Eight new growth stocks

John Mulligan runs the STAR Portfolio system. For an explanation of STAR, see: A simple system that trounces the FTSE.

Those of you who have followed the STAR selections since I started writing about them a couple of years ago may recall that this is a long-term method of selecting and managing a UK equity portfolio using growth at reasonable price criteria. It is also a long-only approach, meaning that all the funds earmarked for investment are assumed to be invested in the equity market.

The assumption is that the strategic decision about overall asset allocation as between cash, loans, shares and other assets has already been made. I feel it is important to make this point as it helps to explain why the STAR Portfolio remains fully invested in equities even during bear markets.

I have now been running the STAR selection methods for a 10 share growth portfolio over a total period of some 22 years. During this period, I have tracked the relative performance, in terms of selection ability, through five years in which the All Share Index ended the year lower than it started. In only one of those years, 1990, did the STAR selections record a fall greater than the index and that was only one percentage point greater. Last year was another difficult year in which the STAR 10 growth selections (nb this is not the same as the iii growth selection list) fell 1% against a 2% fall in the market.

The 2006 growth selections: As at the start of 2008 

The basic procedure for operating the STAR system requires that all portfolios that have been held for a full calendar year should be re-balanced each January. The table below shows the value of the original portfolio just before the updating of the holdings took place on 9 January. 

In essence, these 10 selections had achieved an overall return since inception, excluding dealing costs and dividends received, of 4.9% against an index gain of 3.5% over the same period. The weak performers have been the banks and financials while, recently at least, growth has been provided by the shares in the mining and oils sectors.

One of the more disappointing investments has been Premier Foods (PFD). This holding entered the list as a result of the acquisition of RHM by Premier. At one stage, the RHM investment had made a significant profit, but over the past few months Premier Foods has under-performed the market as investors fear that the group's sales and profits will suffer severely from the dramatic rise in world grain prices. Since the shipping out of Premier as part of the January re-balancing exercise, Premier shares have fallen back even further.   

The January 2008 re-balancing

The January analysis, rating and ranking of more than 300 larger quoted equities covered by STAR was carried out a bit later than usual last January in order to allow time for any changes in analysts' estimates to flow through after the Christmas holiday period. 

As a result of the re-vamping of this portfolio, only two shares - St James Place (STJ) and Prudential (PRU) - were retained from the previous list. The nominal proceeds from the other eight shares were divided equally between the eight shares selected as replacements. These were Mecom (MEC), Luminar (LMR), Woolworth (WLW), UK Coal (UKC), Michael Page International (MPI), Daily Mail and General Trust (DMGT), BlueBay (BBAY) and Brammer (BRAM). It is worth noting that the present portfolio is producing an indicative gross dividend yield of almost 4.5% which is high in comparison with recent levels. In past years, a relatively high dividend yield on the growth selections has often preceded a recovery in the market. However, in the present volatile investment environment, I offer this observation as a comment rather than a prediction.

After this substantial re-organisation of the existing portfolio, the current value has managed to remain in positive territory with an overall gain of 1.8% since the start of the exercise almost two years ago. In the same period, the All Share Index has fallen by 2.9%. Over the past month the revised portfolio has fallen by 3% against an index fall of 6%. All in all, the STAR approach seems to be holding its own so far this year, but with both markets and individual shares subject to extreme variations on a daily basis it would be rash to predict where values will be in a month's time, let alone a year.

Next month, John will update the STAR Income Portfolio. Subscribers to the STAR system receive a monthly newsletter with full buy and sell recommendations. For more information, see the STAR website.