Published on 24 January 2011
We are all busy people, living busy lives which makes it easy to allow a portfolio to drift along and the end result can be that, even when you have strong views on where growth may be greatest and risk most limited, they are not really reflected in the stocks you actually own. We are all simply sometimes too busy chopping down wood to sharpen our own axes!
I thought it would be a good idea to set out my own views for 2011 and highlight my top 11 investments for 2011, or 11 for 11 as you will. I will revisit this list each quarter to review progress, or lack of it, and chop and change the constituent parts when appropriate to demonstrate how I modify my portfolio, taking account of market events and the investment environment.
I have always been a great believer in diversification and normally manage my liquid personal funds to an old style three piece asset allocation model of cash, fixed income (Gilts and Bonds) and shares leaving property exposure to my largest individual investment, my own home. The problem for me this year is that Gilts and Bonds offer little appeal at current price levels. You could offer a similar case against cash, however for me, holding cash in my investment portfolio is seldom about returns alone. It is about the power and flexibility it allows me to have to wait for the growth of long term investments and the ability to take advantage of any sudden opportunities. In contrast to the other asset classes I feel that stocks and shares offer reasonable long term value at present.
Therefore the three themes I would want my portfolio to reflect this year are;
High dividend shares preferably large companies with global exposure. These will help cover for the absence of Gilts and Bonds as they will probably produce a higher income and hopefully a little growth as well.
The following selections are in no way recommendations and are simply meant to act as a catalyst to help kick start your investment thought processes for the New year and potentially highlight some new research sources to consider. As they are all equity based and some are focused on foreign economies they may offer significant potential for returns but it also has to be stressed they offer an equally high level of risk so make sure you do your own research and you are happy with the risk reward ratio involved before you get involved.
The top 11 investments that currently catch my eye under each theme would be…
1) iShares FTSE UK Dividend Plus (IUKD)
This ETF is designed to provide exposure to the 50 highest yielding shares in the FTSE 350 (excluding Investment Trusts).The unusual feature here that I like is the fund is weighted on a one year forecast dividend yield basis and is rebalanced every six months.
If you want to follow a "high dividend" investment policy this ETF offers a low cost and effective way of doing so, as there are no front end fees, no stamp duty and a total expense ratio of just 0.40%.
However, it is not just about cost, diversity and income (current yield 4.48%). The obvious correlation between yield and growth potential, means this ETF tops my list right now in a diluted "Dogs of the Dow" type of way.
2/3 Glaxosmithkline (GSK) and Astrazeneca (AZN)
I have grouped these two together as they are similar in many ways and offer the same potential benefits from my perspective.
Both are large global pharmaceutical companies and appear undervalued based on current ratings. On a forecast one year basis GSK has a PE of 10.4 and AZN 7.3. The heyday for "Global Pharmas" may have passed as less new drugs come to market and more come off patent protection, at which time their profit potential is undermined by cheap copy-cat versions. However, at current price levels the forecast dividend on GSK is 5.4% and AZN 5.6%. Almost whilst we weren't looking both of these have moved from growth stocks to value stocks and although they no longer fit the bill in the former category, while interest rates remain at current levels, there will always be a place for lower risk high dividend payers in my portfolio.
In both cases the ‘house’ view coincides with my own and Barclays Wealth has both stocks rated as "Buy". The attractions of these stocks do not just end with high dividends - the house fair value forecasts place AZN at £33 and GSK at £14.85. If these values are realised this adds +10% growth for AZN and +20% for GSK. If these two stocks were to achieve half of these growth forecasts plus the dividend I would be a happy man!
(See ‘Barclays view’ link under Markets, News and Data, company information when logged in for further information and analysis from Barclays Wealth).
4. G4S (GFS)
G4S was formed by the merger of Securicor and Group 4 and is now the number one world security firm. Crime would appear unfortunately to be a non-cyclical growth industry and therefore the need for security seems set to grow. G4S has global exposure operating in 100 different countries. It is cheaper than the average share with a PE of 11.5 and a healthy dividend of 3.5%.
5. TULLOW OIL (TLW)
Tullow Oil is the largest ‘Oil explorer’ in Europe by market capitalisation. It has an excellent long term track record and unlike other oil majors it does not have refining and distribution operations to worry about. Ironically during 2010, which turned out to be a big year in terms of price rises for the minnow oil explorers (e.g. Gulf Keystone, Xcite Energy, Ithaca Energy), this relative giant’s price remained static.
TLW has 85 exploration licenses in 22 different countries offering an important level of diversification in such a hit and miss industry. 2011 could be a much better year for the company and this potential is emphasised by its PEG ratio which is a striking 0.1. Barclays Wealth view rates Tullow Oil as a “Buy” with a fair value estimate at £15.75. The price of the oil for which it seeks has surged ahead. Perhaps its time for the share price to follow?
6. Xstrata (XTA)
XTA is a global diversified mining group and at the time of writing is the 10th largest company quoted on the London Markets. In truth you could be a buyer of Rio Tinto or BHP Billiton as well, as any follower of PEGS would come to the conclusion that much of the mining sector is undervalued. XTA has PE of 9.4 so it is cheap enough and the PEG of 0.2 would suggest to me that it is undervalued. Its operations are diversified both in terms of geography and commodities - Australia, South Africa, Spain and Germany in terms of locations and Copper, Nickel and Coal in terms of its main commodities. Barclays Wealth view – “Accumulate".
7. Medusa Mining (MML)
This stock, with a market cap of £815m, is the smallest of the companies on the list and therefore probably carries the most risk. It is a Philippine-based gold miner and is one of the cheapest gold producers in the world producing gold at US$183 per ounce over the last quarter. The current price of gold is at record highs (above US$1,360) so that is quite a simple business case!
These figures are reflected in a PE of 7.3 and a PEG of 0.2. It had a great year in 2010 but I think there is the potential for an even better 2011. Unusually for a gold mining share it actually pays a dividend! It paid its first in November and is committed to a regular dividend policy in the future. In October it transferred over to the main market from AIM and is therefore now eligible to be held in ISA accounts.
Away from the financials I like the way this company has become integrated into Filipino society. This is no hit, dig, find and run mining company - 99% of its workforce is local and it has built up partnerships for benefit of the community. It sponsors schools, runs a scholarship programme, makes interest free loans to rice farmers, and builds health centres and bridges.
On the risk front I suppose the most obvious is a fall in the price of gold. The Philippines is also exposed to extreme weather conditions which can effect mining operations especially during the typhoon season between August and November but extreme weather seems to be a problem the whole world has to face these days.
8. DB X-Trackers Russell 2000 (XRU2)
This is an ETF brought to the market by the Deutsche Bank which tracks the Russell 2000, an index that measures the performance of the US small company equity universe. Many people predicted that the US would be the first developed economy to recover having been the first to go into recession. To date such forecasts have proved to be premature but there does now seem to be signs of an improving outlook.
In the Barclays Wealth ‘Weekly’ publication dated 7 January 2011 you will see that the house view on the US is positive and recommends an overweight position. It states "We consider that US equities offer the best risk reward attractions of all the developed markets” and then goes on to say "small cap stocks look particularly attractive".
If you agree then XRU2 offers a convenient and cost effective way of tracking this segment of the market. The Total expense ratio (TER) of this fund is 0.45%, view the factsheet for DB X-Trackers Russell 2000.
(for the Barclays Wealth ‘The Weekly’ archive login and select ‘Special Reports’ from the ‘Markets, News & Data’ tab)
9. Fidelity China Special Situations PLC (FCSS)
This is an Investment Trust managed by the legendary Anthony Bolton. He came out of semi-retirement and moved to China to run it and then invested a significant amount of his own money and has recently agreed to stay on for an additional 12 months on top of his original commitment (meaning he will manage the fund until at least April 2013). Commitment like this should not go unnoticed and his long term record of success as a stock picker speaks for itself.
The growth potential of China is not in doubt but experts are concerned about potential overheating and the measures which will have to be taken to keep inflation under control. The increase in Chinese interest rates, badly timed for some on Christmas day, emphasised the problem. However, I would rather invest where growth is even if there are inflation problems to face than a developed economy with anaemic growth and weighed down by debt.
In this context I personally prefer an investment trust like this which is actively managed and is attempting to benefit from a wide based increase in domestic demand than an ETF that tracks an index. For instance the iShares FTSE/Xinhua China 25 tracks the 25 most liquid Chinese stocks but because of this nearly 50% are banks and other financial stocks. As I think there is more growth potential in trying to harness the increase in domestic consumption I prefer on this occasion the Investment Trust to the ETF.
10. JP Morgan Brazil (JPB)
This Investment Trust shares a similar story to FCSS but substitutes Brazil for China. Over the last 10 years Brazil has gone from borrower to lender on the world stage. It is now the largest economy in Latin America and the ninth largest in the world. With a population of 200 million there is ample cheap labour available and also crucially scope for domestic growth. It is this domestic growth that is the point of focus for this Investment Trust. As host for both the next Football World Cup and the Olympics this domestic growth should be accelerated with the need for improvements to the infrastructure of the country. It seems that everyone and his dog are tipping Brazil as a country to invest in at present. Normally this would put me off a bit but this time I will go with the crowd.
11. iShares FTSE BRIC 50 (BRIC)
Finally, an ETF brought to the market by Blackrock. BRIC offers a flexible and easy way to gain access to the 50 largest companies in Brazil, Russia, India and China all areas with high levels of GDP growth forecast for 2011. It has a Total Expense Ratio (TER) of 0.74% so although more expensive than most ETFs it is still relatively cost effective. It will be interesting to see how this tracker compares to the managed Investment Trusts in China and Brazil as we progress throughout the year.
(if you want to learn more about PE and PEGS see my previous Corners in the archive)
Have a great year and good luck with your investments!
Page last updated 24 January 2011
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