It has been a challenging market so far in 2008, but how have our Plays of the Week performed? Read on to find out

by Russ Mould

Despite a difficult environment, Shares tips have continued to leave the broader market for dead. The FTSE All-Share has fallen by 17.1% so far this year, but Shares Plays of the Week have so far lost a mere 0.2%. This is the sort of performance a professional fund manager would kill for, particularly as the Shares picks form a long only, UK-only equity portfolio in what has been a bear market.

Our 20% stop-loss strategy has offered a little assistance and Shares is far from complacent. All investors put their money into the market to make a profit, and not merely outperform the broader indices, no matter how badly they have done. Shares will continue to sift the market for the prime picks in an attempt to conjure a profit whatever the circumstances for the rest of 2008 and there are useful pointers which can be drawn from careful analysis of how our choices have performed so far this year.

STOCKS AND STRATEGIES WHICH WORKED

In the table of our 60 Plays on the next page, Shares has ranked them in order of performance, to help investors assess which picks worked and why.

Not surprisingly in a falling market, our ‘sell’ selections, where we have taken a short position, have generally done well. Of our four Plays here, Uniq has generated a 20% profit in just two weeks and further gains look likely, while InterContinental Hotels has generated a 17% gain, again with the prospect of more to come. Online retailer ASOS has been our one failure as while the valuation looks stretched, good numbers mean no catalyst has arrived to crystallise this concern.

Our best returns have come from recession-proof firms where an economically insensitive market or excellent product has guaranteed good returns. As the UK economy slides toward a downturn, it seems appropriate corporate insolvency expert Begbies Traynor is Shares’ best performer of the year, returning a 63% profit since May. Other recession busters have included translation software expert SDL, in vitro diagnostic specialist Immunodiagnostic Systems, pharmaceutical giant AstraZeneca and organic growth stories such as wind turbine gearbox maker Hansen Transmissions.

Stop-loss strategy

As a final point, Shares stop-loss strategy has helped, but only a little. Had Shares not employed a 20% loss our 0.2% portfolio loss would have become a 2.5% deficit. This is mainly because only 14 of our 60 picks fell far enough to trigger the stop loss but also because some of those stopped out subsequently bounced back, including GlaxoSmithKline and ET-China.com International. However, the stop loss did prove useful in the cases of those few which fell and kept on falling, including Albidon, Central Rand Gold and Xaar.

AND THOSE WHICH DIDN’T

One failing of Shares Plays this year is they have not been managed actively enough. In markets as volatile as the ones we have seen this year, our usual approach of incubating each pick for the full year has not proved ideal. An 11% profit on the BlackRock Latin American Investment Trust was cannily locked in at 616p after Brazil’s debt was granted investment grade status and the trust has since slipped back to 523p. But elsewhere we have let fat profits slip away on Anite, Coal of Africa and Ferrexpo to name but three, which is especially galling as takeover talk had driven up the first two to heady heights shortly after we highlighted their attractions.

At the start of the year, the picks featured too few mining, resources and oil services plays, as those sectors dominated the performance charts, although this is now working in our favour. Our recession busters may have worked but our hedges against inflation did poorly. Miners China Goldmines and Central Rand Gold as well as retailer Tesco were all stopped out, the last-named as fears of consumers trading down came to dominate. Our foray into exchange traded funds (ETFs) with the StreetTRACKS Gold Trust had the right idea, as gold has outperformed global equities this year, but was less than ideally timed.

Value and turnaround stories such as healthcare software play Ascribe, IT services stock SciSys and automotive supplier TT Electronics have also generally failed to deliver.

Lessons to be learned

In sum, Shares has proved it is possible to beat the market by means of judicious stock selection. There has been no great difference between our small cap and large cap selections – six Aim stocks featured among our 14 stopped out plays and six among our best 14 returns.

However, recession-beating stocks capable of generating earnings growth whatever the economic environment have beaten our value, turnaround plays hands down and our inflation hedges have largely failed too. This suggests, recent rally or not, the market is hunkering down in anticipation of a recession and investors should position themselves accordingly.

Our Plays will be more proactively managed to try and capitalise on bear market rallies and slumps and the biggest question of all between now and Christmas is whether to go for financial stocks or not. Shares decision to shun all banks and insurance firms has paid off handsomely so far and while further rallies are likely, it still feels too early to take a large long bet here.