More momentum outperformance

The FTSE 100 index's performance over the period has been a fairly unexciting 2.6 per cent rise, but the long portfolio stormed ahead by 9.1 per cent. That result actually puts the portfolio into the top quarter of the 25 portfolios I’ve monitored since mid 2007 based on outperformance of the index (see bar chart).

Source: IC, S&P CapitalIQ

The short portfolio, which is meant to underperform the market, was less of a success as it actually outperformed with a 4.25 per cent rise. The key contributors to the outperformance were shares in precious metal miners, which have recently bounced back strongly as investors have pushed up the price of gold and silver in their hunt for safe havens. Two precious-metal miners (Fresnillo and Polymetal International) are to be found in this quarter's long portfolio, which is laid out in detail below.

Source: IC, S&P CapitalIQ, Datastream

THE LONGS*

ITV

Half-year results in late July underlined ITV's (ITV) success in building up its ITV Studios production business through internal investment and bolt-on acquisitions. Production accounted for 30 per cent of first-half revenues and 22 per cent of cash profit following a 26 per cent rise to £63m. The group’s productions are proving to be increasingly big hits overseas, too. It is now one of the top five independent producers in the US. All this adds up to a reduction in the group’s reliance on advertising, which accounted for 57 per cent of first-half revenue. That's considered a good thing given the cyclical, and currently depressed, nature of the advertising market. That said, there are hopes that improving economic prospects in the UK and the enduring fondness for traditional TV broadcasts among the viewing public means ad revenues could soon pick up.

Last IC view: Buy, 165p, 31 July 2013

Lloyds Banking Group

Lloyds' (LLOY) shares continue to benefit from the banking sector's improving recovery prospects. The shares made it into the previous quarter's momentum portfolio too, as the market warmed to signs that the group was overcoming many of its legacy issues. First-half results last month added credence to investors' hopes by reporting a significant - 43 per cent - drop in impairment charges and an impressive hike in profits. Lloyds looks like it is getting to grip with its problems in Ireland, too, and it has also benefited from the sale of its St James' Place asset management business. The strengthening of the group's capital base reported at the half-year stage was very reassuring. The prospects of the reprivatisation of the government's stake in the bank and a potential return to the dividend list also loom.

Last IC view: Hold, 73p, 1 August 2013

Melrose Industries

Engineering-company turnaround specialist Melrose (MRO) has been exciting the market with the progress being made by last summer's £1.5bn acquisition of German metering business Elster. Last month the group announced that Elster had hit its 16 per cent margin target in one year rather than the three years it had originally targeted. And there appears to be plenty more left to go for. Meanwhile Melrose is making good progress selling older investments having recently offloaded its Truth and Marelli businesses for £312m, which was four times what it paid for them. There are also hopes of a return of capital should Melrose sell its Crosby business which broker Investec thinks could fetch £580m. Meanwhile Killik & Co calculates that the company has now created £2bn in equity value over the past 10 years, which is equivalent to an average annual return of 20 per cent over the period.

Last IC view: Hold, 295p, 29 August 2013

London Stock Exchange

London Stock Exchange (LSE) is making its first entry into the momentum portfolio following its promotion to the FTSE 100 in March. We can only hope it does better than the stock it was promoted alongside, easyJet, which after making it into last quarter's portfolio became the worst performing of the 10 stocks to 5 September, dropping 1.8 per cent. The LSE's shares have benefited from the company’s strategy of diversifying its revenue streams which should underpin future growth. And despite a poor performance from the company’s treasury business in the first quarter brokers made modest upgrades due to higher-quality operations doing better. Broker Numis points out, though, that the shares are now trading at a premium to the sector and it only expects 19 per cent earnings growth over the next three years. But, if nothing else, perennial consolidation rumours have the potential to buoy the share price.

Last IC view: Hold, 1,411p, 15 May 2013

Polymetal International

In common with Fresnillo (see below), recent share price movements in Polymetal International (POLY) have been all about the price of the yellow metal it digs for. The Russia and Kazakhstan-focused gold miner recently released an abysmal set of half-year results, which emphasised the point that its shares are effectively a geared play on gold. Despite a rise production of 11 per cent, the devastating impact of the gold price fall was exaggerated by a big increase in costs. The company was also forced to take a $305m impairment charge against its assets. Still, with gold recently bouncing back, the shares are in the ascendant once more, making them a risky addition to this quarter's portfolio.

Last IC view: Sell, 691p, 28 August 2013

Aviva

Following painful news earlier this year that life assurance giant Aviva (AV.) was cutting its dividend, the recent strong performance of the shares seems to be based on relief that the company may now be getting a grip. Iinterim results last month sent the shares up 7 per cent in one day. While trading was not very inspiring, the market's view seems to be that the company's new chief executive, Mark Wilson, is doing the right things. Indeed, a substantial cut in costs led to a 5 per cent boost to operating profits and analysts were also very heartened to see a substantial reduction in the high intercompany debt levels. Sentiment towards the company has also been helped by disposals, most notable of which was the sale of the US business.

Last IC view: Hold, 396p, 8 August 2013

Vodafone

Mobile phone company Vodafone (VOD) was the Investor's Chronicle's 2013 income tip of the year and it looks set to deliver on this front with gusto. The main event for the group in the quarter has been speculation that it was set to sell its 45 per cent stake in US joint venture Verizon Wireless followed by confirmation that the deal would be done, bagging it $130bn (£84bn), much of which (£54bn) will be returned to shareholders. The sale will also help provide the group with fire power to continue to extend its geographic spread and the range of services that it offers its customers, such as internet and TV. The company has earmarked £6bn to invest in growth over the next three years in what has been named Project Spring. News on strategy detail and strategy development are likely to be the main drivers of the shares now following such an exciting period.

Last IC view: Hold, 205p, 4 September 2013

Shire

Shares in pharmaceutical company Shire (SHP) have been bounding back as actions taken by the company's new chief executive, Flemming Ørnskov, start to alleviate fears about a lull in the group's growth rate. Following an encouraging first half the company now expects double-digit growth this year compared with the disappointing mid-to-high single digits it had previously guided analysts towards. The interim numbers were hit by a number of one-off charges related to the restructuring work that the new boss has undertaken. The results also contained encouraging signs that the group’s attention deficit drugs are holding up well against increased generic competition and the company now has nine drugs in late-stage trials.

Last IC view: Buy, 2,288p, 25 July 2013

Fresnillo

Mexican gold and silver miner Fresnillo (FRES) has been riding the upsurge in precious metal prices as investors once again scramble for safe havens. The sensitivity of the business to selling prices was abundantly clear in recent interim results, which in fact did not actually reflect the full pain of the metal price falls. The company slashed its half-year dividend by 68 per cent after earnings plummeted 61 per cent. Management hopes to mitigate some of the decline by cutting costs but there may be limits to what it can do on this front. But costs are already low compared with rivals, which has shielded the company from the worst of the sector’s write downs. And as long as precious metal prices continue to be regarded as being on an upward trajectory, the shares should benefit.

Last IC view: Hold, 925p, 7 August 2013

Resolution

Life assurance company Resolution (RSL) has suffered in the past from governance issues and investor uncertainty about its strategy, but more recently the business appears to be making good progress. Last month the group reported a 17 per cent first-half profit increase helped by lower investment in new business. It also beat expectations by announcing that its sustainable free surplus, a key driver of cash flow, was up 23 per cent to £143m. This progress was particularly significant as management has said it will consider upping the handsome dividend the shares pay - equivalent to a 6.5 per cent yield - once sustainable cash generation reaches £400m.

Last IC view: Buy,328p, 13 August 2013

THE SHORTS*

*Due to the timing of publication, stock selection is based on a performance period of 15 June 2013 to 5 Sep 2013. In future updates this will be adjusted to account for the official period end date of 15 Sep 2013 which means performance for the period will differ from the numbers reported in this article and the Long and Short portfolio constituents may change.