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One of the main reasons to be an active investor instead of a passive one is the opportunity to outperform the market. The FTSE 250‘s up 8.5% over the past year. Based on the assumption of a similar trajectory in the coming year, here are a couple of FTSE 250 shares to consider that I think could offer higher returns.
Positive momentum
The first one is Man Group (LSE:EMG). Over the past year, the stock’s only up 3%. So some might be puzzled as to why it’s worthy of further research.
The primary reason is that the company has achieved significant growth in assets under management this year, setting new records. As of the end of September, it stood at $213.9bn. This was up $20.6bn from $193.3bn the previous quarter, which in itself was a record.
As a result, this should lift management fees and fee-related earnings if sustained, which will be reflected in quarterly earnings reports early next year. Simply put, the more money the asset manager looks after, the more money it can earn from fees.
I also don’t feel it should suffer a sharp withdrawal of assets even if the market is volatile next year. This is due to its wide range of different strategies. Even if one area or asset class underperforms, it can hopefully offset this by generating gains in another area.
With a price-to-earnings (P/E) ratio of 10.82, it’s below the FTSE 250 average. This leaves room for the share price to rally next year relative to the index without it being perceived as overvalued.
Of course, there are risks. The boost to profitability from the inflows might be offset if costs rise, meaning the overall benefit to the share price could be limited.
A strong track record
A second company worth considering is Diploma (LSE:DPLM). The stock’s easily beaten the FTSE 250 over the past one-, two- and three-year time periods. In the last year, it’s up 21%.
One of the primary factors driving this outperformance is the consistent growth in earnings. Earnings per share continue to rise through organic growth and bolt-on acquisitions. Given that this growth has been maintained for over a decade, I see no reason to suggest it will suddenly stop in the coming year.
Another perk of owning the stock as part of a FTSE 250 portfolio is that it offers good exposure away from the UK. About two-thirds of revenue now comes from North America. There are signs of a rebound for US industrial activity. If this continues, Diploma’s earnings could accelerate faster than the UK-centric FTSE 250 average.
Some will flag the P/E ratio of 56. When I compare it to Man Group, Diploma could indeed be seen as potentially overvalued. This could eventually mean future share price gains are harder to come by. Another risk is currency swings. Given the amount of revenue in US dollars, the volatility in the exchange rates can provide a headache.
Based on company-specific factors, I believe both could outperform the broader index in the coming year and are therefore worthy of further research.
