Winners & Losers: The fund managers

Even the experts look shaky in the turbulence

THE PERFORMANCE of our fund managers' tips last year shows that turbulent market conditions can catch out even the experts. Three of our fund managers recorded healthy gains and comfortably outperformed the index. But the other four suffered as concerns grew about weakening consumer spending and the risk of recession.

Top of the pile was Colin McLean at Scottish Value Management, who tipped British Energy. Shares in the nuclear generator soared by 62 per cent as investors sought the relative safety of power generation. A bottle of champagne to our winner.

Unilever, tipped by Vanessa James at Legal & General, also did well with a 29 per cent gain as the market continued to warm to the re-shaping of the consumer foods group by Niall FitzGerald, chairman.

First Choice Holidays, the selection of John Hatherly at M&G also did well. Tipped at 100p, the stock soared to 1666p by the summer, helped by good figures and the pounds 134m purchases of Unijet and Hayes & Jarvis. Though fears over consumer spending dragged the stock off this peak, they showed a healthy gain by the year's end

At the other end of the scale, British Airways hit turbulence due to a slowdown in traffic and a dramatic fall in higher-margin business and club class fares as City banks and other frequent-flyers tightened purse strings. The much-mooted takeover of EMI failed to materialise, putting the shares in a spin, as the slowdown in CD sales continued.

Mike Grimble, Norwich Union.

Tip: Airtours 384p.

AGAINST a background of a slowing UK economy, consumers are preferring to spend on holidays rather than making commitments to big ticket goods. Airtours has the advantage of a strong management team running a company with a good brand and a strong balance sheet. The recent convertible bond placing offers the scope for further growth by acquisition following successful moves in Scandinavia and the US.

It is this broad geographical base which makes Airtours less reliant than its competitors on holiday demand in the UK. Given its firm control of costs, Airtours should be able to generate good earnings growth. Although the share price has been volatile over the last year, it stands at a discount of 20 per cent to the market and is well placed to make up ground in 1999.

John Hatherly, M&G

Tip: Clydeport 196.5p

A NEW management team is transforming Clydeport, the Glasgow-based ports group. The market has already begun to recognise its strong forward earnings momentum, based mainly on rising coal imports through its efficient port facility on the West coast of Scotland. In addition, property development could yield substantial benefits. The balance sheet contains net cash and the business is strongly cash-generative.

The shares do not deserve to stand on a discount of 20-30 per cent to their counterparts in the ports sub-sector, implying considerable upside potential.

Vanessa James, Legal & General

Tip: MMT Computing 937.5p

SINCE MMT floated in 1983 it has generated annualised profits growth of 27 per cent. It is involved in computer systems consultancy and software facilities management. The company has a blue-chip client base in retail, health and the financial sectors, often obtaining preferred-supplier status with its key clients.

Currently, MMT is benefiting from Year 2000 millennium bug work and from preparations for the euro, but we are convinced that its established client base will provide sufficient projects to fuel demand post this bubble. The bulk of contracts are undertaken on a time and materials basis, reducing contractual risk, and are staffed by MMT personnel, so producing higher margins than companies reliant on self-employed contractors.

Earnings are expected to grow by 45 per cent in the year just gone, reducing to 22 per cent in 1999, yet this company is rated below the market. MMT has been wrongly compared with the IT staffing companies, ignoring its greater visibility of forward earnings. Also, it is a small company and has suffered with the derating in this area. We believe 1999 should be the year to correct this.

Tom Crombie, Scottish Equitable.

Tip: Next 494p.

IT IS SURPRISING how many cheap stocks there are in the market just now. A private investor can find many shares in unfashionable sectors with high yields and low P/Es. Of course, it is important to choose companies where profits are not going to disappear because of the economic slowdown or overseas competition.

My choice for 1999 is Next. It is a well-known, quality, high-street retailer of fashionable clothes. It made a mistake in its merchandising last year and sales and profits have suffered as a result. Retailing is out of favour in the stock market just now because of the slowdown in spending and high-profile problems at M&S.

I think Next is cheap on a 5.5 per cent yield and 11 times price/earnings multiple. The yield is almost 1 per cent higher than you get on long gilts. Expectations are low and the outlook could improve if interest rates fall below 5 per cent next year. The stock market will anticipate a recovery in consumer spending when monetary policy is eased further. The retail sector could do well and Next could do even better if it sorts out its merchandising problems.

Colin McLean, Scottish Value Management.

Tip: Shanks & McEwan 210.5p.

MY SHARE TIP for 1999 is a company that performed well in 1998, despite a weak background for medium-sized companies. The waste management business Shanks & McEwan Group has made steady progress over the past three years, yet still remains substantially undervalued.

It operates a range of waste collection and landfill activities. With a market capitalisation of pounds 400m, it is now a substantial business, and has recently moved into Europe. Utilities aiming to diversity have been buying into waste management, and recent takeover prices would value Shanks & McEwan substantially higher than its current share price.

Graham Wood, Standard Life Investments.

Tip: Imperial Tobacco 644p.

THIS YEAR will be characterised by fears over economic growth and possible price deflation as markets wait for interest rate cuts to take effect.

Imperial Tobacco is substantially cheaper than the market average, both in yield and in P/E terms. Its earnings are forecast to show double-digit growth and this forecast should be resilient against a background where economic and profits growth forecasts are generally being cut. This makes it an attractive stock for 1999.

Robert Talbut, Royal & SunAlliance.

Tip: BAA.

THE EXTREMELY challenging background against which we expect companies to be operating predicates our selection for 1999. We expect that inflation will stay very low and be accompanied by a disappointing growth out-turn.

BAA is rightly perceived as exhibiting a relatively defensive earnings stream, relating largely, as it does, to aircraft movements. While the global macroeconomic background next year is unlikely to be helpful, we still believe in the longer-term dynamics of growth in air travel. Even though BAA is still to some extent a regulated business this is becoming less significant in group terms.

The particular positive surprise that may emerge in the new year would be the delay in abolition of EU duty-free. While this would provide an added kicker to medium term valuations we remain comfortable that the company can build upon its recent relative gains, in what promises to be a difficult investment environment.