- Rising interest rates are meant to be good for value investors…
- …but the evidence is scant
- Could higher rates kill the remaining support for traditional value investing?
- There is another way.
- Loads of new idea-generating data.
Reviewing the buy and sell recommendations from the Investors’ Chronicle over the course of a year is awkward. And no, I’m not talking about the awkwardness of the inevitable howlers. Well there is that too, and we’ll talk about the blush-worthy moments from 2021 in hushed tones a bit later. But the 'awkward' I’m referring to here is the contortions required to try to put a single, coherent performance number on all those different recommendations.
One of the biggest complications of summing up the year is that when a magazine makes recommendations every week there are a lot of different time periods over which to assess all those buy and sell calls. In the case of this review there are 48 periods. The reason it is not 52 – ie the number of weeks in a year – is that our Ideas of the Year will get separate scrutiny in next week’s issue; and we also have a two-weeks-in-one bumper issue over Christmas and the two ideas in this issue are too young to be assessed.
All this means the average period over which recommendations are judged in this review is six months as opposed to the year that one may intuitively assume. Individual time periods range from almost a full year to less than a week.
Our recommendations also come from many different parts of the UK market – blue-chips, mid-caps, tiddlers and Aim companies – as well as overseas markets. To judge whether a recommendation is doing well, it is important to judge it against the wider market performance. A 5 per cent gain is a very different outcome when the market has risen by 20 per cent than when the market has fallen by 20 per cent. And to represent “the market”, it is important to try to compare a recommendation’s performance with the index that is most relevant to the share in question.
The UK indices against which we track recommendations are the FTSE 100, FTSE 250, FTSE All Small and FTSE Aim All Share. Our overseas tips tend to be liquid shares in large companies, which means we are able to track them against the relevant country’s blue-chip index. In the case of US tech shares, we use the Nasdaq 100 as a benchmark.
Readers may be starting to get an impression of the smorgasbord of considerations we’re dealing with in this review. I can make no claim that my efforts to square this particular circle are perfect, but they represent my best shot at it all.
With that in mind, let’s put a number on how we have done with our recommendations in 2021. In fact, there are two numbers to report, one for our buy recommendations and one for the sells. The numbers are 1.7 per cent for the buys and -16.1 per cent for the sells.
That is to say, based on all those different time periods, and tallied against all those different indices, the average buy recommendation outperformed by 1.7 per cent and the average sell recommendation underperformed (we want sells to underperform) by 16.1 per cent. As we will see, we did not make very many sell recommendations this year so that very impressive result needs to be taken with a pinch of salt.
The performance numbers do not take account of dividends or spreads (the difference between the price a share can be bought and sold at). These are important real world considerations. The buys had a relatively wide spread of 0.5 per cent, and on average the dividend yield of these recommendations was about 0.5 per cent below that of the relevant indices. That means the 1.7 per cent outperformance probably overstates the case by about a percentage point. For the sells, the average spread was 0.2 per cent and the average yield a full 2.2 per cent lower than the market.
What to make of it?
For our buys, it was something of a 50:50 year. To be precise, 51:49. Or to be colloquial, a smidgen over half of these recommendations beat their benchmark index. However, those that beat their index did so by a more impressive amount than the losers lost. So we’ve seen modest outperformance overall. The accompanying chart showing the distribution of relative performance gives a bit more colour.
While our sells look stunning with a 100 per cent hit rate and substantial underperformance of the index, this has to be viewed in light of the fact that we have only made three such recommendations in 2021. We’ll look to increase the volume of 'sells' next year. The low number in part reflects a format change to how we make recommendations.
In 2020, as part of our 160th anniversary relaunch, the Investors’ Chronicle adopted a less-is-more approach to our recommendations. We decided to move to producing two more in-depth pieces each month rather than the four articles we previously produced. While some have been critical of our focus on more in-depth analysis, we hope that our two-tip format is helping readers develop a deeper understanding of the stocks we cover in the ideas section.
Not only are buy and sell decisions improved by a deeper understanding of a stock (whether it be based on agreement or rejection of IC writers’ arguments), but it is easier to react to new developments. And ultimately, while our writers can offer their opinions on stocks based on their own research efforts and interpretations, the actual act of investing is very much out of our hands. Indeed, there are strict rules that require our writers to have no interest in the stocks they write about. For anyone that doubts whether this is a good idea, a well-documented psychological phenomenon known as the endowment effect suggests it very much is.
Hammers and knives
But no matter what level of integrity and thoroughness is employed by our writers, there are always stock recommendations we make that go on to get utterly hammered. So it proved at the end of the year when three buy recommendations almost immediately cratered after the ink dried on our articles.
The problems stemming from an acquisition made by mask, helmet and body armour maker Avon Protection proved more deep-seated than we had anticipated. Launch delays experienced by computer game company Frontier Development were repeated rather than rectified following our buy call on that stock. And the warnings we made about the business model of influencer-focused retailer In The Style were to prove far more influential on performance than the model’s strengths, which we’d put more emphasis on.
With hindsight, we certainly should have heeded the old adage about not catching falling knives. The numbers reported in this report would certainly have benefited substantially from avoiding the catalogue of painful injuries in the final months of the year. The events could also point to the dangers investors face from relatively high valuations following the strong recovery of markets from lockdown lows and the decade-long bull market that preceded. It’s not that a high valuation necessarily debunks an investment case in itself, but it can make things more painful if something else debunks it.
But we had some very good buy calls too. Our UK large and mid-cap picks showed impressive outperformance, as did the handful of Aim companies we highlighted during the year. Small-caps were the major weakness, though, and our overseas ideas performed largely in line with the market. This is illustrated in the accompanying charts along with the breakdown of the parts of the market the recommendations came from.
As they say, the proof is in the pudding, and for this review that means the performance table below. It details all our buy and sell recommendations for the year, bar this week's, and both their absolute performance in share price terms and their performance relative to the index.
|Thungela Resources Limited||TGA||25/06/21||FTSE All-Small||104%||100%|
|Safestore Holdings plc||SAFE||11/06/21||FTSE 250||49%||47%|
|Focusrite PLC||TUNE||26/03/21||FTSE AIM All-Share||47%||44%|
|Ashtead Group plc||AHT||05/02/21||FTSE 100||40%||55%|
|Wm Morrison Supermarkets plc||MRW||12/02/21||S&P 500||40%||67%|
|Sirius Real Estate Limited||SRE||19/02/21||FTSE 250||39%||48%|
|Pfizer Inc.||PFE-US||28/05/21||S&P 500||36%||52%|
|Costco Wholesale Corporation||COST-US||22/01/21||S&P 500||27%||56%|
|South32 Ltd.||S32||16/04/21||FTSE 100||22%||25%|
|Vietnam Enterprise Investments Ltd Red.Shs||VEIL||27/08/21||FTSE 250||21%||13%|
|ICG Enterprise Trust PLC GBP||ICGT||23/07/21||FTSE 250||20%||18%|
|Touchstone Exploration Inc||TXP||30/04/21||FTSE AIM All-Share||19%||7.5%|
|Hill & Smith Holdings PLC||HILS||18/06/21||FTSE 250||19%||19%|
|Daily Mail & General Trust plc Class A||DMGT||09/04/21||FTSE 250||17%||18%|
|Macfarlane Group PLC||MACF||23/04/21||FTSE All-Small||16%||18%|
|Entegris, Inc.||ENTG-US||14/05/21||S&P 500||15%||30%|
|AbbVie, Inc.||ABBV-US||12/02/21||FTSE 100||15%||25%|
|Sage Group plc||SGE||23/07/21||FTSE 100||14%||16%|
|Ricardo plc||RCDO||03/09/21||FTSE All-Small||12%||7%|
|dotDigital Group plc||DOTD||15/01/21||FTSE AIM All-Share||11%||10%|
|Clipper Logistics PLC||CLG||26/03/21||FTSE 250||11%||15%|
|Rit Capital Partners PLC||RCP||25/06/21||FTSE 250||9.9%||8.9%|
|PRS REIT Plc||PRSR||15/01/21||FTSE All-Small||9.4%||25%|
|Diageo plc||DGE||29/10/21||FTSE 100||9.2%||8.2%|
|Grainger plc||GRI||21/05/21||FTSE 250||8.8%||9.0%|
|Fidelity European Trust PLC GBP||FEV||09/07/21||FTSE 250||8.8%||6.5%|
|Electrocomponents plc||ECM||04/06/21||FTSE 100||8.6%||10%|
|NIKE, Inc. Class B||NKE-US||07/05/21||S&P 500||6.9%||19%|
|Aberdeen Standard European Logistics Income Plc||ASLI||29/10/21||FTSE All-Small||5.0%||1.8%|
|Harworth Group PLC||HWG||17/09/21||FTSE All-Small||4.9%||0.6%|
|Etsy, Inc.||ETSY-US||02/07/21||NASDAQ-100 Index||4.9%||16%|
|Herald Investment Trust PLC||HRI||19/08/21||FTSE 250||4.8%||-0.4%|
|Serco Group plc||SRP||27/08/21||FTSE 250||4.7%||-2.3%|
|BT Group plc||BT.A||26/11/21||FTSE 100||4.5%||6.4%|
|Luceco PLC||LUCE||01/10/21||FTSE All-Small||4.5%||1.8%|
|Treatt plc||TET||02/07/21||FTSE 250||4.4%||3.0%|
|Brooks Macdonald Group plc||BRK||15/10/21||FTSE All-Small||4.0%||0.8%|
|CRH Plc||CRH||09/07/21||FTSE 100||3.5%||4.3%|
|Henry Boot PLC||BOOT||26/11/21||FTSE All-Small||3.5%||2.9%|
|Team17 Group PLC||TM17||05/03/21||FTSE AIM All-Share||1.3%||1.4%|
|Anglo American plc||AAL||22/01/21||FTSE 100||1.2%||8.4%|
|Redrow plc||RDW||28/05/21||FTSE 250||1.1%||0.0%|
|Derwent London plc||DLN||30/04/21||FTSE 250||1.0%||0.7%|
|JPMorgan Russian Securities PLC||JRS||06/08/21||FTSE All-Small||0.8%||-2.8%|
|Bridgepoint Group Plc||BPT||19/08/21||FTSE 250||0.5%||-4.5%|
|Montanaro European Smaller Companies Trust PLC||MTE||03/12/21||FTSE All-Small||0.3%||-0.2%|
|iShares Global Clean Energy UCITS ETF||INRG||21/05/21||FTSE 250||0.1%||0.2%|
|Aberdeen Standard OEIC II - ASI UK Ethical Equity Fund Accum GBP||M67P3S.F||04/06/21||FTSE All-Small||-0.1%||-1.5%|
|Accsys Technologies PLC||AXS||10/12/21||FTSE All-Small||-0.3%||-2.3%|
|CentralNic Group Plc||CNIC||05/11/21||FTSE All-Small||-0.7%||-4.8%|
|UNITE Group plc||UTG||29/01/21||FTSE 250||-0.7%||10%|
|Hollywood Bowl Group Plc||BOWL||15/10/21||FTSE All-Small||-0.9%||-4.0%|
|Target Healthcare REIT PLC||THRL||05/03/21||FTSE 250||-0.9%||6.0%|
|Fidelity Emerging Markets Limited Red Pref Shs GBP||FEML||12/11/21||FTSE 250||-1.2%||-5.9%|
|MFM UK Primary Opportunities Fund Accum.Shs Class A GBP||G0WZWX.F||08/10/21||FTSE 100||-1.5%||-0.4%|
|S&U plc||SUS||10/12/21||FTSE All-Small||-1.8%||-3.7%|
|Rathbones Group PLC||RAT||10/09/21||FTSE 250||-1.9%||-7.3%|
|Phoenix Group Holdings plc||PHNX||24/09/21||FTSE 100||-2.1%||-0.4%|
|Rentokil Initial plc||RTO||09/04/21||FTSE 100||-2.1%||1.5%|
|Biotech Growth Trust PLC||BIOG||24/09/21||FTSE All-Small||-2.6%||-7.0%|
|Numis Corporation Plc||NUM||30/07/21||FTSE AIM All-Share||-2.7%||-9.5%|
|Intuitive Surgical, Inc.||ISRG-US||23/04/21||NASDAQ-100 Index||-2.7%||14%|
|Infineon Technologies AG||IFX-DE||19/02/21||Germany DAX (TR)||-2.8%||7.5%|
|Smith & Williamson Investment Funds PLC - Sanlam Artificial Intelligence Fund Accum B GBP||CG1MFG.F-IE||22/10/21||FTSE 100||-2.8%||-3.3%|
|Genus plc||GNS||02/04/21||FTSE 250||-4.5%||-1.4%|
|Spirent Communications plc||SPT||13/08/21||FTSE 250||-4.7%||-10%|
|Games Workshop Group PLC||GAW||12/03/21||FTSE 250||-5.5%||-1.5%|
|Dunelm Group plc||DNLM||17/09/21||FTSE 250||-5.6%||-10%|
|Workspace Group PLC||WKP||02/04/21||FTSE 250||-5.6%||-2.5%|
|Endeavour Mining PLC||EDV||13/08/21||FTSE 250||-5.8%||-11%|
|Renalytix Plc||RENX||03/12/21||FTSE AIM All-Share||-6.4%||-7.8%|
|Publicis Groupe SA||PUB-FR||07/05/21||France CAC 40||-6.7%||1.2%|
|Tharisa Plc||THS||12/11/21||FTSE All-Small||-7.7%||-12%|
|IP Group plc||IPO||19/03/21||FTSE 250||-7.8%||-3.5%|
|Just Group plc||JUST||29/01/21||FTSE 250||-9.2%||0.7%|
|De La Rue plc||DLAR||16/07/21||FTSE All-Small||-10%||-11%|
|Johnson & Johnson||JNJ-US||12/03/21||S&P 500||-10%||7.2%|
|Autodesk, Inc.||ADSK-US||11/06/21||S&P 500||-12%||-2.1%|
|MJ Hudson Group Plc||MJH||16/07/21||FTSE All-Small||-13%||-14%|
|Align Technology, Inc.||ALGN-US||26/02/21||S&P 500||-14%||6.2%|
|HSS Hire Group PLC||HSS||19/11/21||FTSE All-Small||-14%||-17%|
|Caledonia Mining Corporation PLC||CMCL||14/05/21||FTSE All-Small||-15%||-14%|
|Rolls-Royce Holdings plc||RR||22/10/21||FTSE 100||-16%||-16%|
|tinyBuild Inc.||TBLD||30/07/21||FTSE AIM All-Share||-17%||-22%|
|Hargreaves Lansdown plc||HL||26/02/21||FTSE 100||-22%||-14%|
|Medtronic Plc||MDT-US||06/08/21||NASDAQ-100 Index||-24%||-18%|
|Frontier Developments Plc||FDEV||19/11/21||FTSE All-Small||-27%||-30%|
|Okta, Inc. Class A||OKTA-US||16/04/21||NASDAQ-100 Index||-29%||-18%|
|Gap, Inc.||GPS-US||08/10/21||S&P 500||-33%||-28%|
|Hunting PLC||HTG||19/03/21||FTSE All-Small||-50%||-46%|
|Shanta Gold Limited||SHG||05/02/21||FTSE All-Small||-50%||-44%|
|Avon Protection PLC||AVON||05/11/21||FTSE All-Small||-51%||-53%|
|In the Style Group Plc||ITS||10/09/21||FTSE All-Small||-53%||-55%|
|IWG Plc||IWG||01 October 2021||FTSE 250||-13.3%||-15.3%|
|London Stock Exchange Group plc||LSEG||03 September 2021||FTSE 100||-16.8%||-16.5%|
|WH Smith PLC||SMWH||18 June 2021||FTSE 250||-19.7%||-19.3%|