Because I'm generally pessimistic about economic prospects, I prefer to invest in big, established and profitable companies that have a good chance of surviving any downturn. I also hold a large part of my portfolio in cash. I have some investments in precious metals, in case things go very badly wrong and it takes us a very long time to recover from the recession. And I have some investments in shares related to agriculture, which might do well in the scenario where inflation picks up significantly. (These investments are in the form of unit trusts. I don't know much about this sector to select individual company shares. That's why you won't find any of these in the sample portfolio below.)
I try to have a portfolio that is diversified over a wide range of industries and countries, so that I'm not too heavily exposed to a particular industry or country. I try to include some sectors that I don't have much confidence in. This is because I believe that any of my assumptions and predictions could turn out to be wrong, and I don't want my portfolio to perform spectacularly badly in that event. I want a portfolio that will do well if my predictions are correct, and less well but still producing an acceptable return if my predictions turn out to be wrong.
I prefer companies that pay a reasonable level of dividends (about 3% or more p.a.). This is not a strict rule, and my portfolio does contain some shares that pay a much lower level of dividends, but I generally have more confidence in companies with good dividend yields. It shows me that their profits are not just an accounting fabrication, made up of weird accounting rules and regulations, but real money that can be paid out to me as a shareholder.
And finally, I have a very long-term investment horizon. (I do make short-term investment decisions from time to time, but am ignoring these for the purposes of this post.) I want to build a portfolio that I can hold over the next 10, 20, 30 years without the need for constant re-balancing. Not many people can predict how different industries will perform over these timescales, and I don't pretend to be one of them. Diversification is therefore important. I don't worry too much about short-term market volatility if I think that in the long term things have the potential to improve.
This document was actually written at the beginning of July 2008 and emailed to some friends and family members. What follows is an investment portfolio, made up entirely of shares that I used to own at the time. The only reason this portfolio is included here is to demonstrate the type of shares that I had selected based on my views discussed above. It is NOT meant as a list of recommended shares or as a recommended investment portfolio.
Ok, so here comes the list.
|
|
| Share Price | Dividend yield |
| BP | £ 3,000 | £ 5.5150 | 4.1% |
| Shell | £ 3,000 | £ 19.4000 | 3.7% |
| Glaxo | £ 3,000 | £ 11.7350 | 4.5% |
| Astrazeneca | £ 3,000 | £ 23.5600 | 4.0% |
| Prudential | £ 1,500 | £ 5.0800 | 3.5% |
| Aviva | £ 1,500 | £ 4.8450 | 6.8% |
| RBS | £ 1,500 | £ 2.0600 | 8.1% |
| BBVA | £ 1,500 | £ 9.6020 | 4.3% |
| General Electric | £ 3,000 | £ 13.4370 | 3.6% |
| Vodafone | £ 3,000 | £ 1.5190 | 4.9% |
| Rolls Royce | £ 2,000 | £ 3.2550 | 4.0% |
| Toyota | £ 2,000 | £ 45.9370 | 2.2% |
| Unilever | £ 2,000 | £ 14.0900 | 3.7% |
| P&G | £ 2,000 | £ 31.7920 | 1.9% |
| Hewlett Packard | £ 3,000 | £ 21.6900 | 0.6% |
| Veolia | £ 3,000 | £ 26.4890 | 2.2% |
| Physical Silver | £ 4,000 | £ 8.9620 | 0.0% |
| Cash | £ 38,000 | £ 1.0000 | 4.0% |
|
|
|
|
|
| Sum | £ 80,000 |
| 3.7% |
Notes: This is NOT my actual current portfolio, or current value of my portfolio. I've been buying and selling shares for a number of years now, so my portfolio is not as neat and tidy as the one above. However, the list above is made up entirely of shares that I currently hold (I thought I would be cheating if I included shares that I don't actually own.) Amounts are made up (to come up with something that looks like a balanced portfolio) and do not represent my actual percentage exposure to each share. I've included cash to illustrate the point that I'm not fully invested in shares, and assumed that cash will earn interest of 4%. I've also included silver to illustrate one of the other areas that I invest in to increase diversification. I got the information on share prices and dividends from the internet on 5 July 2008. Dividend yields were calculated using information on dividends paid during 2007. For non-UK shares, I've reduced the yield to allow for 15% withholding tax, and for RBS I've divided last year's dividend by half to make some allowance for expected dividend reductions following the recent rights issue. I do have other investments that are not listed above (mainly in unit trusts), and I do not intend to keep updating this list for shares that I may buy or sell in the future. Again, I need to point out that the above table should NOT be taken as advice to structure (or not to structure) your portfolio in a similar way. Oh, and if I was starting again, I probably wouldn't have bought RBS shares…
(Note written in September 2008: I should probably state here that I have sold my Astrazeneca shares since originally writing this document. They had increased in price by about 30% since I'd bought them, so decided to take some profits. As this doesn't really change any of the things I've written below, I decided not to edit the list above or any of the comments below.)
Some very brief comments on the companies listed above follow. I've tried to discuss briefly some of the risks relating to these shares, although this is only a very very brief summary…
BP, Shell: Big oil producers, reasonable PE ratios, good dividend yields. Oil prices are currently very high, and could fall, potentially reducing share prices for these companies. As oil reserves are depleted, it's becoming more and more difficult and expensive to find new oil reserves and extract oil from the ground. Oil companies will often operate in countries where the political regime is not stable, or is not friendly towards big multinational companies exploiting their country's natural resources. Governments may decide to increase the tax burden for oil companies. Corruption may be prevalent in some of the countries where these companies operate. Having said all that, I think that the world will continue to rely on oil as a source of energy for some time to come, so BP and Shell should continue to make good profits for the foreseeable future.
GlaxoSmithKline, Astrazeneca: Big pharmaceuticals, reasonable PE ratios, good dividend yields. Budgets for research and development can be extremely high, and there is no guarantee that expensive clinical trials of new drugs and treatments will produce positive results. As patents for old drugs expire, sales will decrease because cheaper generic treatments can be produced by other companies. Pharmaceuticals therefore need to continue to develop and bring to market new drugs to make up for reduced sales from drugs whose patents have expired. The cost of buying drugs is an important part of the overall expenditure for many countries' national health services, and there will always be pressure on pharmaceuticals to reduce prices. However, people will always want to receive the drugs that will treat their various illnesses. And as people are living longer, they are likely to require more care and treatment during their lifetime. So big pharmaceuticals should be able to make reasonable profits for some time to come.
Unilever, Procter and Gamble: Relatively high PE ratios and low dividend yields (especially for P&G), probably justified by the fact that these companies have hundreds of leading brands in household products, used by millions of people around the world, so the companies should be around for some time to come. Inflation in raw materials costs may eat into these companies' profit margins. As the companies try to increase their prices in order to maintain profitability, (and as consumers would have less money to spend during a recession), some people may decide to switch to cheaper non-branded alternatives. Still, Unilever and P&G are huge companies, and should survive a recession, making decent profits for their shareholders along the way. (Very similar comments probably apply to Nestle as well. However, I tend to avoid Swiss shares if at all possible because of the high withholding tax rates applied to dividends by Swiss tax authorities. As I don't consider Nestle to be vastly superior to P&G, I prefer to hold P&G rather than Nestle.)
General Electric: One of the biggest companies in the world, offering a good dividend yield and a reasonable PE ratio. General Electric is a global conglomerate, involved in infrastructure, finance, media, etc. (and facing different risks in each of these areas.) Hopefully, a company of this size can survive a recession.
Toyota: Big auto-manufacturer, reasonable PE ratio, low yield. Car sales are likely to suffer during a global recession, but I've included Toyota in my portfolio for reasons of diversification, (and because I always try to include in my portfolio some sectors in which I don't have much confidence in). I don't know much about cars, but analyst reports suggest that Toyota is one of the best-run auto-manufacturers around. If General Motors or Ford do not survive the downturn, this would reduce competition and help Toyota in the future. I also like Toyota because it gives me some exposure (although probably quite small) to Japan and the Yen. I'm not sure why I like Japan, the last 20 years have certainly not been a very good time to own Japanese shares, but I think that the return of inflation may be bad for the global economy, but good for Japan, who has been struggling with deflation for the last few years.
Veolia: Water utility, also involved in water treatment, desalination, waste management and other environmental projects. Relatively high PE ratio and low yield, especially for a utility. Included because I think that the world is running out of clean, drinkable / usable water, environmental issues are becoming more and more important as time goes by, and Veolia is well placed to benefit from these trends. Because of that, the market has high expectations for Veolia, and if these expectations are not met the share price may suffer. (In fact, this may be why the share price has declined significantly over the last few months.) I am thinking of adding some more utilities in my portfolio (as Veolia is not really a typical utility). Any suggestions welcome.
RBS, BBVA: Big banks with low PE ratios and high dividend yields (but note that this is based on historic earnings and dividends, and there is no guarantee that either of these can be maintained. In fact, I think RBS has already said that dividend levels will have to be adjusted following the recent rights issue.) These are probably the two stocks in my portfolio that I am least confident about, and if I was starting my portfolio now I would probably buy HSBC or a big Japanese bank instead of RBS and BBVA. Banks make money by lending funds to people and businesses. During a recession, lending activity tends to slow down, reducing bank profits. Some borrowers may also be unable to repay their loans, further reducing bank profits. So there are certainly risks involved with holding bank shares. But banks will always provide a valuable service to the economy, and should be rewarded for that. In the long term, they should be able to make reasonable profits. RBS has operations in several parts of the world, and BBVA is mainly exposed to Spain, Mexico, and Latin America, but has ambitious plans to expand further.
Aviva, Prudential: Another two companies involved in the financial services sector (insurance), so any recession could hit them hard. As asset values fall, solvency concerns may appear, and the income that insurers receive from managing assets will decrease. Again, these companies are included in the portfolio for reasons of diversification and taking a long-term view. Prudential has a decent yield (but low compared to some other insurers). It has a very strong position in several South-East Asian markets, and that's the main reason I've included it in my portfolio. I also think they've made some very good calls on the markets over the last few years, so they must have some smart people at the top. Aviva is stronger in the UK, and has both life and general insurance operations, which increases diversification. It also has a very good yield.
Hewlett Packard: Dividend yield is less than 1%, but this is common for IT companies. As IT has become such an important part of out lives, I wanted to have some exposure to the sector. My feeling is that this is a very competitive sector, and things can change dramatically very fast. A company dominating the market today may lose that position quickly, and a new competitor may appear out of nowhere to take its market share. (Did Google exist 10 years ago?) HP makes printers, laptops, and they have just bought EDS, which is a company providing IT outsourcing services to other companies. Three sources of income gives HP some element of diversification, which I like in a market as competitive and fast-moving as IT. The fact that HP just bought EDS is seen as a risk by some analysts, because the integration of the two companies may not go smoothly. However, it also gives HP the chance to compete more effectively with IBM in the IT services sector.
Vodafone: Mobile phone operator with a presence in several parts of the world. Reasonable PE ratio, good dividend yield, and exposure to emerging markets such as Turkey and India. I'm particularly interested in the exposure to India, as the market there could be huge. A lot of Indians don't have access to landlines, (ask me about my recent trip to Mumbai if you want to know why), so they're using mobile phones instead. That's more than 1 billion people (potentially) relying on mobiles for their telecommunication needs. But is Vodafone's share price already allowing for this potential? And are people in Europe and the US going to continue to use mobile phones to the same extent as they do now during a recession?
Rolls Royce: Rolls Royce do not make cars, they make airplane engines. I don't own shares in any airlines, so this share gives me some exposure to the sector, and I don't have to worry about the effect of the increasing oil price as much. Although obviously if airlines don't do well, they will stop ordering new planes, so Rolls Royce revenue will be affected. At the moment, RR have a big order book, a reputation for quality, and the shares trade on a reasonable PE and dividend yield.
Physical silver: I've focused so far on company shares, so I wasn't sure if I should be including physical silver in the list. I decided to mention it because I think that any well-diversified portfolio should have some (small) exposure to precious metals. Especially if you think we're headed for a nasty recession. The share price of any company listed above could go up or down, and could, under very negative economic conditions, reach zero if the company goes bankrupt. I don't think the price of silver will ever reach zero. It could fall significantly, but silver will always have a value. Physical silver does not provide you with dividends (in fact, there is a small annual charge to cover fees for storage, insurance, etc.) and its price has increased a lot over the last few years, which some may see as another bubble forming. (I don't take a view on this. People have used precious metals as a store of value for thousands of years, and that's why I hold some in my portfolio.) Very similar comments to the above would equally apply to gold, or platinum.
Posts
No comments:
Post a Comment