And what should I choose to own?

Thursday, 6th September 2018 08:42 - by David Harbage

Following last month’s article “How much of my wealth should I put in shares?” which suggested how long term cash could be allocated between differing asset classes, the author has been asked to indicate which individual investments he would choose.

As ever, no personal recommendations are made in these blogs, and the reader should consult a qualified professional adviser if seeking advice specific to his or her circumstances and needs.

The selected investments feature a range of stock Exchange Traded Funds (commonly termed ETFs) which are composed of a particular asset and endeavours to track or match an index – for instance a FTSE100 ETF seeks to own the whole of that index’s one hundred company shares, in perfect proportion to the index (for example owning more Royal Dutch Shell stock and less of Marks & Spencer’s equity) in order to achieve a very similar performance (less the ETF’s expense). These funds are listed on stock exchanges, and therefore priced on a minute by minute basis during business hours and, as passive index trackers (which do not require the subjective, qualitative and expensive overhead of traditional fund management) are almost invariably lower cost (usually no stamp duty and minimal annual management fee) investments.  

In addition to the ETFs, this blog comments on a number of actively managed funds which invest in various kinds of asset and seek to outperform an appropriate benchmark or target – for instance the FTSE250 index (representing the largest 250 companies listed on the London stock exchange after the FTSE100) which features ‘mid caps’ or companies of medium sized market capitalisations. Each of these are investment trusts, which are companies listed and priced on a daily basis on the stock exchange; typically they have performed better than open ended (where investors introduce and withdraw monies, at will) collective investment funds – in part because the fund manager does not have to dispose of investments in order to meet owners’ redemption requests.

Investments trusts typically provide daily advice of the underlying worth of their portfolio – expressed as the net asset value (NAV) per share. The investment trust’s quoted share price, driven by investor demand, can vary from this and such difference will be expressed as either a discount (when the NAV exceeds the share price, the more common situation) or a premium (when the market’s valuation exceeds the NAV). Other features worthy of mention surrounding these ‘closed-ended’ (the underlying portfolio is undisturbed by investor activity) is that they can – like ordinary businesses – borrow, to increase the size of their portfolio, and also buy back shares (usually effected when the discount to NAV has widened appreciably) or indeed issue new shares (in response to investor demand, but only normally when a premium to NAV has emerged in the share price).

Accordingly, while the investment trust can be dealt intra-day, the price can vary from its underlying portfolio worth (unlike an open ended fund, which is usually priced daily based on the valuation of the securities it holds). Since independent financial advisors (IFAs) now tend to charge fees for their services rather than receive an initial and/or trail commission from unit trust managers – as used to apply before the Retail Distribution Review on 31 December 2012 – the popularity of investment trusts has grown and, coinciding with a period of positive returns from many asset types, discounts to NAV have tightened or shrunk to add further value to a client’s experience of return.

The final kind of investment which our portfolios could include is individual company shares or bonds. Essentially seeking to ‘add value’ beyond an index tracker, where the portfolio manager or investor has high levels of confidence or conviction. This could range from the wish to capture a particular event, theme or demographic trend (beyond the exposure already offered by the overall or market-wide asset: a rising oil price, an anticipation of corporate (merger & acquisition) activity in a particular sector, disruptive industries prompted by the internet or other technology or a trend to outsource. Other examples of where an active position might be taken: the investor anticipates a different economic or business outcome to that viewed (and priced in) by the market: stronger or weaker GDP growth, currency projections, the housing market or indeed an overall perspective on how momentum or sentiment has impacted Growth versus Value equities.

Before turning to which investments might merit consideration to capture the differing kinds of asset, a reminder of how the allocation might look like:

1. Cautious or conservative perspective:

15% Cash (to take advantage of investment opportunities in the other asset classes as they arise, perhaps prompted by a major event-driven fall in asset prices),

40% Bonds (to reinvest such reasonable income to provide stability) to include inflation-linked gilts, using both domestic/£ and overseas corporate bonds. UK and £ based investors might wish to favour the domestic bonds via 25% in UK and 15% in overseas bourses

20% Property (to reinvest attractive income to provide growth) as a potential inflation beating asset, with some prospect of capital preservation and

25% Equity (to procure attractive income and capture potential growth in capital and dividends), incorporating both UK and overseas listed stocks, large as well as smaller size businesses. UK and £ based investors might wish to favour the domestic market via 15% in UK equities and 10% in overseas bourses.

2. Balanced perspective: 15% Cash, 25% Bonds (biased to inflation-linkers, with a 15% UK and 10% overseas split), 20% Property and 40% Equity (with a more significant exposure to medium sized and smaller capitalised firms). Reducing the bias towards UK listed equities would seem possible via 20% in each of UK listed and overseas listed company stocks.

3. Growth, less risk-averse, perspective: 10% Cash, 15% Bonds (biased to domestic, via 10% UK and 5% overseas), Property 15% and Equity 60% (with a more significant exposure to medium and smaller capitalised businesses). An appetite for greater risk could persuade for higher non-UK listed equity exposure but, given the presence of many multinationals in the FTSE100 index, a 30% into each of UK and overseas listed equity appears sensible.

In terms of the bond or fixed income content, two Exchange Traded Funds have been chosen as owning individual securities can be impractical except in high value portfolios. These come from the world’s biggest fund manager Blackrock, whose ETF products use the ‘i shares’ brand label:

1. i shares UK inflation index linked gilt ETF – invests in British Government bonds, across all maturities (from a matter of days to the longest dates of 50+ years) whose income and capital returns to redemption are linked to domestic inflation. Sterling denominated and currently valued at £825m, this ETF seeks to match the Bloomberg Barclays UK Government Inflation-Linked Bond index, has a total expense ratio of 0.25% per annum, its current duration is 22 years and weighted average maturity is 23 years. Income is currently 1.9%, in part reflecting the low yield on offer in conventional gilts (which, along with inflation, are prime influences of valuation).

2. i shares Global inflation government bond ETF – invests in government bonds and the currencies of the developed world (which must also be of investment grade, that is excluding countries which fall short of this credit rating), whose returns are linked to inflation. The ETF’s benchmark, which is displayed in US dollars, is the Bloomberg Barclays World Government Inflation-Linked Bond index With a weighted average maturity of 13 years, the US$700m bond portfolio is currently invested: United States 43%, UK 29%, France 9%, Italy 6%, Germany 3%, Japan 3%, Spain 2%, Canada 2%, Australia 1% and the total expense ratio on this ETF is 0.25% per annum. Income is not distributed, but rather accumulated and reinvested within the fund.

3. i shares Corporate bond ETF – invests in sterling denominated, investment grade (BBB or higher) bonds issued by companies primarily based: UK 43%, US 22%, Germany 9%, France 7%, Netherlands 3%, Australia 3%, Sweden 2%, Switzerland 2%, Belgium 2%, Italy 2%. Seeking to track the Markit iBoxx £ Liquid Corporate Large Cap index, the £1.6bn portfolio currently possesses 365 company bonds, has a duration of 8.6 years, a weighted average maturity of 13 years, a total expense ratio of 0.2% per annum and yields 2.7%. The two prime drivers of performance from corporate bonds are interest rates and balance sheet health - rising medium term rates or yields may be unhelpful, but is countered by the possibility of stronger finances indicating a reduction in defaults and therefore an upward rating of the bonds’ creditworthiness (ability to meet its obligations).

4. i share Global High Yield corporate bond ETF – invests in high yield (may be less credit worthy than investment grade) corporate bonds from issuers in developed markets. Currently the fund’s companies are principally based: US 66%, Italy 7%, France 5%, Germany 4%, UK 3%, Luxembourg 3%, Netherlands 2%, Spain 2%, Canada 2%. Seeking to track the Markit iBoxx Global Developed Markets Liquid High Yield Capped index, the US$560m portfolio possesses 1410 company bonds, has duration of 3.6 years, a weighted average maturity of 4.3 years, a total expense ratio of 0.5% per annum and yields 4.7%. The two prime drivers of performance from higher yielding corporate bonds are again interest rates and balance sheet health – but, with a shorter dated portfolio, the latter is likely to be more critical in determining returns.

The next asset class that comes under consideration in our asset mix is property investment (which should be viewed differently to an investor’s residence), as a means of diversification as well as a recognition of its position as a natural real (inflation impacting) asset. Taking both a passive and active approach the reader might be interested in.

1. Picton Property income investment trust – this company has a full listing on the London stock exchange and, with a market capitalisation of close to £500m, is a member of the FTSE250 index. Investing in commercial property across the UK, it seeks to provide investors with an attractive level of income (the shares yield 4%) and the potential for capital growth. The portfolio is focused on industrial (capturing online shopping trend) and regional office properties (no exposure to retail centres), and the latest results confirm further growth (NAV up 1.5% in the second quarter of 2018 to 91.5p, selling two properties at a £8.4m gain on book value), a high level of occupancy (95%) and reversionary potential. A conversion to REIT (real estate investment trust) status is expected on 1 October 2018.

2. i shares UK property ETF – invests in UK listed real estate companies (including REITs) and seeks to match the FTSE UK Property index. It owns 39 constituent companies with the largest being industrial estate and business park owner Segro (12% of the total portfolio), followed by fellow FTSE100 giants Land Securities and British Land (both over 11%), as well as other well-known commercial names Hammerson and Derwent, and interesting businesses Unite Group and Tritax Big Box. Looking through to assess sector mix is not easy, but industrial & offices 36%, retail 18%, hotel & lodging 4% and residential 3% feature, with diversified, specialist REITs or developers making up the balance. This £690m value ETF yields 3.2%, with distributions paid quarterly, and has a total expense ratio of 0.4% per annum. 

Turning now to equity (company stock or share) investment, this asset class can be broken down into UK or overseas listed – mindful, of course, that most of the FTSE100 index’s constituents are multinational businesses, with revenue and earnings arising in non-£ currencies - large company or small. Again, like property, both passive and active opportunities are available. Let’s begin by looking at the low cost, index tracking proposition:

1. i shares FTSE100 ETF – invests in the largest one hundred UK listed company shares, tracking the FTSE100 index. Accordingly, as is the nature of such indices, ‘up and coming’ successful companies will be owned when their market worth rises to achieve the top echelon, while existing index constituents that perform poorly will (eventually) be relegated and therefore ejected from the portfolio. This £5.85bn ETF currently yields 3.95%, income is distributed quarterly, and it has a total expense ratio of 0.07% per annum. The portfolio’s current historic price-to-earnings multiple (PE ratio) is 14.2x and its price to book value ratio is 1.7 times.

2. Vanguard FTSE250 ETF – invests in the next largest 250 (that rank just below the FTSE100 index) UK listed companies, as it seeks to track the FTSE250 index. Vanguard is the world’s second largest passive fund manager. Again, as for the FTSE100 index, ‘up and coming’ successful companies will be owned when they appreciate sufficiently to reach this value-based status level, while weak performers will be relegated and therefore exit the portfolio. This £760m ETF currently yields 2.6%, again distributed quarterly, and has a total expense ratio of 0.1% per annum. The portfolio’s current historic price-to-earnings multiple (PE ratio) is 15.9x and its price to book value ratio is 1.9.

3. i shares FTSE250 ETF – an alternative to the above mentioned Vanguard ETF, (essentially the same ETF proposition), except that its current size is £840m and has a total expense ratio is 0.4% per annum.

4. i shares Core MSCI World UCITS ETF – invests in leading companies from every developed country, featuring US 62%, Japan 8%, UK 6%, France 4%, Canada 3%, Germany 3%, Switzerland 3% and Australia 2%. This £340m portfolio currently invests in 1645 businesses, as it seeks to match the MSCI World index, with the largest positions being in Apple 2.7%, followed by Amazon and Microsoft both being 2%, with the next largest being Facebook at 1%. The ETF currently yields 1.8%, and has a total expense ratio of 0.3% per annum. The portfolio’s current historic price-to-earnings multiple (PE ratio) is 19.8x and its price to book value ratio is 2.5 times.

5. Vanguard All World High Dividend – invests in leading companies from all developed countries, featuring a mix by continent of: US 40%, Europe 33%, Asia-Pacific 15% and Emerging markets 12%. This US$700m portfolio currently invests in 1290 stocks, as it seeks to match the FTSE All-World High Dividend Yield index. The largest positions are Johnson & Johnson and Exxon Mobil, both weighted at 1.7% of the total fund, with Wells Fargo, Nestle and Chevron being the next largest at 1.2%. The ETF currently yields 3.2%, and has a total expense ratio of 0.29% per annum. The portfolio’s current historic price-to-earnings multiple (PE ratio) is 13.5x and its price to book value ratio is 1.8 times.

6. i shares MSCI Europe ex-UK UCITS ETF – invests in companies from the developed countries of Europe excluding the UK ; currently this is achieved via prime positions in France 24%, Germany 21%, Switzerland 18%, Netherlands 8%, Spain 6%, Sweden 6%, Italy 5%, Denmark 4%, Finland 2%, Belgium 2%. This £275m portfolio is invested in 346 firms, as it seeks to match the MSCI Europe ex-UK (hedged to £) index, with the largest exposures being Nestle 4%, Novartis and Roche both at 2.7%, followed by Total with 2.3%. The ETF currently yields 2.3%, and has a total expense ratio of 0.4% per annum. The portfolio’s current historic price-to-earnings multiple (PE ratio) is 16.2x and its price to book value ratio is 1.9 times.

7. Vanguard Asia Pacific ex-Japan ETF - invests in large and medium sized companies of the developed markets of the Asia Pacific region, excluding Japan, via Australia 41%, Korea 28%, Hong Kong 22%, Singapore 7%, and New Zealand 2%. This US$350m portfolio currently invests in 363 companies, as it seeks to match the FTSE Developed Asia Pacific ex-Japan index, with the largest positions being Samsung Electronics 7.4%, AIA and Commonwealth Bank of Australia both at 4%, followed by BHP Billiton on 2.3%. The ETF currently yields 3.4% per annum, distributes income quarterly and has a total expense ratio of 0.22% per annum. Finally, the portfolio’s current historic price-to-earnings multiple (PE ratio) is 12.1x and its price to book value ratio is 1.4.

8. Aberforth Smaller Companies investment trust – invests in UK fully listed small and medium sized companies. Actively managed, the partnership team based in Edinburgh seek to outperform the Numis Smaller Companies (ex-investment companies) index. Currently, this means companies with a market capitalisation of up to £1.5bn; investment in Alternative Investment Market (AIM) is not within the trust’s universe, so will not be entertained. Historically, the fund managers have consistently sought to invest in Value-based stocks (GARP, growth at reasonable price) seeking strong balance sheets, cash generative and apparently under-valued businesses. The £1.4bn portfolio currently invests in 85 companies, with the largest positions being residential property developer Urban & Civic 2.9%, geotechnical engineer Keller Group and recruitment firm Robert Walters both on 2.8%, with transport business First Group and fund manager Brewin Dolphin being 2.6%. The trust yields 3.4% per annum, distributes income half yearly, and has an on-going annual charge of 0.75% per annum. The company is almost ungeared at present (1% borrowed), the shares discount to NAV is an attractive 13% and, in 4 out of the last 5 calendar years, Aberforth has outperformed its benchmark.

9. Henderson Smaller Companies investment trust – an actively managed investment in UK small and medium sized companies. Managed by Neil Hermon since November 2002, the trust seeks to maximise total returns via smaller company investment, which extends to investment in AIM stocks, despite having the Numis Smaller Companies index (ex-investment companies) as the benchmark. The fund manager has traditionally had a bias towards growth companies, with a fair smattering of technology firms, but the additional risk taken (compared to peers) has been well rewarded. The £660m portfolio invests in 110 companies, with the largest positions being house builder Bellway 2.8%, followed by asset manager Intermediate Capital, precision measurement engineer Renishaw and polymer specialist Victrex all on 2.4%. The trust currently yields 2.4% per annum, distributes income half yearly and has an on-going annual charge of 0.42% per annum. The company has 8% gearing at present, the shares discount to NAV is an undemanding 13% and this Henderson trust has comfortably outperformed its peer group over the past 1, 3, 5 and 10 years to September 2018.

10. Mercantile investment trust - an active investment in UK fully listed medium sized and, to a lesser extent, smaller companies. Managed by JP Morgan’s Martin Hudson (since November 2002), Anthony Lynch (2009) and Guy Anderson (2012), the trust seeks to identify businesses outside of the FTSE100 index which have the potential to become tomorrow’s market leaders, but has the FTSE All Share index (excluding FTSE100 and investment companies) as its benchmark. While the fund managers’ prime aim is to achieve capital growth, the trust has a balanced approach to risk-reward, seeking both attractive income as well as growth opportunities. The £1.9bn portfolio currently invests in 117 companies, with the largest positions being steam system engineer Spirax Sarco 3.3%, asset manager Intermediate Capital 2.3%, house builder Bellway 2.2%, followed by life assurance fund consolidator Phoenix Group and Lloyds insurance underwriter Hiscox both on 2%. The trust yields 2.7% per annum, distributes income quarterly (endeavouring to increase dividends ahead of inflation) and has an on-going annual charge of 0.45% per annum. The company has practically no gearing at present (0.4%), the shares discount to NAV is an appealing 11% and, in 4 out of the last 5 year periods to 30 June 2018, this trust outperformed its benchmark.

11. Blackrock World Mining investment trust – an active investment in mining and metal assets worldwide, with the objective of maximising total returns. Primarily via listed companies, but can also include royalties derived from mineral production, up to 10% in physical metals and a maximum of 20% in unquoted investments. Managed by industry guru Evy Hambro and Olivia Markham, the trust has the EMIX Global Mining (£ based with income reinvested) index as its benchmark. While the fund managers’ prime aim is to achieve capital growth, the trust has a balanced approach to risk-reward - although high conviction positions are evident via the fact that the top ten holdings represent 61% of the portfolio. Many of these companies have mines around the world (63% of assets are owned by global businesses), but in terms of country specific positions, 10.6% of the portfolio is in Australasia and also in Latin America, with 6.6% of assets domiciled in Canada and 6.3% located in Africa. The £800m portfolio’s sector allocation is currently: diversified miners 49%, copper 21%, gold 14%, silver & diamonds 8%, industrial 7%, with the largest individual exposures being Rio Tinto 10.6%, BHP Billiton 10.2%, Vale 8.9% and Glencore 7.8%. The trust yields 4% per annum, distributes income quarterly and has an on-going annual charge of 0.8% per annum. The company has relatively high gearing of 15% (reflecting its confidence in its asset class, which typically benefits from higher global economic demand – where China remains a key consumer), the shares discount to NAV is an attractive 14% and, in each of the last two years to 30 June 2018, this trust has delivered 20%+ returns to outperform its benchmark.

12. Scottish Mortgage investment trust – an actively managed, investing in a high conviction global portfolio of companies with the objective of maximising total returns. Managed by James Anderson and Tom Slater, the £8.2bn trust aims to achieve a greater return than the FTSE All World (£ terms) index over a rolling five year period. This must be regarded as a higher than average risk-reward investment as, besides the concentrated portfolio (the ten largest holdings currently account for 52% of the portfolio, the largest 30 for 82%), the fund managers can invest up to 25% of the fund in unquoted investments. Currently the trust owns 38 unlisted businesses, accounting for 15% of total assets. Geographically, the 78 holdings are located, by listing: US 48%, China 22%, Europe 25%, UK 3%, India 2%. Historically, the managers have proven to be adept readers of new trends in the market and early anticipators of new technology in particular. The portfolio’s largest individual exposures are internet retailer Amazon 10.2%, genomics developer Illumina 7.7%, Chinese online trader Alibaba 6.6%, Chinese online conglomerate Tencent 6% and electric car developer Tesla 4.9%. The trust yields just 0.5% per annum and has an on-going annual charge of 0.8% per annum. The company currently has moderate gearing of 9% (which is not high compared to its previous positioning), its shares are currently priced on a 3% premium to NAV (reflecting a strong investor following, and within a 1% discount to 4% premium that has applied over the past 4 years) and the trust has very comfortably (often by a multiple of two or more) outperformed its benchmark over the past 1, 3, 5 and 10 years.

13. JP Morgan Global Growth & Income investment trust - an active investment in companies around the world, with the objective of providing total returns which outperform the MSCI All Country World index. In addition the trust seeks to pay dividends, on a quarterly basis, of at least 4% of the worth of its NAV. Managed by Jeroen Huysinga, this £420m trust can be viewed as a lower than average risk-reward investment within its sector, given its appetite for income as well as a less concentrated portfolio (the ten largest holdings account for 21% of the total portfolio). Geographically, the 87 holdings are located, by listing: US 43%, UK 14%, Japan 8%, Germany 6%, France 4%, Belgium 3%, China 3%, Canada 2%, Finland 2%, Ireland 2%, remainder 13%. The portfolio’s largest individual exposures are technology giants Alphabet 4.3% and Microsoft 3%, followed by health technology platform United Health Group 2.9%, the insurer Prudential 1.9% and Spanish electricity utility Iberdrola 1.8%. The trust currently yields a relatively high 3.7% and has an on-going annual charge of 0.57% per annum. The company has moderate gearing of 6%, the shares currently are priced at NAV (neither a discount or premium) reflecting an increasing appetite from retail investors, and the trust has outperformed its Global Equity income peers over the past 3 and 5 year periods.

14. Edinburgh Worldwide investment trust – an actively managed global portfolio of initially immature entrepreneurial companies – typically with a market capitalisation of less than US$5bn at the time of initial investment – which are believed to offer long term growth potential. The focus is on capital growth, with the objective of providing total returns which outperform the S&P Global Small Cap index. Managed by Baillie Gifford’s Douglas Brodie, this £530m trust should be viewed as a higher than average risk-reward investment within its sector, given its appetite for smaller start-up businesses (often with a focus on technology), as well as its rather concentrated portfolio (the ten largest holdings currently account for 30% of the total portfolio). Geographically, the 99 holdings are primarily located, by listing: North America 55%, UK 19%, Europe 10%, Asia 9% and Australia 2%. The portfolio’s largest individual exposures are: electronic trading platform MarketAxess 4.6%, online food retailer Ocado Group 4.3%, Alnylam Pharmaceuticals 3.7%, online exchange Lending Tree 3.5% and e-commerce home furnishing group Wayfair 3.2%. The trust offers no income yield and has an on-going annual charge of 0.87% per annum. The company currently has gearing of 10%, the shares currently are priced at a 2% premium to NAV (which is high compared to its history, but investors should be mindful that the benchmark changed from the MSCI All Countries World index in February 2014, when the fund become a small cap specialist) and the trust has outperformed its relevant benchmarks over the past 1, 3, 5 and 10 year periods.

15. JP Morgan Emerging Markets investment trust – an actively managed investment seeking attractively valued, quality stocks across the world’s emerging markets. The focus is on capital growth, high conviction calls and low stock turnover, with the objective of providing total returns which outperform the MSCI Emerging Markets index. Managed by JP Morgan’s Austin Forey since 1994, this £1.1bn trust should be viewed as a slightly higher than average risk-reward investment within its sector, given its concentrated portfolio (the ten largest holdings currently account for 44% of the total portfolio). Geographically, 28 countries feature and currently the 64 holdings are primarily located, by listing: China & Hong Kong 23%, India 21%, South Africa 12%, Brazil 11%, Taiwan 9%, Indonesia 6%, Mexico 5%, Belarus 3% and Russia 3%. The portfolio’s largest individual exposures are: Chinese online conglomerate Tencent 6%, Housing Development Finance 5.8%, Taiwan Semiconductor Manufacturing 5.7%, Chinese online trader Alibaba 5% and Indusind Bank 4.8%. The trust offers a dividend yield of 1.3% and has an on-going annual charge of 1.07% per annum (higher research costs surround emerging market securities). The company currently has virtually no gearing (0.9%), the shares currently are priced on an appealing 13% discount to NAV, and the trust has only underperformed its benchmark once in the past 5 years periods to 31 July 2018.

Finally, and only where investors have appetite for the higher risk-reward inherent in owning individual company shares, here are a few UK listed company shares which appear to offer scope to outperform the wider market over the appropriate longer term. Often the driver of anticipated performance might be a particular theme, in addition to the equity’s valuation; both the fundamentals and the price should be regularly monitored to ensure that the opportunity remains appealing. In brief terms, given the length of this script, here is the rationale for each stock:

1. Barclays – the banking industry has suffered like no other over the past decade, attracting unwelcome media headlines and posting disappointing financial results since the global banking crisis. Bank management have had to work hard to contain costs and focus on preferred business activities as various exceptional items have adversely impacted profits and the worth of the asset. With an end now in sight on domestic PPI claims and hopes for an easing in regulatory fines (historic malpractice), it is hoped that the focus can be on the ‘normal’ drivers of bank profitability: the interest rate and economic cycle. The prospect of further rate rises (facilitating wider margins) and a healthier economy (constraining loan defaults) to enhance trading performance could be boosted by corporate activity within the industry. Edward Bramson recently became a 5% stakeholder and the US activist is seeking (somewhat controversially) to get the board to review its product strategy (perhaps this led to unfounded speculation of acquiring Standard Chartered). Over the past half year Barclays stock has fallen from 217p, as mixed opinions amongst institutional investors continues to impact, to the point that the equity appears to undervalue the longer term upside potential. Looking at broker research, double-digit earnings and dividend growth this year and next would lead to a PE ratio of 8 times for calendar 2019’s EPS (earnings per share) and a 4.5% income yield (dividend nearly 3 times covered). Of the 21 analysts publishing a view on the £30bn bank, 11 say Buy, 8 Hold and 2 suggest Sell.   

2. Bellway – capitalised at £3.5bn, the UK’s fifth largest house builder is on the cusp of reaching the FTSE100 index. Building 10,300 homes across the country in the year to 31.7.2018, at an average selling price of £285,000 and an operating margin of 22%, with net cash on the balance sheet, the company is a beneficiary of an excess in demand over supply for homes, low interest rates, low unemployment and HM Government’s Help to Buy scheme. The prospect of some of those factors deteriorating in an uncertain post-Brexit domestic economy and a lack-lustre overall housing market has driven sentiment over the past year – as the stock has retraced from 3792p. Those fears appear to be more than ‘priced in’ based on the equity’s valuation, brokers’ consensus earnings and dividend growth: a PE ratio of 6.4 times the current year’s forecast EPS and a 5% income yield (dividend more than 3 times covered). Of 12 brokers proffering research, 11 say Buy, the other Sell.    

3. Crest Nicholson – capitalised at £1bn, this FTSE250 index constituent home builder has traditionally focused on the South East of England (London commuter housing). This company’s operating performance of late has been more pedestrian compared to peers, building 2,900 homes in the year to 31.10.2017, at an average selling price of £388,000 and an operating margin of 20%, but again with no net debt on the balance sheet. The company is taking steps to move geographically (into England’s Midlands) and into lower priced units, but has not communicated its strategy as well as it might. This has depressed its equity valuation to an anomalous degree and the stock – which possesses and faces the same housing market fundamentals and uncertainties as its peers – appears oversold, to the point of being vulnerable to a predator (be it a trade or private equity buyer). A year ago the stock was priced at 589p, but today the equity’s valuation, (based again on brokers’ consensus forecasts of earnings and dividend growth) is: a PE ratio of 5.4 times forecast EPS for the year to 31 October 2019 and a 9.2% income yield (twice covered by profits). Of the 10 brokers proffering research, 6 say Buy and the remaining 4 are neutral or publish Hold recommendations.

4. GVC Holdings – this multinational sports betting and gaming company has grown dramatically over the past decade - both organically, as its web-based platform encompasses new products and reached new countries, and by acquisition. The latest purchase of Ladbrokes Coral, earlier this year propelled the company into the FTSE100 index and attracted the attention of more investors. An excellent track record of successful integrations, delivering synergy benefits ahead of predictions, is likely to be tested with the UK High Street-based Ladbroke Coral combine – with shop closures probable against a backdrop of the reduced stakes on FOBT (fixed odds betting terminals) electronic gaming machines. On 30 July, management announced a tie-up (50/50 joint venture) with MGM Resorts to take advantage of an anticipated easing in betting in the United States to create gaming platforms for that potentially huge market. The latest trading update confirms strong growth in online betting (+22% in the first half of 2018) helped by the World Cup, and its ability to outperform the wider industry is anticipated in brokers’ forecasts. Looking at broker research, double-digit earnings and dividend growth this year and next would lead to a PE ratio of 12.6 times calendar 2019’s EPS (which is a 5% discount on the overall UK equity market’s multiple) and a 3.4% dividend income yield (covered 2.3x). Of the 16 research houses publishing a view, 15 say Buy and I broker recommends Hold.

5. Legal & General – capitalised at £15bn, this is one of the UK’s largest life insurance groups, with operations in the US, France, Germany and the Netherlands as well, and has been a pioneer of passive index-tracking funds. Whilst not a fund management business per se, its sensitivity to assets under management (be it life, pension or investment products) – by reference to management fee income – makes it a beta stock benefiting from rising global stock market valuations. The stock was within ‘touching distance’ of its all-time high in early May this year, but has since retreated from the 286p level it achieved. The half year’s results, announced last month, were somewhat mixed: while annuity sales disappointed, strong progress was seen in investment management, lifetime mortgages and general insurance premiums. The current valuation appear to be focusing on the immediate outlook for profits (low single-digit growth), rather than the longer term opportunity. Looking at broker research, consensus forecasts persuade for a PE ratio of 8.4 times 2019’s EPS (which is a 35% discount on the overall UK equity market’s multiple) and a 6.9% dividend income yield (covered 1.7x). Of the 19 research houses publishing a view, 10 say Buy, 4 are neutral and 5 recommend Sell. By contrast with its peer group and other listed asset managers (both in the UK and beyond), the stock appears undervalued.

The Writer's views are their own, not a representation of London South East's. No advice is inferred or given. If you require financial advice, please seek an Independent Financial Adviser.