Surge in Arcadia rescues the professionals' portfolio

The Fund Managers

Our fund managers outperformed the index this year thanks mainly to the performance of Arcadia, the clothing retailer tipped by Colin McLean of Scottish Value Management. Arcadia shares soared 227.5 per cent, offsetting declines in four of the other stocks our team selected. Arcadia bloomed thanks to the recovery strategy of new chief executive Stuart Rose. Then there was the surprise bonus of an indicative bid from Baugur, the Icelandic retail group. A bottle of champagne to our winner.

Corus, the steel group tipped by Tom Crombie, of Scottish Equitable, was the other tip in positive territory with a 5 per cent rise. John Hatherly, who won our competition in 1999 and 2000, had less success this time with Northgate Information Systems, which slumped 50 per cent. Jazz FM and Reuters both fell victim to the media sector sell-off.

One tip of last year didn't materialise. David Cumming of Standard Life selected Domus, which was to be the new name for the merged Bryant Homes and Taylor Woodrow. The deal was trumped by Persimmon which snapped Bryant up before the merger could be completed.

Here are our team's selections for 2002:

Robert Talbut, Royal & Sun Alliance

Compass (515p)

The results for 2001 reflected another good year of progress in organic sales and margins at Compass, which has now shed its hotel interests that came with the Granada merger. While contract catering food service is traditionally seen as defensive, the group is showing a continuing ability to add new business through contract gains on a global basis. This underpins market share growth, which is further augmented by infill acquisitions as the business builds global reach, resulting in additional scale economies. Combined with this the UK roadside businesses have undergone a successful rebranding exercise and have started to demonstrate the ability to produce further organic growth.

In what promises to be a tough year, companies such as Compass, which demonstrate the ability to deliver a structural growth model, will be highly prized by investors.

Colin McLean, Scottish Value Management

Waterman Group (133.5p)

My tip for 2002 is a support services business, Waterman Group. It operates as a multi-disciplinary consultant, providing engineering services to the private and public sectors. Recently, Waterman has been moving into environmental engineering and health & safety consulting, including areas such as urban regeneration. The company has an excellent growth record, with a high proportion of recurring revenue. Although capitalised at just £35m, it has the potential to achieve the higher share rating its bigger competitors enjoy. Against a relatively dull economic background, 2002 could be the year in which Waterman's strengths attract attention from institutional investors.

Tom Crombie, Scottish Equitable

Scottish Power (380p)

The market is expecting a recovery in the US and world economies next year and that is now built into share prices in the London market. The bounce in cyclical and electronic stocks since the bottom of the market in September has been enormous. To make money in 2002 it will be necessary to avoid this consensus and pick stocks that are undervalued and out of fashion.

Scottish Power is certainly out of fashion following a series of problems in America and at home. Management credibility is very low in the City. The news flow has started to get a little better and they must eventually get a decision in the US right. Meanwhile, the share yields 7 per cent, the value of the business is 500p a share, or more, and it does not look like going bust. A winner for 2002.

David Cumming, Standard Life Investments

Old Mutual (87.5p)

Old Mutual is the largest life assurance company in South Africa with an estimated 30 per cent market share. The group has been expanding its asset management and private stockbroking businesses, which now account for approximately 20 per cent of earnings. Given its high exposure to South Africa (75 per cent of earnings against 25 per cent US/UK) the group has been hard hit by the weakness of the South African currency, the rand. The rand has been affected by problems affecting Argentina due to the currency's "emerging market" status, despite South Africa not suffering any related economic issues.

After recent weakness, Old Mutual shares are trading at an historic price-earnings ratio of five times earnings and yield over 6 per cent. Should markets rally from current depressed levels, this will significantly benefit asset management revenues. Any recovery in the rand will also help. The overall risk reward ratio is clearly balanced in the group's favour.

John Hatherly, M&G

Mothercare (220p)

The recovery programme for this high street retailer with a 10 per cent share of the mothers-to-be and childrenswear market has been blown off course by distribution problems. This has caused investors to lose faith in the management's ability to realise the group's full potential. Such concerns seem overdone. With a strong balance sheet and an established retail format there is every chance that the recent setback will prove temporary. It is up to the management to deliver.

David Phillips, Britannic Asset Management

Easyjet(469.5p)

After a strong 2001, we are backing easyJet to perform again in 2002. We believe that the strong business model, under the stewardship of the management team, will allow the company to tap into the substantial growth opportunities presented by the continental European market, where budget airlines' share is only 4 per compared with 22 per cent (and growing) in the US.

EasyJet has helped revolutionise short-haul air travel in the UK. With 91 per cent of sales online through its unique yield management system, Easyjet is in excellent shape to continue to grow its profits throughout Europe. The market should reward the share price accordingly.

Rod Oscroft, Legal and General Investment Management

Westbury (264.5p)

Westbury is a well managed house builder with a broad regional spread. It has produced strong growth in revenue and profits and innovated by moving into financial services, home furnishings (Westbury Direct) and manufactured housing (Space 4).

Against a background of stable economy, reasonable house price increases outside of London and a disciplined approach to supply by volume house builders, Westbury should continue to perform well in 2002 producing double digit growth.

Westbury currently trades on 5.9 times consensus earnings. The rating should further improve as the perception of Space 4 improves as it moves into profit. The significant discount to asset value highlights both the value in the stock and the potential.