After 52 weeks, The Independent's Share Challenge came to a close last weekend – with Colin McLean, our professional fund manager, easily beating both the school pupils from Leicester's Moat Community College and the group of hobby investors from Singleton Birch, the UK's largest lime producer. He receives £2,000, courtesy of our competition sponsors Abbey Sharedealing, and has said he plans to donate the money to the Teenage Cancer Trust.
In previous years our professional has lost out to both the school pupils and the investment club, but Colin McLean's performance this year was impressive. During a year when the FTSE All-Share index fell by around a third, McLean, the chief executive of SVM Asset Management, lost less than 5 per cent. To put this in context, even the best performing fund in the UK All Companies sector lost more than 9 per cent over the same period.
Though our school pupils were a long way behind McLean, losing just over 33 per cent, they achieved an almost identical return to the FTSE All-Share index, which is better than 100 of the 344 funds in the UK All Companies sector.
The investment club, alas, made some bad decisions early, putting much of their hope in the recovery of banking stocks. Unfortunately, after the collapse of Lehman Brothers in September, the share prices of financial stocks fell sharply, taking the investment club's chances of winning the competition with them. The club all but gave up, finishing the competition with 70 per cent less money than they started with.
While McLean did dabble in risky bank shares during the course of the year – with mixed success – the strong performance in his portfolio was mainly driven by his focus on defensive stocks, companies that he believed would perform well during an economic downturn. Energy, tobacco and pharmaceutical stocks featured most regularly in the portfolio, sectors that McLean has also held within his SVM funds.
In the competition, his most successful move was purchasing Imperial Energy back in July; a few weeks later it saw its share price jump after receiving a takeover approach. McLean ultimately made a profit of more than £520 on this position, equivalent to more than 10 per cent of his portfolio's starting balance of £5,000.
British Energy Group was another utility that chalked up a profit for him; GlaxoSmithKline and AstraZeneca also made a positive contribution.
McLean admits that his foray into the banking sector was somewhat premature. After the collapse of Lehman, he believed that the Government would be forced to guarantee all deposits – a move that would ultimately restore confidence in the sector. Though he did make a profit on his dalliance with HBOS, he lost more than £500 on Royal Bank of Scotland. With hindsight, McLean now believes that we have yet to see the solution to the banking crisis, and says he has not yet started including banks in his regular funds.
Asked for advice for his losing competitors – and any other hobby investors out there – McLean says that in tough economic times, it is safer to stick to larger firms. Investors should also resist the temptation to trade too often, and should keep an eye on the long term. "A lot of investment clubs trade too much, and try to latch on to short-term ideas, rather than sticking to some central themes," he says. "And a lot of people tend to focus on smaller companies, which is particularly difficult in this kind of market.
"My advice is to work out some bigger themes and stick with bigger companies. Some of the larger ones don't have the borrowing problems that smaller companies do, and also tend to have a better diversification of interests. There are also quite a lot of good dividend yields around at the moment."
The school pupils started out badly. They put their faith in a number of small stocks, which quickly lost them around 10 per cent of their portfolio. But a move into oil stocks and an out-of-favour construction group helped to edge them into the lead by mid April.
At this point, they considered how best to tailor their portfolio for a recession. They opted for a cinema group, a budget airline and a cheap clothes retailer, believing that these companies offered good-value products that would be popular as consumers tightened their belts.
These were great ideas – the team's only mistake was selling out too early. EasyJet's share price, for example, rallied sharply during the autumn as the price of oil plummeted; but by then the team had already sold out of their position, at a loss.
As markets got trickier during the autumn, the pupils resorted to buying smaller companies again. Their biggest loss came on JKX Oil & Gas, a stock that has been performing badly since the drop in the oil price. Dragon Oil and Victoria Oil and Gas also cost the pupils money.
In December, with a lot of ground left to make up, the pupils switched back to some larger, more dependable stocks; these either held their ground or generated a profit during the final weeks. But it was too little too late.
The investment club started out with a mix of miners, construction companies and retailers – three sectors that have all taken a hammering. By the end of the second month, the club had already lost more than 18 per cent of their portfolio's value.
During the spring, they put their faith in the banks, hoping that, with the collapse of Northern Rock more than six months behind them, the sector was beginning to recover. For the first few months, they did not fare too badly: they made a healthy profit on Barclays and Bradford & Bingley, just about enough to offset their loss on Alliance & Leicester. But moves into HBOS and Royal Bank of Scotland turned out to be catastrophic. By the end of the competition, the team had lost almost 30 per cent of their portfolio's value on these two stocks alone. A foray into a Canadian mining stock also proved disastrous, losing the club more than £660.
Ellen Rainey, the investment club's treasurer, admits that by the autumn the club had lost heart. Not only did its chances of winning the competition appear to be gone, but the club's real-life portfolio had also suffered some heavy losses. Things went from bad to worse when their company laid off workers, forcing the investment club to liquidate some of their holdings so that they could pay back the members who were leaving. "We kept thinking things couldn't get any worse, but they always did," she said.Reuse content