Track records ... investor newsletters are a difficult game. Photo: Nicolas Walker
Many self-directed investors rely on the stock tips and advice offered by investor newsletters. But there is no real way to gauge which one has the best strike rate, writes John Collett.
Investor appetite for share tips is growing strongly, spurred by the flight to DIY super. Many self-directed investors rely on the stock tips and advice offered by investor newsletters.
But how good are their recommendations?
While the performance of fund managers is easily established by looking at independently audited performance data, the same is not true for these analysts.
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Only a few have their performance audited. And to complicate things further, all use different methods to measure their success rates. Of the leading players, only Fat Prophets has its numbers independently audited by an accountant.
''Nothing hums like a paper portfolio,'' says Ben Griffiths, co-founder of Eley Griffiths Group, a small-companies manager. ''When the dollar is alive, it's not as easy.''
Demand is growing for these services, particularly from the swelling ranks of DIY super fund trustees looking for advice on how to make money in the sharemarket.
Whereas 10 years ago the newsletters offered a printed publication with recommendations of stocks once or twice a week, these days, the subscribers can access the advice any time as they are updated almost daily.
Investors pay up to $900 a year for their flagship, web-based reports; more when the newsletter is bundled with specialist reports such as mining and small companies.
Fat Prophets has 20,000 subscribers. More than 13,000 of those are based in Australia, with the rest in Britain, where it has a London office, and a small number in the US. In 2005, Fat Prophets had about 7000 subscribers in Australia.
Angus Geddes, who co-founded Fat Prophets in 2000, says a big part of the growth in his business has been the rise of DIY super funds.
''We also attract a lot of people who are disgruntled with the big broking houses,'' he says.
In recent years, Fat Prophets has added a share brokering service and a funds management arm to its stock-tipping services.
Huntley's Your Money Weekly, started by Ian Huntley in 1973, has a loyal following, many of whom are DIY fund trustees and small-business owners. Morningstar bought Huntley's business in 2006.
The head of retail at Morningstar, Paul Easton, says: ''Subscribers are high-net-worth individuals who like to take control of their finances.''
Strike rate
When it comes to the tipsters' track records, it is difficult to make meaningful comparisons - some account for a portion of the costs of investing and others do not.
The Rivkin Report says its recommendations have produced an average annual return of 13.2 per cent against a total return (including dividends) from Australian shares of 9 per cent between mid-1998 and the end of 2010. While the cost of brokerage is deducted from the ''estimated'' return, the performance is not independently audited.
Intelligent Investor's stated return between May 2001 and December 31 last year - a total of 521 recommendations - is 8.9 per cent, compared with the market's return of 8.4 per cent.
Huntley's main model portfolio for the 20 years to the end of last year produced an average annual return of 11.9 per cent, compared with the market return of 11.2 per cent.
Fat Prophets says its recommendations have produced an average annual return of 24.6 per cent, compared with the All Ordinaries Accumulation Index of 8.2 per cent between October 2000 and the end of last year. The numbers for last year have not yet been audited - but they will be.
''It [auditing] is expensive to do but you have to do it, particularly if you use it in advertising,'' Geddes says.
Fat Prophets was pulled up by the regulator in 2002 after using potentially misleading performance figures in its advertising and was required to engage an independent expert to devise a methodology for measuring performance.
Whether the numbers are audited or not, the performance of the tipsters on all their recommendations may not mean that much, since investors could not possibly trade on every one of the tipsters' choices.
Model portfolios
To help subscribers replicate their recommendations in their own portfolios, the tipsters have ''model'' portfolios.
The model portfolio contains a limited number of the newsletter's best stock ideas and is constructed to be balanced between the various industry sectors of the sharemarket.
Each stock holding will be ''weighted''. Stocks they favour most will make up more of the portfolio. The performance of the model portfolio is published to the tipsters' subscribers.
The performance of the Rivkin model portfolio, for example, accounts for the cost of brokerage, interest on the cash balance and franking credits.
''Model portfolios provide a transparent method of reporting our performance and provide valuable advice as to capital allocation,'' says the chief executive of the Rivkin Report, Kristian Dibble.
Tipsters say their services are as much about giving their subscribers advice on what to do when shares they own are the subject of a takeover offer or a buyback from the company as they are about giving tips on stocks.
Dibble says the Rivkin Report's advice to buy BHP Billiton shares in the expectation of a buyback would have made about 26 per cent on the trade. ''It's an example of an event-driven trade,'' Dibble says.
Despite not having a single standard on measuring their performance, Griffiths says the tipsters generally do a good job.
They provide investor education and go into the smaller stocks that normally don't get much attention. However, their market timing on when you should be buying stocks is often less than ideal, he says.
''But the private investor could do far worse than have a copy of the tip sheet like Huntley's at the ready,'' Griffiths says.
Best calls
Fat Prophets' Angus Geddes says their best call was on gold in 2001, when it was at $US258 an ounce. It is now about $US1500. Their view on gold led to a number of gold stock recommendations.
One was Red Back Mining, which Fat Profits recommended in 2003 at between 30¢ to 40¢ a share. The Perth-based miner floated in late 1996 as a junior explorer. The share price of the company rose and the company was taken over last year by a Canadian-listed miner.
Other good calls include Oil Search and uranium miner Extract Resources.
One of Huntley's best calls was its "speculative buy" recommendation on Australian-listed copper miner Equinox Minerals in 2005 at about $1 a share. Huntley analysts recognised the risks facing the company in developing its copper interests in Zambia but liked the fundamentals.
Since Huntley's initial call, the company has been the subject of merger proposals, which helped lift its share price. Equinox is currently under a takeover offer, with its shares trading at more than $8.
Intelligent Investor's two best calls were Cochlear, which makes hearing implants, and ARB Corporation, which makes four-wheel-drive accessories.
The tipster first recommended Cochlear at $6.30 in 1998. Intelligent Investor stuck to its positive view on Cochlear even when its share price dipped in 2004, recommending the dip as a buying opportunity. Cochlear shares are now trading at more than $80.
Intelligent Investor first put a long-term buy recommendation on ARB Corporation in 2004 at about $3.50. It again recommended subscribers buy in 2006. The shares are now trading at more than $8.
Both companies have paid good dividends over that time.
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