Tips of the week: 2018 review

The bald numbers

The bald numbers in this review are in part a reflection of the fact we tip 200 shares a year. Reversion to the mean is an inevitable consequence of making recommendations in such large quantities, which means spectacular outperfromance or underperformance is always unlikely. Also the average holding period covered by the tips in the review is a little less than 6 months. The buys on average outperformed relevant indices by 0.9 per cent while the sells underperformed – fell by more than the market – by 8.8 per cent. While past reviews have found our buys normally outperform on average, the sells have not done well since I’ve been conducting this review (I took over reviewing the tips in 2013 and made some alterations to the methodology in 2014). That means this years’ result for the sells represents a welcome turnaround. More diappointingly, only half of our buy recommendations outperformed their respective indices (a hit rate that has dropped markedly during recently market volatility) and 56 per cent of the sells underperformed.

Individual experience is likely to prove far more meaningful to readers than these bald numbers. That’s why I aim to provide a lot of detail with the tables that accompany this review – there is a need to go beyond just the headline numbers.

How do you make sense of that lot?

A key issue this review faces is the question of how best to provide an honest assessment of such a large and diverse collection of tips covering a significant range of time frames, each of which will represent different market conditions.

The method used is to measure the performance of each share tipped relative to the closest fitting mainstream index (for UK shares that’s a choice from FTSE 100, FTSE 250, FTSE All Small or FTSE Aim All-Share). This approach means that, in tough markets, such as the ones experienced recently, a buy tip can look as though it has done well (ie versus the falling market) despite falling in value, while the reverse is true when markets are rising. Indeed, while the average buy tip outperformed “the market”, in absolute terms the average buy tip was down 11.5 per cent. The sells on average fell 18.0 per cent. The average index performance associated with all tips (buys and sells) monitored for this review was a torrid 12.0 per cent drop.

Given the large difference there can be between the relative and absolute performance of tips, the tables accompanying this review show mid-to-mid share price performance of each tip, as well as relative to index performance.  

Because tips are issued throughout the year, this 12-month review covers some recommendations that were made almost a year ago and some made only last week. Overall, that means the average performance figures used in this review are based on an average holding period of a bit less than six months. The average is a bit below half a year because we reverse some recommendations during the year if we feel the investment case is not panning out.

The data used for this review does not take account of dividends or spreads (the difference between the price at which shares can be bought and sold at a given point in time). However, the average spread for the buy tips was 0.45 per cent, while the average dividend yield was 0.63 per cent above relevant indices. So, as has tended to be the case in previous years, our leaning towards tipping shares with a higher than average yield is likely to have more than compensated for the spread. In other words, the omissions are more likely to be understating rather than overstating relative performance. The sells have a lower spread of 0.18 per cent.

A humbling experience

Another factor that is easy to overlook when assessing the tips is the role publishing timeframes play in dictating tip performance. This is a dry topic, even for such a stats-heavy review as this. However, it is a topic that this year I can add some self-effacing colour to by highlighting a truly humbling example – arguably our worst tip of the year. As mentioned, this review aims to be upfront about failures

We tipped drinks distribution disaster Conviviality based on its turnaround plans just as a bombshell profit warning dropped. We were misled. There were warning signs that we overlooked. But we have learnt from this humbling experience to the extent that we’ve been making changes to internal processes and are planning some fundamental changes to the way we recommend shares, which we will be letting readers know about in the new year.

But for now, back to Conviviality. Following the warning we were quick to see the error of our ways – it really wasn’t hard – and switched our recommendation to a sell. However, here is where the publishing timeframe throws a curve ball to this review. The fact that the warning occurred between the writing and publishing of the Conviviality tip, and our change of recommendation was made the day the tip was published, means the table below shows a relatively limited impact from this terribly badly botched buy call. It feels like an injustice that there is not a far bigger blotch (to match the botch) on the copy book.

However, there is a twist in this tale as far as the review is concerned. While Conviviality is rightly the tip that will be haunting us from that fateful week in March, it’s ironic that another tip from that week had an opposite fate. Pizza chain Fulham Shore (FUL) appeared alongside Conviviality in that week’s tip section as a sell. Its shares also tanked on a profit warning the day before our advice was published, upending what would have been a most timely call for the right reasons. What's more sentiment (the market's not ours) has turned in favour of the company since the warning, making it appear as one of our worst sell tips of the year.

As has been my method since I took over writing these reviews, I attempt to make the fairest fist I can of tracking performance by looking at share price movements from the time each tip was first published online (ie not the at-the-time-of-writing price used in the tip table, which can sometimes vary substantially from the price available in the market by the time the tip is published). This methodology favours the Convivialities but disfavours the Fulham Shores. More importantly, though, it is more reflective of a reader’s experience.

Break it down

I’ve tried to break down the performance of our tips by type and index to give a bit more 'high level' insight. One depressing feature for us is that once again our speculative tips (we made 26 such tips in total last year) have been a source of relative underperformance, even though the two best performing tips this year were classed as speculative. We tend to label tips as speculative when they are very high risk but potentially very high reward. The nature of commodity exploration companies mean they often find a home in this category, which means the fortune of these tips are often tied to commodity prices as well as the hit-or-miss nature of exploration.

It’s potentially interesting that the relative performance of our value-orientated tips (those classified as 'income' and 'value') have out-punched 'growth'. This tallies with the idea that the value style of investing may finally be coming back into vogue after a decade in which growth has taken the lead. Not too much can be read into the strong outperformance from our overseas tips as this only represents four shares.

The sell tips represent the most impressive category, and this result is based on 24 recommendations. The star among the sell calls was outsourcer Interserve, which we recommended getting out of in February. The value of this company’s equity is now insignificant compared with its debt pile. A few retail dogs have also made big contributions to the big average fall recorded by the sells.

The quantity of tips this magazine produces means there is always the potential for smaller companies to dominate our output. However, over the year we managed to source 43 per cent of our ideas from either the FTSE 100 or 250. Less pleasing is the fact that, based on buy tips, this year these larger company share picks on average underperformed the indices they came from. The relative performance of our tips from Aim was the best.

Enough of the waffle, though. Here's the meat: all the weekly tips from 2018 ordered from best to worst relative to the market:

ALL THE BUYS

ALL THE SELLS

Source: Investors Chronicle/S&P CapitalIQ