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STAR Online User Guide

 

 

Background to STAR

What is STAR

What the bulletins contain

How to Use the Programme

Using STAR to invest cash

Using STAR for existing share portfolios

Using STAR for ISAs and Pension funds

Adapting STAR for Your Own Needs

Scope and Limitations

 


Background to STAR

The methods of share selection that form the basis of the STAR monthly online updates were originally developed by John Mulligan 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 over the past 25 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 were selected for use in STAR. A detailed explanation of the background to STAR is set out in Chapter 9 of the Financial Times/Prentice Hall book on "Smarter Stock Picking" by David Stevenson.

The STAR updates provide a regular monthly investment evaluation on approximately 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 three main sets of share selection indicators. One is primarily for growth, one for a combination of capital growth and income and the other for high income per se. 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 more than 20 years. During this period annual selected lists of ten shares would, by December 2013, have grown in value, before deducting costs, more than eight 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 2013.


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 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 provide sample portfolios focused on achieving either: a) growth, b) income combined with growth or c) high income.

The first two models are obtained by sorting out each month those companies that combine the highest expected rates of earnings growth with the lowest prospective price earnings ratios based on consensus data forecasts provided by many of the leading equity analysts. 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 third model, with the objective of achieving a high and rising dividend yield, is generated through a parallel approach that filters all the 300 shares in the basic database for high future dividend yields that are also well covered by rising forecast earnings.

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 seven years, 1990,1996,1997,1998, 2008, 2011 and 2012 over the past twenty eight when the STAR growth selections underperformed the market.



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 the three equity portfolio types as well as updates on each of the 300 plus shares regularly monitored. There is also usually a more detailed corporate profile on a share featured in one of the STAR selection lists.

More specifically the monthly bulletins contain the following sections:-

* Market Commentary
* STAR corporate profile
* The Latest Growth Selections
* The Latest combined Income & Growth Selections
* The Latest High Income Selections
* The Current Sales List
* Full List of all 300 companies covered by STAR


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 our 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 three separate tables that list the latest ten and twenty share selections whose objectives are Growth, Income and Growth and also High Income. 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 SIPPs

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 either the Growth, Income & Growth or High Income selection lists 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 do not form part of the STAR selection process except for shares with indicative gearing of more than 250% which are usually excluded from the selection lists. The filters we use are;
Gearing of more than 250% = E
Gearing of more than 100% = D
Gearing of 51% to 100% = C
Gearing of 0% to 50% = B
No net gearing = A


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.

The Business Growth Indicator (BGI)

In order to try and improve the detection of shares that may have the ability to do better over the longer term we have recently been testing the success of an additional filter that highlights companies exhibiting above average capital expenditure while also achieving high returns on capital employed in the business. This measure is not yet incorporated within the ranking system but is being used as a filter for inclusion in the underlying database and shows promise as an aid to initial share selection.



Putting STAR into Action

An example may help. Let us assume that you have £20,000 to invest and you wish to spread this sum equally between twenty shares featured in the growth share list for the current month. The examples which follow are taken from the STAR ranking list published in the bulletin dated 6th February 2013. The list of the top twenty shares shown in the table below has been selected after first sorting all the 300 shares in the underlying database according to each one's expected earnings growth rate and then according to its current valuation. Shares rated "BUY 10" are the first ten that 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 "BUY 20" rating subject to there being no more than three shares in any single sector in the top twenty list.


Sector Company Name Price (p) as at 6/02/2013 Net Yield % Gearing factor Ranking Order Rating
Financial F & C Asset Management 105 2.9
A
1 BUY10
Oil & Gas Soco International 398 0.0
A
3 BUY10
Insurance Amlin 382 5.9
A
4 BUY10
Oil & Gas Afren 154 0
C
6 BUY10
Insurance Novae Group 417 4.1
A
8 BUY10
Electronic Laird Group 230 3.0
B
11 BUY10
Forestry Mondi 773 0
B
20 BUY10
Financial Close Brothers 1018 4.0
A
32 BUY10
Transportation Stobart Group 99 6.1
B
46 BUY10
Tech Hardware Pace 229 1.0
C
54 BUY10
Travel & Leisure Enterprise Inns 101 0
D
60 BUY20
Insurance St James Place 463 1.6
A
9 BUY20
Oil & Gas BP 465 2.4
B
23 BUY20
Construction Low & Bonar 63 2.9
B
62 BUY20
Support Services Interserve 461 4.0
A
66 BUY20
Automobiles GKN 248 2.2
B
79 BUY20
Health Cartech Holdings 154 4.0
D
99 BUY20
Chemicals Synthomer 200 1.3
C
104 BUY20
Financial Investec 476 3.6
A
105 BUY20
Retail WH Smith 685 3.4
A
113 BUY20

Share Selection for a Small Portfolio

As mentioned above, in order to reduce risk, a ten share selection from this list should probably not include more than 2 shares from each sector. The 10 shares that would be selected for a ten share portfolio would thus be all those marked with a "Buy10" rating in the above table.

Share Selection for a Larger Portfolio

Similarly with a larger new portfolio of say £100,000 comprising twenty shares, £5,000 would be invested in each of the twenty shares in the above table and would include those with ratings "BUY10" as well as "BUY20".

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 following initial investment. 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 200. 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 selections 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 STAR 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 STAR 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 as SELL. The total proceeds from any sales should be reinvested equally 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 ten holdings.

Scope and Limitations

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 large. 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 growth and combined growth and income 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