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Spring storms have been rolling through Southern Ontario and chasing away the last of the winter snow. As summer approaches, I’m looking forward to enjoying sunny skies and eating perch at the beach in Port Dover, Ont. The thought of fried fish prompted me to revisit the Perch portfolio, which enjoys savoury long-term returns.

The Perch portfolio gained an average of 14.1 per cent annually from the end of 1999 through to the end of March, 2023. In comparison, the S&P/TSX Composite Index climbed by an average of 6.6 per cent annually over the same period. (All of the returns herein come from Bloomberg. They include dividend reinvestment but not fund fees, taxes, commissions, or other trading frictions.)

The portfolio starts with the largest 300 stocks on the Toronto Stock Exchange based on market capitalization (price per share times shares outstanding). It then removes the 50 largest firms and keeps the remaining 250 smaller stocks from the original 300. Today that means picking stocks with market capitalizations between about $16.5-billion and $570-million.

The portfolio goes on to focus on the dividend payers from the remaining pool of 250 stocks and specifically the half of dividend payers with the lowest volatility over the prior 260 days. (Here I made a slight alteration to the portfolio’s original formulation, which used volatility over the prior year instead.)

The Perch portfolio picks the 20 stocks with the lowest price-to-earnings ratios from the dividend-paying low-volatility group, holds an equal-dollar amount of each stock, and rebalances monthly. The accompanying graph highlights its long-term returns.

Investors could obtain similarly good results by rebalancing annually instead of monthly. The portfolio gained an average of 13.7 per cent annually when rebalanced once a year over the 23 years to the end of 2022 while the market index climbed by an average of 6.4 per cent annually over the same period.

Opting for annual rebalancing would have cut down on trading costs because an average of roughly 11 stocks (of the 20 in the portfolio) were replaced each year whereas three stocks were replaced each month when the portfolio was rebalanced monthly.

Alas, the Perch portfolio didn’t fare well over the past few years. It got whacked in the COVID-19 crash of 2020 and it floundered as the Bank of Canada boosted interest rates in the face of inflation in 2022.

The second graph shows the periods when the portfolio, and the market index, fell from their prior highs.

Times were good for the Perch portfolio in the early 2000s when it avoided the fallout of the internet bubble while the market index suffered. It also fared better than the market in the financial crisis of 2008.

However, during the COVID crash of 2020, the portfolio sank 34 per cent while the market dropped 22 per cent (based on monthly data). It also flopped last fall when it gave up 26 per cent versus the market’s slide of 14 per cent.

While the economic swings of recent years have not been kind to the smaller stocks of the Perch portfolio, I hope it returns to form. With a little luck, it might even pay for a fish-filled summer vacation in a few years.

You can find the stocks in the Perch portfolio via this link, which also provides updates to many of the other portfolios I track for the Globe.

Norman Rothery, PhD, CFA, is the founder of StingyInvestor.com.

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