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MONEY: SHARE CLUBS: Time to call in the big boys

David Stevenson
Saturday 10 July 1999 23:02 BST
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There are now more than 3,700 share clubs in the UK and the number is growing by more than 100 a month. These groups meet regularly to pool their cash and invest in shares they believe will perform well. An estimated six out of 10 club members have never bought shares before.

For the past year we have been following the fortunes of the Reservoir Dogs share club, a diverse group of London friends. The club has an adventurous investment strategy.

This month: filling the portfolio

One of the great ironies about building up a portfolio of shares over time is that the more shares you buy, the more you dilute your chance of making big percentage gains in the money you have invested. In our first six months, we got off to a flying start with four shares generating an overall 35 per cent profit. Now, with a more mature portfolio of 15 shares, that profit margin is a more pedestrian 20 per cent, but it is still ahead of the stock market.

So why bother with a diverse portfolio? The simple and blindingly obvious answer is that a larger portfolio may lessen your chances of giant moves forward, but it also lessens any chance of a big drop in overall value. With the stock market at what even hardened City experts are calling an irrational high, that is an important consideration.

An equally pressing consideration for any club in developing its portfolio of shares is the question of size. Size, as the adverts for Godzilla pointed out, really does matter. At Reservoir Dogs our share portfolio has been heavily oriented towards smaller company stocks. We felt that smaller company stocks can represent unprecedented value with low valuations, high dividends and real growth potential.

But because we have been underweight in large companies, it looked like we were missing out on the great performance of global firms. They have globalised, diversified, built IT into their core decision-making and offer customers big and small the reassurance of dealing with a multinational that has the ability to deliver on all fronts.

This thinking has helped propel the FT-SE 100 list of top UK companies to all-time highs as investors scramble into hot growth stories like telecoms or pharmaceuticals.

The problem any investor has in rebalancing any portfolio, so it holds a bigger percentage of FT-SE 100 companies, is that because the market is close to an all-time high you may well end up paying well over the odds for a brand name.

Undaunted, since our last report in May we have researched and selected some big name shares for our portfolio:

First up was Rolls-Royce, the aero-engines maker. We remain convinced of the wisdom of our investment in Britain's pre-eminent manufacturer. It is also cheap in comparison with the Vodafones of this world.

At another recent meeting we opted for Scottish Power. It has embraced the US with takeover plans and has an interesting telecoms division that takes in the Demon internet business. There is talk of floating this off as a separate entity, which is bound to generate massive interest.

Carlton is a big company that has a relatively lowly rating, despite a solid raft of businesses. It owns a substantial share of the terrestrial digital network ONdigital. Investing in Carlton is a bit of a gamble, especially when you consider that ONdigital's main foe is Rupert Murdoch and BSkyB, but at least the Carlton empire will represent a tasty target if the likes of Bill Gates decides that owning a chunk of multimedia assets is worth the price.

We have also looked at companies just below the big league. Wassall is not an FT-SE 100 company but belongs to the next index of companies, called the FT-SE 350.

It is what they used to call a diversified industrial. It started off in the 1980s by apeing Hanson, buying companies, breaking them up and then repairing the good bits.

It is still on the acquisition trail (it got a bid in for the disastrously performing cable group BICC) and shows every sign of building a viable collection of international-level industrial firms.

AEA Technology has a first-rate collection of consulting and technology development companies. Profits have moved ahead consistently and this is a good business.

We have got some shares in the boring West Midlands metal-basher Metalrax. But even though its share price continues to fall, we decided to buy some more. Why? Simple. We believe in the company and as its share price has hit an all-time low, it is an amazing opportunity to buy.

Our last buy falls into a handy "dog" category. Dialog, nicknamed "Dial a Dog", is a collection of interesting internet-based information businesses. It is British-based and promises some of the most interesting e-commerce technology around. It is hated by the City but we think it has a sound collection of businesses at a bargain price.

And the rest ...

Our earlier buys have been a mix of good and bad news. AB Airlines has been a disaster. We bought the shares at 65p and they are now at 20p. One of our members went on a flight and a member of AB's staff said the company was great and thought it would be taken over. We have no doubt this will happen but think any takeover will be more of a firesale, a way of picking up cheap assets.

Engineer Transtec has been marking time, falling at one point by as much as 20 per cent, only to recover. We still believe Transtec is cheap and it has an excellent dividend.

Our star performer, Acorn, is no longer. All its old businesses are being sold off and its hugely lucrative holding in ARM, a microprocessor manufacturer, is being passed on tax-free to shareholders. A tasty 250 per cent profit for us.

The recent star for us has been Brookes Services. This boring but well- run cleaning and linen rental firm has shot up by at least 50 per cent in a couple of months as the City has warmed to its excellent recent figures. There are plenty more companies like Brookes out there: we will try to reshape our portfolio to accommodate them and let you know how we get on.

Next month: we look beyond conventional UK stock market investments for our next move.

n If you are interested in getting together with friends to form a share club, Proshare offers a share club manual for pounds 20 including postage and packing. Call 0171-394 5200.

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