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Everything you wanted to know about Top Stocks...
...but were afraid to ask. Learn what it is, how it works, and how to use it.
by Richard Harris on Sep 07, 2011 at 14:35
...but were afraid to ask. Learn what it is, how it works, and how to use it.
Top Stocks is a list of some of the most interesting companies to invest in, as chosen by five of the most talented investors in the UK.
We've collected and analysed their portfolios to find out which stocks they all agree are worth owning, and which stocks they have the most conviction in.
Those five investors are:
- Derek Stuart, manager of the Artemis UK Special Situations fund
- Nigel Thomas, manager of the AXA Framlington UK Select Opportunities fund
- Thomas Dobell, manager of the M&G Recovery fund
- Richard Buxton, manager of the Schroder UK Alpha Plus fund
- Edward Legget, manager of the Standard Life Investments UK Equity Unconstrained fund
They've all been picked from Citywire Selection, our investment fund shortlist, for their track record in 'beating the market' by investing in the right companies.
Fund managers try to beat the market ('the market' in this case meaning the FTSE All-Share, an index of 630 or so companies traded on the London Stock Exchange) by owning more of the good stocks and less (or none at all) of the bad ones.
The short version: Conviction score is a measure of how much the fund managers like the companies in Top Stocks. Think of it as a way to find the hidden gems that normally get crowded out by the megacorporations.
Now for the long version. If a company – let's call it Example Plc – makes up 1% of the FTSE All-Share, but a manager has invested 3% of their fund in it, it's a good sign that they think it's a stock with decent prospects.
If they own less of a company than they would if they were tracking the market, it probably means they're less excited by it (but not necessarily that they dislike it – they've bought it, after all).
In the example above, the fund manager can be said to be 2% overweight.
Now let's say they've invested 12% in Metaphor Plc, which makes up 10% of the market. Again, they're 2% overweight, but that 2% isn't as strong a statement of conviction as it is for Example Plc because the relative overweight is smaller – 1.2 times overweight instead of 3 times overweight.
In the Top Stocks system, if the average fund manager (which may only be one manager) is 1-2 times overweight, the stock has one conviction bar. If the average manager is 2-4 times overweight, it gets two bars; 4-8 times, three bars; and so on, with the maximum eight bars reserved for the rare occasions when the average manager is more than 128 times overweight relative to how much they'd own of the stock if they were simply tracking the market.
Just to complicate matters further, some of the Top Stocks constituents don't feature in the FTSE All-Share, because the fund manager has decided to buy a company based overseas (UK fund managers are permitted to invest up to 20% of their assets outside UK shares). This is a strong statement of conviction; as such, we've assigned the maximum eight bars in these cases.
The important thing to take away is that stocks with a high conviction score are some of these fund managers' favourites.
Not necessarily – the fund managers decided to buy it, after all. It just means that they're probably not quite as excited by its prospects as those of other stocks in their portfolios. At the risk of generalising, they are often larger stocks, and may be there for the dividend yield (see below) or to balance out some of their risk.
Think of Top Stocks as a way of generating investment ideas. You can order the table by any of the columns depending on what you're looking for.
Here's an example. Suppose you want to invest in a company in the mining sector. Clicking on the 'Sector' label at the top right of the table will allow you to see which Top Stocks are in that sector. At the time of writing there are four – Xstrata, Vedanta, First Quantum Minerals, and Kenmare Resources. Xstrata is in two managers' top 10s, and they have 'conviction' (meaning they own more of it than they would if they just following the market – see above for more details on conviction score) so it's probably worth a look.
Having decided that, you can click on the stock to reveal more information, such as recent news about the stock and a chart showing how well (or badly) it has done.
It depends what you mean by 'best'. Every stock is different – some are riskier smaller companies, others are safer large ones with lower growth prospects; some make their money by selling products to other British business, others are dependent for their revenues on consumers in far-off lands. If you're not sure what sort of companies you want to invest in, you may prefer to invest in funds, such as those featured in Citywire Selection, or seek the advice of a professional financial adviser such as those featured in Adviser Finder – or you can always get pointers from fellow Citywire users via our forums.
Once you know what sort of stock you're looking for, clicking the column headers will show you the most popular stocks, those in which our managers have the most conviction, or those with the highest dividend yield.
We refresh the list once a month, as soon as the latest data arrives from the fund managers which is around 30 days after the end of the month in question – so data for the end of August arrives at the beginning of October, for example.
Average holdings, overweights, conviction score and dividend yield are all as per that date. The share price performance column is live with a 15 minute delay.
Because that's the data that fund managers are required to make public – if they gave away all their secrets no-one would buy their funds.
But the beauty of Top Stocks is that it whittles down the 630-odd constituents of the FTSE All-Share to around 35 of the most interesting companies, enabling you to focus your research accordingly. So it's a blessing in disguise.
Many companies pay dividends to their shareholders, typically twice a year. The dividend yield is a measure of how much you would have earned in dividends over the previous year, relative to the price of the share.
So if a stock is trading at 100p per share, and paid two dividends of 2p each over the previous year, the dividend yield is 4%.
Buying high-yielding shares and reinvesting the proceeds is a popular investment tactic – companies tend to be reluctant to cut their dividends, which means the returns can be more predictable (though the usual caveats apply – historic yields are no guarantee of the future). But there are no free lunches: high-yielding stocks are often larger, more mature companies, which may be unlikely to grow as fast as younger companies that don't yet pay dividends.
For more help understanding dividends read Smart Investor.
Why certainly! Registered users (it's quick, painless and free to register) can set up email alerts, or add stocks to their virtual portfolio, by using the buttons in the top right of the pop-up windows that contain details of each stock
There are no guarantees in investing, and anyone who tells you otherwise probably has an agenda. You shouldn't invest in a stock just because it features in Top Stocks – it exists to give you ideas and inspiration. The usual rules apply: DYOR (do your own research), don't invest money if you can't afford to lose any of it, and invest for the long term rather than for quick gains – which usually turn into even quicker losses. (If you're looking for the exit at this point, you may prefer to look at investing in funds, seeking the advice of a professional, or getting the views of fellow Citywire readers on our forums.)
Our track record is in identifying the most talented fund managers, via the Citywire Ratings. The Ratings, which have been going for over seven years, have become an indispensable tool for investment professionals, because they establish which fund managers are able to outperform their benchmarks without taking unnecessary risks with investors' money.
We've done extensive backtesting of the Top Stocks methodology, and found that if you treat it as a portfolio it has outperformed the FTSE All-Share by a healthy margin (though buying the five funds it's based on, in equal measure, would have done even better). That said, we don't suggest you try and treat it as a portfolio by buying every stock in the list – if nothing else, the dealing costs would probably wipe out your returns.
The easiest way to buy shares is via an online broker. For a full explainer read How to buy shares.
We'd love to hear your feedback. The Top Stocks team can be reached at firstname.lastname@example.org – we can't promise we'll be able to respond to everyone individually, but your input will help us make the next version even better, so we really appreciate it.
More about this:
Look up the funds
- Artemis UK Special Situations R Acc
- AXA Framlington UK Select Opportunities Inc
- M&G Recovery A Inc
- Schroder UK Alpha Plus A Acc
- Standard Life Inv UK Equity Unconstrained Ret
Look up the fund managers
More from us
- Everything you needed to know about Citywire Fund Manager Ratings...
- How to buy shares
- Top Stocks
- Citywire Selection
- Best investment funds from Citywire Selection
- Adviser Finder
- Citywire Money forums
- Smart Investor