How our 'Ideas of the Year' are holding up

When we selected the ideas, at the end of 2022, a few things were apparent. First, higher rates were real, climbing, and set to stay. As a result, rapidly tightening monetary policy had raised the odds of a recession over the coming 12 months. And lastly, in the wake of the mad rush to the stock market exit doors that had characterised 2022, some company valuations were looking bombed out.

But mindful of a key trend of the pandemic years, and the decade that came before it, there was the nagging sense that investors could not afford to exclude quality and technology names from their holdings – even as valuations appeared stretched, and pessimism was becoming entrenched.

Using the template introduced in 2021 – when our annual Ideas of the Year feature first shifted from a series of individual stocks to five portfolios of 10 stocks – we sought to adapt the above themes into selections we felt had a chance of outperforming the broader market.

So far, they are doing the job – albeit with two whale-sized caveats. The first is that the total return across the 50 stocks is negative (although only just), reflecting losses in three of the five mini-portfolios. That they are ahead of their collective benchmarks so far is a clear indication of their UK bias, given the FTSE All-World is up 4 per cent in sterling terms so far this year at a time when the FTSE All-Share is in negative territory.

The second is that only one of the themes we highlighted at the tail-end of 2022 has been borne out by events.

For a start, the 10 unloved investment trusts we identified have continued to be unloved, reflecting the sector’s continued discount to net asset value and lingering market doubts about the mark-ups some investment managers have ascribed to unquoted holdings.

Investors have also eschewed small-cap and high-yield stocks – wisely in the case of our badly misfiring selection of ‘Yield Leaders’, whose dividend prospects have in several instances been seriously challenged by souring operating conditions. Indeed, as high inflation has persisted, the apparent security of income and fat near-term yields has proved a mirage and instead served as a sign of non-existent earnings growth.

While the ChatGPT-initiated hype around the power of artificial intelligence (AI) was already building up steam in December, and although we tipped Nvidia (US:NVDA) at the start of December, declaring that it was worth its high price, we did not anticipate how it would wholly capture stockpickers’ imaginations in 2023. Three of the biggest beneficiaries of this rally – chipmakers Nvidia and dual-listed Taiwan Semiconductor (US:TSM), alongside Google parent Alphabet (US:GOOG) – featured in our portfolio, and have been big positive contributors. Were it not for Nvidia’s inclusion, our Ideas of the Year portfolio would be down against its benchmarks, whose UK focus already makes for a low bar when compared with a decent-ish run for global equities in 2023 thus far.

Is there a lesson in all of this? It’s hard to say. Usually, diversification and broad exposure to a range of equity themes are hailed as a smart way to hedge against an uncertain future. In this case, one could equally make the case that it increases the chance of getting lucky with 2023’s star stock.