More recent evidence on the net current asset value method of investing

Yesterday’s newsletter displayed results from the 1950s of using the net current asset value, NCAV, method of investing published by the originator of the idea, Benjamin Graham. Today I want to take things further by displaying more up to date evidence.
A reminder of the NCAV criteria:

1. Current asset values are taken from the balance sheet (e.g. inventory, receivables and cash).  From this total are deducted all the liabilities. Long term asset values are usually ignored (counted as zero, with the possible exception of freehold and long leasehold property).  Usually, further deductions are made to reduce inventory and receivable values to give a conservative bias.

1. Companies passing the quantitative test are also assessed qualitatively for business prospects, managerial ability/integrity and business stability.

So, first today I want to present the evidence of the effectiveness of this method from an academic paper and secondly from my experience over the last decade – I include all the NCAV investment I’ve made (no cherry picking).
As a Professor it was my job to supervise PhD students and publish original research. One of the most interesting studies asked the question:  “If, over the period 1981 to 2000, you had bought a series of portfolios of shares whose prices are less than two-thirds the Net Current Asset Value would you have outperformed the market?”
We (Ying Xiao and I) imagined that we had gone back in time.  We searched the entire Official List each July (average of 1,109 companies).  If the ratio of NCAV to market capitalisation is greater than 1.5 we imagined buying.
We then ‘held’ the portfolios for five years, noting the month-by-month performance and compared it with the general market. The average number of companies fulfilling the criteria in a year was 23.
The average performance of the 20 portfolios is striking (see table): In the first year after portfolio formation the NCAV shares averaged a return of 31% which was almost 11% more than the market.
And it just got better and better the longer you held the shares (up to five years – which is as far as we took it).  This is good news for those of us looking to reduce transaction costs and delay tax payments on gains – just hold onto the shares.
After 5 years, on average, NCAV ‘investors’ had turned £10,000 to £35,402.
Average raw buy-and-hold returns
Months after portfolio formation                                    12               24             36              48           60
NCAV portfolio (20 formations averaged)                      31.19%        75.11%     126.27%   191.62%   254.02%
Market index return averaged over the same months      20.51%        45.98%       73.28%   104.97%   137.18%
(Source: Ying Xiao and Glen C. Arnold (2008) “Testing Benjamin Graham’s Net Current asset Value Strategy in London” Journal of Investing, Winter 2008, Vol 17, Number 4)
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There are many other tests in the paper, e.g. the NCAV investments are shown as less likely to be liquidated than the average share – over 5 years the liquidation rate is 2.6% compared with 4.2%.  I guess all those BS assets must be good for something.
Note this paper used a purely quantitative criterion for qualification for inclusion in the NCAV portfolios – only whether the share price is one-third or more below the NCAV.
In an academic paper we cannot test subject factors such as ‘prospects for the industry’ or ‘quality of management’ because these factors though vital, are subjective.  Thus we can improve the sophistication and outcomes by overlaying the mechanical NCAV criterion with judgment concerning the quality of the business. This is something I did when investment in NCAV shares over the last decade. The results are shown below.
My NCAV share selections in the decade after I gave up my chair to invest full-time
The 2013 Net Current Asset Value, NCAV, portfolio
 CompanyPurchase date Purchase price Divs to 31 Mar 2023 Price 31 Mar 2023        Return to 31.3.23
French Con.25.7.13                £0.3047                      zero                   Sold July 2015 £0.4378                44%
Caledonian T25.7.13               £0.70                         zero                    Sold April 2020 £1.391                99%
Fletcher King6.8.13                 £0.30                        14.25p                Sold June 2016 46p                     101%
Northamber22.8.13                £0.287                          1.6p                 Sold Oct 2016 £0.303                    11%
Titon5.9.13                             £0.379                         6.5p                   Sold May 2016 £1.06                   197%
Mallett   12.11.13                  £0.7682                        12.7p                 Sold Nov 2014 £0.60                      -5%
AVERAGE                                                                                                                                                 75%

The 2014 NCAV portfolio
CompanyPurchase date Purchase price Divs to 31 Mar 2023 Price 31 Mar 2023          Return to 31 Mar 2023
Holders Tech10.10.14 & 3.11.14 £0.47             1p                            Sold March 2017 £0.33                  -28%
Airea4.11.14 £0.1195                                          0.9p                        Sold Sept 2016 £0.309                   166%
Northamber17.11.14 £0.4265                              0.7p                       Sold Oct 2016 £0.303                       -27%
Caledonian T30.12.14 £1.39                               zero                        Sold April 2020 £1.391                       0
AVERAGE                                                                                                                                                  28%

​The 2015 NCAV portfolio
 CompanyPurchase date Purchase price Divs to 31 Mar 2023 Price 31 Mar 2023 Return to 31 Mar 2023
PV Crystalox15.1.15 £0.122 zero Sold Dec 2016 £0.237 94%
Arden Partners1.9.15 £0.422 1p Sold May 2018 £0.364 -11%
Northamber4.9.15 £0.443 0.4p Sold Dec 2016 £0.303 -31%
AVERAGE        17%The AGA holding was doubled 30 April 2015 at a price of £0.9466.
The 2017/18/19 NCAV portfolio
 Purchase date Purchase price Divs to 31 Mar 2023 Price 31 Mar 2023 Return to 31 Mar 2023
Caledonian Trust7.11.17 £1.23 zero Sold April 2020  £1.391 13%
J Smart30.1.19 £1.13 4.14p Sold Mar/Apr 2020 £1.101 1%
Northamber6.12.19 £0.504 0.3p Sold Mar 2020 £0.5717 14%
AVERAGE        9%More Caledonian Trust shares bought in February 2019 at £2.29.
More J Smart bought 30.4.19 at £1.16
The 2020/21 NCAV portfolio
 Purchase date Purchase price Divs to 31 Mar 2023 Price 31 Mar 2023 Return to 31 Mar 2023
McCarthy & Stone1.10.20 £0.718 0 Sold Dec 2020 118.5p 65%
Capital & Counties Properties6.11.20 £1.032 0 Sold 19 Aug 2021 £1.743 69%
J Smart18.3.21 & 24.3.21 £1.253 3.22p Sold 7 Feb 2022 £1.575 28%
Fletcher KingFeb20 – May21 £0.3265 0.5p Sold Sept21 – Feb22 £0.40 24%
Orchard Funding7.6.21 £0.568 6p £0.415 -16%
Caffyns22.6.21 £4.65 30p £5.25 19%
Highcroft22.7.21 £8.75 78p £9.10 13%
Town Centre Securities10.8.21 £1.426 1.75p Sold Feb22 £1.581 12%
AVERAGE        27%Bought more Orchard Funding 7.12.22 at 48p

​Professor Glen Arnold now offers a Managed Portfolio Service at Henry Spain Investment Services under which clients’ portfolios contain the same shares as his (write to [email protected])

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