The Share Challenge: Old pro goes big on oil for an early lead

The bitter cold temperatures outside have not kept red-hot stock expert Colin McLean, of SVM Asset Management, from taking a healthy lead in this year's Independent Share Challenge. Our three-way stock-picking battle pits a professional fund manager against an amateur investment club and a group of 16-year-old students to see who can rake in the most profits.

Each team has been given a virtual sum of £5,000 to invest in five UK shares, which they may trade up to five times each month. The winning team with the highest portfolio value after 12 months will take home £2,000 from Abbey Sharedealers, the sponsor of the competition.

Two weeks into trading, McLean has already pocketed a profit of 2.4 per cent, or £121, with the Bucket & Spade Investment Club, from Bournemouth, in second place, up 0.5 per cent, or £26. Both teams have done well to outperform the FTSE All-Share Index, down 0.5 per cent over the same time period.

The 16-year old novices from Moat Community College, in Leicester, are already nursing a humbling loss of 4.3 per cent. The girls know they have their work cut out defending their school's winning title in last year's challenge, when their classmates beat the pros and scooped up the £2,000 prize.

They will need to catch frontrunner Colin McLean, head of SVM Asset Management, who has more than 25 years' experience investing in British stocks and shares. The SVM Select Opportunities Fund, one of the stable of equity funds McLean oversees, has increased 36 per cent over the past three years. McLean's portfolio in the competition reflects his style of balancing powerhouse blue-chips with smaller undervalued plays.

Shell Transport, the oil giant, is McLean's top holding at the moment and represents 25 per cent of his portfolio - the maximum allowed for a single share in the competition.

"Shell is one of the big FTSE stocks offering the most potential," says McLean. "The share will continue to benefit from strong oil and metals prices and its weighting will increase in the index when it completes its merger with Royal Dutch."

McLean is bullish on the oil and mining sectors, and the majority of the fund manager's shares have a commodities influence. In addition to Shell, McLean has tucked into Oriel Resources, a small-cap mining company, and Corus Group, the steel conglomerate.

"Many institutional investors are underweight in oil and natural resources, and are likely to add if oil and metals prices remain high," says McLean. "The companies I've chosen also have the potential to add to assets with further exploration."

Fun Technologies, which provides systems for gaming websites, is another of the expert's top picks. Last week was the five-year anniversary of the dot-com bubble bursting, and most technology shares are still far from recovery. But many investors, including McLean, think certain parts of the sector are due a rebound in the coming year. "There is still a lot of potential in Fun," says McLean. "The share has risen far less than similar businesses this year, such as Neteller and Sportingbet, which are both up over 17 per cent."

McLean gives high marks to Fun's management team, which has a successful track record in the industry, and the share should benefit as the company expands into new areas and makes acquisitions, he says.

After McLean scooped up Fun at 190p, the share jumped to 210p - a new high. But the City expert adds a cautious note: "Fun is trading at a premium to next year's expected profits. But the company should continue to grow in the long term." The advice strikes a bitter chord with the student team. Eager to share in McLean's profits, the girls traded into Fun Technology at its peak price of 210p - only to watch the share reverse course. It now hovers between 203p and 206p.

It's a hard lesson for the novices, who have no prior experience, but they are far from alone when it comes to amateur investors who have taken punts on hot stocks - only to watch them die soon after.

Stakes in Next and Manchester United have also proved disappointing. The girls have done well to buy businesses they are familiar with; the strategy is a favourite of stock millionaires such as Peter Lynch and Warren Buffett. But it is just a starting point. Even the most trendy brands make poor investments if the share price is too high and future growth has already been accounted for.

Impatient with their losses, the girls sold out of Next after one week. They still have more than £1,000 in cash to invest,but they used the Next proceeds to buy into McCarthy & Stone, the retirement home builder, which also features in the Bucket & Spade Club's portfolio.

"McCarthy & Stone is based near us and it is a big developer in the Bournemouth area," says David Lawrence, the club's chairman. "We have met a number of residents who live in their properties who speak highly of them. The company is well positioned to take advantage of the demand for more retirement communities as the population ages."

Most of the team's stock picks are based on those they hold as an investment club. The members, diagnostic engineers in the British Telecom office in Bournemouth, formed the club four years ago after they saw an advertisement in the canteen from Proshare Investment Clubs, an organisation that helps amateur investors get together and learn to trade.

"We've been investing ever since. We went through a tough patch when we first started, but we're really on a roll now," says Lawrence. The club recently hit an all-time high when its unit value, a measurement of profitability, hit 117p, which equates to a profit of 17 per cent.

Tesco is one of the club's favourite shares, and is now part of its contest portfolio as well. Despite the supermarket giant's unprecedented growth, the team thinks there is still more to come, particularly in financial services such as insurance and personal loans.

"Tesco is expanding its cheap and simple format to a whole range of new products and services that appeal to consumers. Nowadays, you can pop into the shop or go on the internet, fill out a form, and you have your travel insurance in minutes. We think Tesco's share price will continue to perform well off these new offerings," says Lawrence.

It is still early days in the Share Challenge and anything can happen over the next 12 months. Stay tuned for monthly updates, or log on to Bullbearings.co.uk/independent to track the challengers in real time throughout the year.

Abbey Sharedealing, the discount broker, is sponsoring the Independent Share Challenge. For information on Abbey's low-cost trading fees, or to set up an account, visit www.abbeysharedealing.com or call 0800 389 2324. Data for the game is provided by leading financial website www.digitallook.com.

To find out how to set up and run an investment club and earn while you learn, go to www.proshareclubs.co.uk or phone 0906 802 2222.