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Contents Using STAR for existing share portfolios Using STAR for ISAs and Pension funds Adapting STAR for Your Own Needs
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Background to STAR The methods of share selection
that form the basis of the STAR monthly online updates were developed
by John Mulligan, the Managing Director of MD Management, in order to
provide him with an objective approach for managing his own portfolio
of UK quoted shares. In the absence of any regular data source that he
could use to select and subsequently manage his shares he devised this
structured approach to share selection and management. It is a rigorously
researched method of regularly re-rating leading shares according to a
number of key fundamental criteria. These methods have been
developed by MD Management Limited over the past 20 years and are backed
by more than 5000 hours research. This has involved a detailed study into
the relationship between monthly equity earnings and dividend forecasts,
since 1985, and the subsequent movement in prices of the relevant shares.
The most consistently successful combinations of factors have now been
selected for use in STAR The STAR updates provide
a regular monthly investment evaluation on more than 300 of the largest
UK quoted companies. They employ methods of evaluating and rating leading
UK shares that enable you to select and manage your own share portfolios
to suit your own investment objectives and preferences. They do all this
with the minimum cost and effort. The STAR updates combine
two main sets of share selection indicators. One is primarily for growth
and the other for growth combined with a higher level of income. There
are also permutations testing for effectiveness in selecting speculative
shares and smaller company portfolios. The monthly STAR updates are specifically
designed to help in the management of ISA share portfolios and self-invested
personal pension plans (SIPPS) as well as conventional portfolios. The methods, which are used to provide regular investment signals for the STAR updates, have been back-tested on a monthly basis since 1985 and published in monthly bulletin form for almost 20 years. During this period annual selected lists of ten shares would, by January 2011, have grown in value, before deducting costs, more than ten times faster than the FTSE All Share Index. Please remember however, that past performance on any investment management programme or selection process is no guarantee to future success. One of the main advantages
of the methods used for selecting growth shares is that in most years,
since 1985, relatively few share switches have been signalled during the
course of the year. The records indicate that on average less than one
half of the shares in each portfolio were switched in each year between
1985 and 2011. What is the STAR Selection Programme ? The STAR monthly updates
provide you with a straightforward structured approach to share selection
and equity portfolio management. By means of the regularly updated share
ranking lists you have the choice of either closely following the signals
given for model portfolios comprising 10 and 20 shares or of devising
your own preferred strategies based on the monthly tables ranked according
to basic value investing criteria. In essence the STAR approach
is based on the results derived from a simple process that regularly reassesses
the relative share values of the largest 300 plus quoted UK companies.
By taking account of expected corporate growth rates and also the latest
stock market valuations of each company's shares STAR delivers a regular
framework for investment decision making. There is no magic or guarantee
to the methods used. What the regular updates do is to sort out each month
those companies that combine the highest expected rates of earnings growth
with the lowest prospective price earnings ratios. The approach tends
towards that of value investing by selecting shares that are temporarily
out of favour with investors. Provided that their lack of support is not
due to deteriorating profits growth such companies frequently prove to
be successful investments. One of the keys to this is to check the trend
in earnings forecasts and avoid, where possible, those equities where
the share price fall is preceding a significant reduction in earnings
estimates. The basic share ranking
methods have been developed by testing a large number of forward estimates,
such as dividends, earnings and cash flow, since 1985 and selecting those
that have proved to be successful over the longer term. However, it must be stressed
that there are bound to be periods, especially during a bear market, when
these structured methods result in returns that are below the market average.
Despite this there have only been five years, 1990,1996,1997,1998 and
2008, over the past twenty five when the STAR selections underperformed
the market and then only by a marginal amount. What the STAR Monthly Bulletins Contain Each monthly update usually
contains a short commentary on the latest movements and trends in the
UK stock market as well as charts and editorial on both the fundamental
and technical background to current equity markets. The monthly updates
also provide the latest share selections for growth and income portfolios
as well as updates on each of the 300 plus shares regularly monitored.
More specifically the monthly bulletins contain the following sections:- * Market
Commentary
The Market Commentary section includes a resume of domestic and international equity markets. The progress of the UK equity market is also featured in a regularly updated chart, with plots of both long term and short term moving average lines, generated from MD Management's own database. The same section also includes an update on the progress of the year's benchmark share portfolios and comments on new share selections. There are two separate tables that list the latest ten and twenty share selections covering both Growth and Income as well as the latest Speculative selections. Regular users with established portfolios usually then take a quick look at the Latest Sales List which summarises all shares currently rated for sale. The Full Ranking List classifies all 300 companies by sector and
indicates the current price, dividend yield, borrowing level, ranking
position and action rating. How to Use the Programme The STAR updates may be
used in any of the following ways:- · To set up and manage share portfolio selections from scratch using cash · To manage part or all of an existing portfolio · To
select shares for self-managed ISAs and Pensions The notes which follow show,
in detail, how STAR can be used to set up and manage a ten share portfolio
using cash and the modifications required for use with existing portfolios.
Using the STAR updates to invest Cash Deciding on the Number
of Shares to Buy Evaluation of portfolio
selections since 1985 indicates that it is sensible to spread the initial
investment funds between at least 10 shares in order to reduce risk. Fewer
than 10 shares increases the adverse impact of a single poor performing
share even though the long term gains from selections of as few as six
shares have often exceeded those from 10. With more than 20 shares management
of private portfolios can become expensive and time consuming. For this
reason each STAR bulletin provides a list of the month's cheapest 20 shares.
On the basis of an initial 10 share portfolio equal amounts would be invested in each of the shares marked as BUY10 in the latest Ranking list - selecting from the Growth or income pages as appropriate. Similarly construction of an initial 20 share portfolio would be carried out by buying all the shares marked as BUY10 as well as those marked BUY20.
Spreading the Risk In order to prevent share
portfolios becoming too exposed to problems in any one sector of the market
the rating system allows for no more than two shares in any single sector
in ten share portfolios and no more than three in twenty share selections.
The rating guidelines (BUY10 and BUY20) allow for this in each monthly
list but it is obviously up to you to check that sector over-weighting
does not become excessive - especially as investment values change through
the year. The Ranking Numbers These indicate the relative
position of each share in terms of both expected earnings growth rates
over the next two years and current valuation. In general terms shares
with a low ranking number are cheap and those with a high number are expensive.
Each month's Top Twenty lists comprise shares with the lowest ranking
positions after removing those which fail certain other tests.
The Rating Values The basic Rating Values
are as follows:- Shares with BUY10 are worth considering for purchases in 10 & 20 share portfolios Shares with BUY20 are worth considering for purchases in portfolios of more than 10 shares Shares with HOLD may be held in all portfolios Shares with
SELL
could be sold in all portfolios
The Gearing Filters Gearing ratios indicate
the extent to which the company uses borrowed money. When interest rates
are low and money is cheap a relatively high gearing ratio may help the
company to generate fast profits growth. However, when interest rates
rise high gearing can be dangerous and investors may wish to exclude shares
with high gearing ratios. The data on gearing does not form part of the
STAR selection process and is only included for information. The filters
we use are; Gearing of more than 100%
= D
Dividend Yield The dividend yield shows
the gross dividend yield that is receivable by shareholders at the current
market price of the shares. The STAR Income list uses the same basic selection
criteria as the capital growth list but excludes all shares with a dividend
yield below the median for the total 300 companies monitored. Putting STAR into Action A couple of examples may
help. In the first case let us assume that you have £10,000 to invest
and your objective is capital growth. The second example is the investment
of £100,000 spread between twenty individual share holdings. The examples which follow
are taken from the STAR ranking list published in the bulletin dated 7th
May 1998. The list of the top twenty shares shown in the table below has
been selected after first sorting all the 300 shares according to each
one's expected earnings growth rate and then according to its current
valuation. Shares with 4 stars are the first ten which meet the basic
criteria provided that there are no more than two in any single industry
sector. The next ten shares in the ranking list which meet the criteria
are given a 3 star rating subject to there being no more than three shares
(with 4 and 3 stars) in the top twenty list.
Share Selection for a
Small Portfolio In order to avoid unacceptable
risk, a ten share selection from this list should probably not include
more than 2 shares from each sector. The 10 shares would then be all those
on the above list marked at BUY10 against them. They would be; British
Aerospace, Salvesen, Charter, City Centre Restaurants, Monument Oil, Hillsdown
Holdings, Fine Art Developments, Booker, Norcros and Bryant Group. Share Selection for a
Large Portfolio Our second example is of
a larger new portfolio of £100,000 comprising twenty shares. This
would require the purchase of all shares which at that date had ratings
of both BUY10 and BUY20. This would include all the shares in the above
table. Subsequent Management Once the portfolio is established
you should review the rating indicators of your shares in each subsequent
issue of the STAR updates. If any share is flagged as a sale you should
carefully review the reasons. It may be because it has risen in value
and is now viewed as expensive or it may be that the outlook has deteriorated.
If you wish to follow the structured approach completely you could consider
selling. In any event the change in rating should act as a signal to monitor
the progress of that holding very carefully. In order that portfolios
do not become too unbalanced, it is usually a good idea to re-adjust existing
holdings after completion of the first full calendar year. Depending upon
taxation liabilities and personal preferences this may involve, at the
most extreme, the replacement of all shares not currently rated as purchases
with those that are. Less dramatic is the sale, subject to taxation considerations,
of all shares rated as either being a SALE or a HOLD and with a ranking
number exceeding 100. They would then be replaced by shares, not already
held, from the latest Top Twenty list. The STAR performance record assumes
that all shares not rated with an appropriate value (BUY10 for the 10
Share list and BUY10 and BUY20 for the 20 share list) are sold at the
end of each calendar year and the proceeds reinvested in the new slections
list. Using STAR for Existing Share Portfolios Investment Objectives
Before putting STAR to work
on existing portfolios it is advisable to review the overall objectives
of your equity investments. At this point it may also be helpful to seek
investment advice from a qualified accountant or other advisor. More specifically
it will be essential to decide on the number of holdings you want to have
in your portfolio and their average value and the weighting between sectors
as explained in the preceding notes dealing with the investment of cash. Investment action Once you have decided on
the strategy to be adopted you may use the latest issue of the S.T.A.R.
bulletin to sell any shares rated as SELL and to reinvest all net proceeds
equally between those shares currently rated as either BUY10 or BUY20
depending on the final composition of portfolio desired. Deciding on Your Portfolio
Size In adjusting existing portfolios
to the S.T.A.R. system, you must first decide on the total number of holdings
you want to have in your portfolio and their average initial value, as
explained under the section above. Setting up the Portfolio Subject to potential tax
liabilities and transaction costs of share sales, you should consider
disposing of any existing shares that are currently rated with only a
single star. The total proceeds from any sales should be reinvested between
as many shares, on the current buy list, as are necessary to make up a
balanced portfolio. The procedure is then as explained in the previous
section dealing with cash investments. Subsequent management After you have re-organised
your existing portfolio, the subsequent management procedures will be
exactly the same as those outlined in the previous sections. Using STAR for ISAs and Pension funds The basic advantages
of STAR for tax exempt funds The structured approach
to share selection which is provided by the STAR updates is ideally suited
for portfolios, such as ISAs and SIPPs, that do not incur any taxation
liabilities on asset disposals. Investment Management The actual management of
the funds will follow the same procedures as those outlined above for
cash or existing portfolios except that, when starting a new fund of one
of these types, the total sum may initially be too small to benefit from
the STAR approach. One way round this difficulty may be to use high quality
investment trusts during the first year or two until total resources have
grown sufficiently to make it economical to spread the investments among
a minimum of at least six holdings. Because the STAR updates
concentrate on the three hundred largest UK quoted companies you are unlikely
to encounter any practical dealing difficulties unless the overall portfolio
size is really massive. In essence the STAR approach therefore offers
you an extremely low cost and simple way in which you can manage your
equity investments. Although the methods used
in the bulletins have been back tested on a monthly basis since 1985 and
in most years have provided results vastly better than the main indices,
there have been periods when the annual and monthly selections have significantly
underperformed the general market. It is therefore important that the
STAR methods are viewed over the long term and not used as investment
trading signals. This means that you should really allow the approach
to work for at least two years before making a judgement on its overall
effectiveness.
Adapting STAR for Your Own Share Selection Methods The STAR Ranking Lists
May be Used to Develop Your Own Share Selection Methods The monthly STAR update tables rank all the shares covered according to their expected earnings growth rates over the next couple of years with selections taken from within the lowest priced quartile of all shares in the total universe. This method has been termed that of Growth at a Reasonable Price (GARP). It is clearly possible for interested users to adapt these selection lists according to their particular requirements thus generating portfolios comprising any chosen number of shares and if necessary ignoring the sector weighting limits.
General Notes and Warning Before using the STAR
updates you should carefully consider the likely dealing and transaction
costs as well as all taxation implications and, if in any doubt, you should
seek professional financial advice. The information contained within the
STAR updates is provided strictly on the basis that subscribers make their
own investment decisions. Users of the STAR updates must accept that the
value of their investments can go down as well as up and past performance
is no guarantee of future income, earnings or capital growth. STAR bulletin is a publication that features certain securities and comments on them, based on a number of factors. These factors may vary and are subject to change from time to time without notice. The information contained
within the STAR updates will be prepared with all reasonable care. No
responsibility is accepted for errors and omissions. The editor cannot
be held responsible for any losses (including, without limitation, consequential
loss) which may be incurred by you acting on any information contained
within the publication. The contents of the STAR
updates do not constitute, nor should they be taken as, a recommendation
to buy, sell or otherwise maintain any particular investment or share
holding and take no account of whether a particular investment is best
suited to an investor's individual circumstances at any time. The editor cannot give,
nor should the communication of any information given within the STAR
updates be taken as being investment or taxation advice. The editor is
only the publisher of the STAR updates and, in this context, is not acting
as a financial adviser. If you need investment
or taxation advice you should consult a duly authorised financial adviser. John Mulligan - Editor |