New Economy still flavouring our tipsheet for the year ahead

The Independent's Portfolio

It was all going so well at the half way stage, then as with most other share portfolios last year, disaster struck. It was not as bad as it could have been, however. Our portfolio of 10 tips is down 6.9 per cent on the year, comfortably beating the FTSE 100 index, which fell 10 per cent.

It was all going so well at the half way stage, then as with most other share portfolios last year, disaster struck. It was not as bad as it could have been, however. Our portfolio of 10 tips is down 6.9 per cent on the year, comfortably beating the FTSE 100 index, which fell 10 per cent.

One share did particular damage, our "risky" biotechnology tip, Scotia Holdings, which tumbled 89 per cent. Almost all of the fall occurred in one day's trading in September after the group said US regulators had rejected its lead drug, Foscan, a cancer treatment.

The tip was made on the expectation Foscan would win approval in 2000. Foolishly, we overlooked the fact that Scotia had raised £50m in a convertible bond, rather than straightforward equity, which ensured that any delay to receiving revenues from Foscan would leave Scotia vulnerable to collapse. And we so very nearly tipped Shire, which doubled in value, instead.

Our other New Economy tips had a mixed year. Cable & Wireless, the telecoms giant, EMI, the record company, and Cordiant Communications, the media group, soared 50 per cent during the frenzy for TMT (technology, media and telecoms) stocks but have ended the year in negative territory. The portfolio's overseas representative, Socket Communications, a developer of Bluetooth wireless technology, leapt almost sevenfold to $51, only to end 2000 down almost 50 per cent. Guardian iT, which provides computer back-up services, was up 100 per cent as recently as September but closed the year almost flat.

The best returns arose from merger and acquisition activity, with Thomson Travel, an obvious takeover target, being bought for cash by Preussag, the German holiday firm, at a 75 per cent premium to its opening price at the beginning of the year. Likewise, Booker, the groceries distributor, fell to an all-share offer from Iceland, the supermarkets firm. Booker shareholders now possess shares in Iceland worth 44 per cent more than the value of their holdings in January.

The logic behind selecting Kingfisher - that the booming housing market would mean strong sales in its DIY and electrical chains - seemed faultless, but analysts spent most of 2000 cutting group forecasts. By contrast, VTR, the Soho-based independent post-production house, came good at the last minute, enjoying a rally over the last few days of 2000 resulting in a 14 per cent annual gain.

Entering 2001, the problems facing tipsters are similar to those 12 months ago - there are many voices forecasting recession in the US and beyond. By the same token, however, most City equity strategists are forecasting some kind of a rebound in shares this year. Don't forget, the last time equities fell in two successive years was as far back as the 1970s.

In any case, active fund management comes into its own in a bear market, so good stock selection is going to be more important than ever this year.

This newspaper continues to believe that the New Economy is a reality, and that some technology stocks offer impressive growth prospects. The problem, as ever, is picking them. Right now may not be the time to pile back into equities. There could easily be another six months of turbulence to come. But with the long-term future in mind, we are sticking to our guns and giving our portfolio a high New Economy flavour.

If one thing is for sure in the New Economy, it is that there will be an increasing amount of data needing to be stored. Intechnology, which floated in March, is a provider of online data storage that was set up by Peter Wilkinson. Mr Wilkinson's entrepreneurial track record is impressive. He set up Sports Internet Group and Planet Online, later bought by BSkyB and Energis, and was the brains behind Freeserve. The shares, at 315p, have so far proved resilient to the tech sell-off, and should benefit further this year from newsflow attending Intechnology's push into Europe.

Bookham Technology, the fibre optics group, also proved relatively immune to the tech collapse last year, until it revealed it had large unsold stocks of its optical switches and routers last month. At 950p, the shares are now trading at just below their flotation prices of 1,000p, which provides a solid support level given the number of committed long-term investors who bought in at the float. Cutbacks in capital expenditure by Bookham's telecoms customers remain a worry, but Bookham, which after all knows its business best, has been investing heavily in new capacity. Growth may be slower than once anticipated, but the company remains uniquely well placed in its main telecom markets.

Internet security continues to be a headache for all companies, and nCipher, the technology tiddler, offers an attractive punt on the sector. At 272.5p, the group's shares are now just below their October issue price of 275p, again a likely floor against further falls. The group raised £92m in the float, which gives plenty of room for development. The company's customers include Microsoft's Hotmail e-mail service.

Not to be confused with nCpiher is Scipher, the intellectual property group that owns patents belonging to the former Thorn electronics group. The group has done deals with the likes of British Telecom and AstraZeneca, and has a wealth of experience in exploiting intellectual property. The shares, at 570p are risky, but have proved resilient over the last six months when other techs have been tumbling.

For all John Prescott's, manly negotiation technique, the solution to global warming is more likely to come from industry than the Deputy Prime Minister's office. This year's overseas stock pick is Ballard Power Systems, a Canada-based manufacturer of engines powered by fuel cells rather than petrol. Ballard is part owned by Ford and DaimlerChrysler, but it has also supplied fuel cells to General Motors, Nissan, Volkswagen, and Honda. True, 2001 will not be the year when petrol stations are replaced by stations selling hydrogen for fuel cell-powered cars. But automobile manufacturers are committed to fuel cell technology, and Ballard is regarded as the leader in the field. The shares, at CA$95.15, (£42.50) have risen 100 per cent this year but they are 50 per cent off their high. The stock is high-risk but cannot be ignored.

Capital Radio, the fast-growing radio group, is running up against the limits of its permitted share of the UK radio audience but that should not hinder continued growth in its share price. The group can still take minority stakes in local radio stations, which would be useful toeholds for when radio regulations are relaxed. The shares have retreated lately amid fears of a slowdown in advertising revenue growth, and, at 1,197.5p, look attractive.

First Choice Holidays, has real scarcity value in the UK travel market now that rivals Thomson Travel and Thomas Cook have succumbed to bids by German holiday companies. First Choice has outlined a credible strategy based on shunning the mass market to pursue niche holidays. Margins are now among the best in the sector and a European merger remains a possibility.

For exposure to the financial sector, we have selected Aberdeen Asset Management, at 622.5p. Aberdeen has an excellent reputation in both the retail and wholesale markets and may be back in play as a bid target, now that Scottish Provident, the life insurer which rescued it from takeover by Jupiter Asset Management by taking a 38 per cent stake, has come under new ownership.

Capita, the highly rated outsourcing group, is perhaps one of the stock market's most boring companies but that's no problem given the consistency with which it has delivered shareholder value. The group specialises in providing myriad services, including payroll management and benefits payment systems. Now it is looking to replicate its success in the private sector. The shares, at 500p, bring solidity to the riskiest of portfolios.

Our embarrassment with Scotia Holdings last year has not deterred us from the biotechnology sector altogether. British Biotech is about the only biotechnology group to have gone nowhere in 2000, largely due to continuing negative sentiment surrounding Marimastat, the disappointing cancer treatment that was formerly its lead drug.

The drug is likely to be dropped when trials end next year, a move likely to lift the cloud that has hung over the stock. That will also leave British Biotech with six drugs in clinical trials - plenty to attract investor interest. A new chief executive has promised to acquire more compounds to flesh out the group's pipeline in 2001, and, unlike Scotia, the group has plenty of cash. At 19.15p, the shares are just 4.75p off their all-time low, and the risks appear limited.