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Tips of the Year Review 2015

The IC's Tips of the Year delivered a fifth successive year of outperformance in 2015 with a 20 per cent total return.
January 7, 2016

Our Tips of the Year have outperformed the wider market for the fifth year on the trot, and what's more, they've outperformed by a handsome margin in 2015. All in all, the eight shares we selected at the start of the year have delivered a total return of 20.2 per cent, compared with a negative 1.4 per cent from the FTSE All-Share index. That takes the five-year cumulative total return from our Tips of the Year to 94.7 per cent, compared with 28.2 per cent from the index.

That performance stands up well to UK All Companies funds, too. According to TrustNet data, the Tips of the Year performance over the past year was better than all but eight of the 257 UK All Companies funds on its database. Meanwhile, the cumulative total return over five years is better than all but seven of the 239 All Companies funds with a five-year record. Adding in an annual 1 per cent charge to account for dealing costs to reshuffle our fictional Tips of the Year portfolio causes the five-year return to fall to 86.2 per cent, which beats all but 11 of the All Companies funds.

 

 

Tips of the Year returns in numbers

Total return20153-year5-year
Tips of the Year 20.2%60.9%94.7%
Tips of the Year with 1% p.a. charge19.2%56.1%86.2%
FTSE All Share-1.4%17.7%28.3%
FTSE 100-3.7%12.3%21.3%
FTSE Small Cap7.0%41.6%60.3%

Source: Thomson Datastream

 

Despite the strong headline performance, the past 12 months have not provided an entirely smooth ride for our 2015 share picks. Indeed, on the first day of trading after the publication our Income Tip of the Year, Persimmon (PSN), lurched 5 per cent lower on the back of a very negative sector note on the housebuilders from broker Jefferies. While this hopefully meant some of our readers got a better buying price on the tip, as our own monitoring of performance ran from the closing price of the previous day it was not the best start to the year. The negative sentiment did not persist, though, and Persimmon has managed a strong return for 2015 as a whole (see table below).

 

2015 Tips of the Year

CompanyTIDMTip typeTotal return (9 Jan 2015 - 5 Jan 2016)Current IC View
St ModwensSMPGrowth2.4%Buy
PersimmonPSNIncome36.7%Hold
FyffesFFYLTake Over40.5%Buy
VeoliaFR:VIEInternational49.0%Sell (29 Dec 2015)
RecordRECContrarian-10.5%Sell (25 Nov 2015)
Hill & SmithHILSOld Reliable27.4%Buy
PacePICValue23.1%Takeover (4 Jan 2016)
BarclaysBARCRecovery-7.3%Buy
Average--20.2%-
FTSE All Share---1.4%-
FTSE 100---3.7%-
FTSE Small Cap--7.0%-

 

IC Tips of the Year, year by year

YearTips of the YearFTSE All-ShareFTSE 100 FTSE Small Cap
2011-2.4%-4.5%-3.2%-12.7%
201224.7%14.1%11.7%30.2%
201332.3%17.4%15.2%30.5%
20141.4%0.7%0.2%1.1%
201520.2%-1.4%-3.7%7.0%

Source: Thomson Datastream

 

Nervousness about housebuilders is understandable because their valuations, based on some commonly used metrics for valuing this type of company (such as price-to-book) look high. On this basis, we moved our rating on Persimmon down from buy at 2,016p near the August peak, but have continued to recommend that the shares are held for income. Indeed, conditions for the sector continue to look extremely favourable, which is enabling Persimmon to throw off cash which it is returning to shareholders. True, the prospect of rising interest rates, a slowdown in the top-end London market and the government's stance on small buy-to-let investments makes the picture a bit more nuanced, but overall growth prospects remain strong. Indeed, you'll find another housebuilder among our 2016 Tips of the Year.

 

 

Given Persimmon's strong performance it seems rather unfair that one of its joint venture partners, St Modwen (SMP), our 2015 Growth Tip of the Year, has not performed better. News from St Modwen was positive during the year and its developments continue to have the potential to create significant value. What's more, the company's projects reached a number of major milestones over 2015 and it reported record results during the 12 months. Nevertheless the shares have drifted, which may represent some investor nervousness about its exposure to London residential property through its vast Nine Elms development. We remain fans, though.

Top spot in our performance table once again goes to our International Tip of the Year, which for 2015 was Veolia (FR:VIE). The French utility group had a storming year as it came good on the recovery potential we highlighted in our tip. Indeed, were it not for the weakness of the euro, the return from the tip would have been even stronger than the sterling adjusted number in our table, at 58.1 per cent. We feel the story has played out now and have recently recommended readers to take the gain and sell up.

Our dual-listed Takeover Tip of the Year for 2015, fruit grower and distributor Fyffes (FFYL), put in the second best performance over the 12 months. Fyffes has actually been making more waves as an acquirer of rival businesses than as a takeover target. The company has continued to benefit from the quality of its operations, which is driving organic growth, as well as building on its management's track record of making well-received acquisitions. Despite about €50m-worth of deals being completed this year, broker Investec reckons the group has firepower to spend a further €60m on acquisitions, which it thinks could enhance 2016 EPS by 8 per cent based on recent purchases. And, despite a great run, the shares also continue to look inexpensive compared with those of rivals, so we remain buyers.

 

 

The only tip that did actually become a takeover target in 2015 was our Value Tip of the Year, Pace (PIC). The news broke in April that rival set-top-box maker Arris had tabled a cash-and-shares bid. Ensuing events helped illustrate how easy it is to lose money while being right in the stock market (fortunately the reverse is also often true, too). Indeed, we correctly bet the deal was likely to go through and therefore the discount the market was valuing Pace at compared with the implied value of the Arris offer was too wide. We were right, as the deal completed at the start of this year. All the same, waiting for the deal actually delivered a lower return than we would have made by selling after the offer was announced, due to a fall in the price of Arris's shares and therefore a drop in value of the part of the bid funded by Arris paper. Still, the gain from Pace is not to be sniffed at.

One of the shares from last year's selection that we remain very keen on is our Old Reliable Tip of the Year, Hill & Smith (HILS). Hill & Smith is rather more cyclical than the companies that we'd normally class as Old Reliables, but we felt the outlook for its markets meant it fitted the bill - temporarily at least. The somewhat leftfield choice also reflected the fact that we felt the high valuations being commanded by classic Old Reliable-type shares was not a risk we wanted to take on. In the event, our valuation qualms have proved a fuss about nothing. High valuations by historic standards continue to be commanded by shares in the highest quality companies. Indeed, valuation in itself is rarely the cause for a share to come a cropper, however if things do go wrong a derating can significantly contribute to the pain.

Despite not being a classic choice, Hill & Smith has performed very well and the shares have started to re-rate. With strong conditions in the company's end markets likely to persist, we think this re-rating process will continue and we have recently doubled down on our buy advice.

Not all of our bets for 2015 came off, although we avoided suffering the kind of single-stock disaster we faced last year with Zambeef (ZAM). The performance of Barclays (BARC) has been disappointing. There has been significant management and strategic upheaval at the bank and we are waiting for an imminent update from the new chief executive. We've stuck with Barclays as a buy despite the changes, but it is fair to say we feel impatient for a new course to be firmly set. For us, a lot is riding on the next update.

In November, we threw the towel in with our Contrarian Tip of the Year, currency manager Record. The divergence in global monetary policy should be a major boost for Record's business because it is creating currency volatility, which should in turn cause more businesses to turn to the kind of currency management services that Record offers. The added potential plus is that the increased interest in Record's services could drive clients to some of Record's higher-margin products rather than the wafer-thin margins on its bog-standard hedging business. While much potential remains in this narrative, we turned sellers after the company announced a second mandate loss and reported some poor performances by its high-margin currency-for-return strategies. It felt to us too much like things had moved in the wrong direction despite the positive backdrop. That said, the company is hoping to announce mandate wins in the current financial year. We've lost patience, though.

All in all, 2015 has been a good year for our Tips of the Year and it is very pleasing that we've outperformed for five years in a row. The last year of underperformance was 2010 and the previous year of underperformance before that was 2005. The comparisons between the cumulative performance of the Tips of the Year and the best performances managed by fund managers is also pleasing. However, as always our minds are very much on the future and we've put every effort into finding eight strong Tip of the Year prospects for 2016.