COMMENT
Britain's Top Twelve Shares

By Cliff D'Arcy
December 23, 2005

When it comes to investing, bigger isn't always better: investing in leading companies isn't the one-way ticket to riches that you might imagine it to be. Indeed, often the opposite is true, and investing medium-sized or small companies can sometimes be a better bet.

A year ago, we compared the relative annual performances of the FTSE 100, FTSE 250 and FTSE Small-Cap indices to see which came out on top. (The FTSE 100 measures the value of the UK's one hundred largest listed firms; the 350 covers the 250 next-largest companies; the Small-Cap tracks around 350 small companies.) In the six years from 1999 to 2004 inclusive, the blue-chip FTSE 100 index only beat both the 250 and Small-Cap in a single year: 2002.

One reason why the performance of the FTSE 100 follows its own unique course is that it is dominated by three huge sectors: banking, pharmaceuticals and oil. The sheer size of the businesses in these sectors dramatically influences the Footsie's overall return. Indeed, the UK's twelve biggest companies (collectively, they are worth £771 billion) account for roughly half of the index on their own, as the table which follows shows.

What's more, the performance of these dozen companies is of critical importance to British investors, because we each own a stake in these businesses, thanks to our holdings in pension funds, savings plans and other collective investments. So, let's see how these giant corporations fared in 2005 (data compiled from closing prices on Friday, 15 December; table sorted by market capitalisation):

Company	Market Cap (£ billion)	Share price (p) on 15/12/05	Price (p) on 31/12/04	Change (%)
FTSE 100	1,400	5,495.3	4,814.3	+14
BP (LSE: BP)	129	624	508	+23
HSBC (LSE: HSBA)	104	921.5	879	+5
GlaxoSmithKline (LSE:GSK)	85	1,460	1,222	+19
Vodafone Group (LSE: VOD)	76	123.5	141.25	-13
Royal Dutch Shell A (LSE: RDSA) Royal Dutch Shell B (LSE: RDSB)	70 51	1,767 1,840	N/a 1,545.25	N/a +19
Royal Bank of Scotland (LSE: RBS)	55	1,741	1,752	-1
AstraZeneca (LSE: LSE: AZN)	43	2,747	1,889	+45
Barclays (LSE: BARC)	39	600	586	+2
HBOS (LSE: HBOS)	37	962	848	+13
Anglo American (LSE: AAL)	28	1,884	1,232	+53
Lloyds TSB (LSE: LLOY)	27	483.5	473	+2
Rio Tinto (LSE: RIO)	27	2,489	1,533	+62

As you can see, these "FTSE 12" companies have produced a wide range of returns for investors. Stand-out stars of the show are mining firms Rio Tinto (up 62%) and Anglo American (up 53%), which have benefited from booming metal and commodities prices. Oil giants BP (up 23%) and Royal Dutch Shell (up 19%) have also produced decent returns in 2005, thanks to oil prices almost tripling since 2003. However, it's debatable whether commodity and energy prices can continue to rise without undermining demand and slowing world economic growth. Hence, these three businesses aren't exactly topping my watchlist.

At the other end of the scale, 2005 was a seriously disappointing year for Vodafone shareholders, with its shares falling by almost as much as the FTSE 100 rose. Poor subscriber numbers in Japan, plus a £5 billion tax provision, took the shine off what was the UK's biggest company at the turn of the century.

Also feeling unloved were Britain's big banks, with the Big Four -- Barclays (up 2%), HSBC (up 5%), Lloyds TSB (up 2%) and Royal Bank of Scotland (down 1%) -- also performing poorly this year. Then again, with HBOS (up 13%) emerging as a major force in banking, perhaps it's time to rename the big boys of banking the Big Five?

Only two other FTSE 12 companies beat the FTSE 100's return of 14%; drug companies AstraZeneca (up 45%) and GlaxoSmithKline (up 19%) both put in above-average performances in 2005. After roughly five years trapped in the wilderness of falling growth, these companies finally returned to investors' buy lists in 2005, thanks to launches of new products and improving drug pipelines.

What this analysis clearly demonstrates is how important stock picking can be in improving your returns. Investors and fund managers who were long on oil and mining stocks and short on telecoms and banks would have enjoyed outstanding returns this year.

What this number crunching also reveals is the power of diversification (not putting all of your eggs in one basket). By spreading your capital across a wide range of companies and sectors, you avoid concentrating your risk and damaging your returns by picking a loser. As a recent study in the US confirmed, investing in just a few companies produces lower, not higher, long-term returns. This is one of several reasons why I'm a big fan of index-tracking funds, which I praised here.

So, which firms will be the winners in 2006? No-one can be sure, but you can learn which shares we think have real potential by signing up for a thirty-day free trial of Champion Shares, an investment newsletter edited by stock-picker extraordinaire Maynard Paton!

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Cliff owns shares in GlaxoSmithKline, HBOS and Lloyds TSB.