it happens to us all! - provided of course (a) its actual value doesn't, and (b) Mr Bland's not about to get out of the market?

goodlifer 01 Apr 2012 , 8:37am


Why do you think this portfolio is highly speculative?

alarmbells 03 Apr 2012 , 8:15am

I'm never sure about the "sell when the value is out" rule.

As well as value, momentum strategies do well. Why sell a winning share.

I agree it may have reached its "full value" - so why not place a tight trailing stop loss on it so as to capture any further upside momentum and not sacrifice much gain if the value assessment was correct.

RobinnBanks 06 Apr 2012 , 7:27pm

This is a Virtual Portfolio - it does not exist - click on the link at the top of the page.
I fell for it too: I'm holding Aviva for the dividend and the recovery - thanks Stephen! If you have any more ideas, you can stick them!

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