If you followed any of our eight 2015 Tips of the Year when they were published on 9 January, you should now be comfortably outperforming the FTSE All-Share. Indeed, of our eight tips the 'worst' is showing a 10.3 per cent first-half total return, which compares with 2.9 per cent from the FTSE All-Share. Overall, the eight tips are showing a total return of 17.5 per cent, which represents a 14.1 per cent outperformance of the index. So despite a very uncertain outlook for the second half, our Tips of the Year are in a strong position to clock up a fifth consecutive year of market outperformance.
| Name | TIDM | Tip Type | Total Return to 30/06/2015 |
|---|---|---|---|
| Persimmon | PSN | Income | 35.6% |
| Fyffes | FFYL | Takeover | 19.9% |
| Veolia* | FR:VIE | Overseas | 18.7% |
| Record | REC | Contrarian | 17.5% |
| Hill & Smith | HILS | Old Reliable | 14.5% |
| Barclays | BARC | Recovery | 11.9% |
| St Modwen | SMP | Growth | 11.6% |
| Pace | PIC | Value | 10.3% |
| Tips of the Year 2015 | - | - | 17.5% |
| FTSE All-Share | - | - | 2.9% |
| Outperformance | - | - | 14.1% |
Source: Thomson Datastream. *Sterling adjusted return, constant currency return 31 per cent
Our first-half Tips of the Year performance also looks good compared with the performance of fund managers, with only one of the 461 UK-equity-focused unit trusts listed on Trustnet doing better (18.3 per cent from the MFM Techinvest Special Situations fund). The cumulative long-term performance of the Tips of the Year is also encouraging. The 3-year total return stands at 81.4 per cent compared with 36.9 per cent from the FTSE All-Share, while over five years (which includes our last year of market underperformance in 2010 during which all the underperformance came in the second half) the Tips of the Year have returned 81.4 per cent compared with 66.4 per cent from the All-Share.
The best performing of this year's tips at the half-year stage is housebuilder Persimmon (PSN) (see table). This seems somewhat ironic as the day we bought our tips out, the shares took a 5 per cent hit on the back of a negative sector note from broker Jefferies. Hopefully that means some readers will have taken advantage of the dip and have enjoyed an even better run from Persimmon than the return reported in our table, which is based on the closing price the day before the tips were published.
Concerns about housebuilders are understandable given that shares in the sector are currently highly rated against net assets by historical standards. The sector is also highly cyclical and sensitive to interest rates. However, the Conservative general election majority win has proved a major boost to sentiment towards Persimmon and its peers, as the market now expects the government's housebuyer incentives to stay in place. Signs of rising land prices will be something to look out for in the second half as this could put pressure on margins, but in the main Persimmon continues to look very well placed.
The extremely strong performance of Persimmon seems rather at odds with the performance of its joint venture partner and our Growth Tip of the Year St Modwen (SMP). Property developer St Modwen has not done badly by any means (none of the tips have) delivering an 11.6 per cent total return over the past six months. However, its shares' performance has been somewhat lacklustre since it announced a major planning win for its New Covent Garden Market development scheme. We continue to see plenty of potential for the group to create significant value from its exciting development pipeline over the coming few years and think there's very good potential for these shares in the second half.
Set-top box maker Pace (PIC) could also offer some strong upside in the second half should the bid tabled in April from US rival Arris progress. Pace's shares sit 11 per cent below the current value of the cash-and-paper. The scepticism about the deal implied by the discount to the offer price is in a large part down to the fact that there is a tax-inversion angle to the deal for Arris. The US government is trying to stop companies doing such deals and there are also other regulatory hurdles in that the enlarged group would be very dominant in its market. On the trading front, Pace, which was our Value Tip of the Year, has continued to impress despite the perceived threat to its business from internet-streaming companies, such as Netflix.
In what is proving a busy year for mergers and acquisitions, it is nice to have had an approach for one of our Tips of the Year. However, no deal has yet been forthcoming for our Takeover Tip of the Year itself, Fyffes (FFY). That said, the absence of bid interest has not held shares in the banana and pineapple company back. Indeed, the shares soared last month when the group significantly increased its profits guidance for the year on the back of strong trading.
One of the major themes of the first half has been currency movements, especially in Europe. Two of our tips are clearly tied into this theme. One is our International Tip of the Year, Veolia (FR:VIE), which is benefiting from investor enthusiasm for European markets based on the European Central Bank's (ECB) quantitative easing (QE) programme. The weakness of the euro has produced a noteworthy headwind for the stock, though. Indeed, the total return on the shares measured in euros stands at 31.0 per cent compared with the sterling-adjusted return seen in our table of 18.7 per cent. But is has been the recovery story playing out at Veolia rather than European monetary policy that has been chiefly responsible for the soaring share price. The company issued a strong firs- quarter trading update and there are grounds to hope that brokers will start upgrading their forecasts in the second half if trading continues in the same vein. The company is also due to issue a strategy update in November, which could prove a share price catalyst.
The other stock with significant exposure to currency movements is currency manager Record (REC). Its business attempts to protect its clients from exchange rate movements as well as to profit from them. Recent first-half results from the company reinforced our view that currency market volatility and diverging international monetary policies are playing into the company's hands by boosting demand for its services. It could be an exciting second half for the group if its discussions with potential new clients start turning into new business wins.
Our Old Reliable Tip of the Year, Hill & Smith (HILS), isn't your classic 'reliable' stock. Indeed, we were put off tipping a classic old-reliable type company because valuations in this part of the market looked 'peaky' based on historic ranges. While valuations of such stocks have continued to rise, it is interesting to note that the market is showing signs of increased nervousness and a number of commentators have started to talk about the danger of the 'bondification' of this type of equity. No one could accuse Hill & Smith's rating of looking particularly frothy, though. The infrastructure equipment and galvanising company took our Old Reliable spot despite some cyclical characteristics because its shares' rating looked low and all its end markets looked strong. So far, backing the stock has paid off and there could be more strong trading news in the second half.
When we tipped Barclays (BARC) as our Recovery Tip of the Year, it was with the grim acceptance that there was likely to be more news of fines and past wrongdoings. While that has indeed proved to be the case, the market has also been focusing on the recovery story that attracted us to the stock in the first place, and we believe should continue to play out for the rest of the year.
Going into the second half of 2015, there are a number of big uncertainties facing investors. The most pertinent of these at the time of writing is the prospect of the Greek bailout referendum on 5 July. The slowdown in China is another major concern as is the potential for a sharp downturn in bond markets, which could be exacerbated by illiquidity. However, moving into the second half, we remain optimistic about the outlook for all eight of our Tips of the Year given the strong business drivers in place at each of them.
