How our Ideas of the Year 2023 beat the market

Still, after taking a pasting in 2022, there were signs at the time that the share rout was starting to peter out, if not reverse. After early promise, our 50 stock picks – divided into five loosely defined themes and styles – subsequently lost momentum along with their benchmarks. However, since their October nadir, they climbed more than 14 percentage points, finishing the year up 8.6 per cent, and 5.8 per cent above their indices.

What then, produced this outperformance? The place to start with is global equities. As with this year’s weekly investment ideas, this was our most fruitful hunting ground – particularly when it came to technology stocks with even a tangential connection to artificial intelligence. Our decision to include two of the field’s great investor hopes – hardware provider Nvidia (US:NVDA) and search engine behemoth Alphabet (US:GOOGL) – proved the difference.

Second was the timing and balance of the ideas. Twelve months ago, it seemed likely that investors would warm to a few themes, once they had sight of a peak in the monetary policy pain. After a horrible 2022, we thought that quality would bounce back, the importance of yield would re-assert itself, and screaming discounts in both the small-cap and investment trust worlds would eventually prove attractive.

In the event, while quality did bounce back, value and income stocks were more mixed. Three of our small-cap selections – Ten Entertainment (TEG), DWF (DWF) and Kape Technologies (KAPE) – caught a bid, helping to compensate for slack performance elsewhere. Some investment trust discounts closed, albeit modestly. The idea that big dividends would prove a big draw was something of a chimera, at least for our choice of high-yielders, which in several cases proved to be value stocks with less than firm grips on cash generation or operations.

Finally, and maybe most importantly, was the feature’s injunction to stay invested. A year ago, the temptation to cut losses was understandable. But the medicine of higher rates has, so far, taken the heat out of inflation without shattering the economic outlook on which equity valuations depend.

So, is this a record to cheer? I’m not totally sure. While the goal of stockpicking is to beat the market, the choice of market matters. On the one hand, in the age of low-cost global equity trackers – whose success has been repeatedly demonstrated – it’s hard to ignore the 12.7 per cent sterling-denominated total return from the FTSE All-World as the benchmark against which all stocks should be compared.

However, the All-World does benefit from a much larger weighting to overseas shares. In setting the rules for our five baskets of stocks at the start of last year, we gave equal weight to overseas equities as we did to the UK’s small-cap or investment trust universes. Had we beefed the overseas share up to 50 per cent and split the difference between the remaining four portfolios, the average performance would have climbed to 15.3 per cent, outperforming the benchmarks by 8.8 per cent.

Then again, we shouldn’t hold ourselves to the standards of fund managers either way. We’re in the idea generation game, instead. And happy for it.