What a year it's been to be invested in the shares of leading UK-focused companies. My Best of British screen, which focuses on high-quality FTSE 350 companies that derive most of their sales from the UK, has produced a 42 per cent total return compared with a negative 2 per cent from the index. What's more, the top five shares from the screen (classified as the shares with the highest three-month momentum) managed a staggering 52 per cent total return.
Best of British shares 12-month performance
| Name* | TIDM | Total return (7 Oct 2014 - 1 Oct 2015) |
|---|---|---|
| Restaurant Group | RTN | 7% |
| Howden Joinery | HWDN | 49% |
| JD Sports International | JD. | 122% |
| Ted Baker | TED | 63% |
| Next | NXT | 20% |
| Cranswick | CWK | 27% |
| WH Smith | SMWH | 50% |
| Dunelm | DNLM | 22% |
| Sky | SKY | 21% |
| Top five | - | 52% |
| Average | - | 42% |
| FTSE 350 | - | -2% |
*Table order based on highest-to-lowest three-month momentum at time of original screen
Source: Thomson Datastream
The strong run means the screen now boasts a cumulative total return of 129 per cent over the four years I have run it and 170 per cent for the top five shares. That compares with 36.5 per cent from the FTSE 350 over the same period. The screen has produced fairly consistent outperformance. While it did mildly underperform in the year to October 2014, every other year has been decent. However, readers wowed by last year's stellar numbers may want to bear in mind that lightning rarely strikes twice and reversion to mean is a very real factor at work in investing.
BEST OF BRITISH CUMULATIVE TOTAL RETURN
While most of my screens try to mimic a certain investment style - ie, income investing, growth, value, etc - a few are principally thematic, and the Best of British screen fits into this camp. The idea is that if Britain looks good from an investment perspective (originally I devised the screen as a contrarian bet against politicians' ludicrous comparisons between the UK and Greek economies), the screen should outperform. Given the economic concerns gripping Europe and emerging markets, the British economy has looked a good bet recently and, satisfyingly, the screen has done what it is supposed to do: outperformed. Another important factor in explaining the rampant outperformance of this screen is that the resources companies that have been responsible for much of the recent weakness in the FTSE 350 index sell internationally, so don't qualify for the screen.
What's more, while the screen may be first and foremost thematic, it does have a style slant, which is a bias towards 'quality' stocks. This has also benefited the screen over the past year as this type of stock has been performing strongly. A popular explanation for the outperformance of 'quality' stocks has been that fixed-income investors are sick of the low returns on offer in the bond market and have therefore ploughed money into reliable, quality shares that offer bond-like characteristics. Measures of quality and reliability used by the screen include its requirement for a low beta, a decent return on capital and a better-than-average earnings growth record.
This screen is also noteworthy in the fact that it pays no attention to valuation. This can be regarded as a purist's approach towards the hunt for 'quality'. This any-price-will-do approach has also paid off recently as the market has seemed relatively insensitive to the question of valuation when it comes to the market's highest-quality constituents. The screen uses share price momentum as a guide to stocks that the market has a favourable disposition towards. The full screening rules are:
■ At least three-quarters of revenue from UK. ■ Three-month share price momentum better than FTSE 350. ■ Return on equity of more than 10 per cent. ■ One-year beta of less than one. ■ Forecast EPS growth in this and the next financial year. ■ Better-than-average five-year compound annual growth rate (shorter periods used where a full five-year record is unavailable). ■ Net debt of less than 2.5 times cash profit. |
In total, 14 stocks passed all the screen's tests. As with previous years, I've highlighted the top five shares based on highest three-month momentum. Fundamentals relating to the stocks appear in the table below, along with details of the other Best of British shares.
TOP FIVE BEST OF BRITISH SHARES
