One of the questions we get asked most frequently is how to buy shares suitable for long-term portfolios. Stock picking for value is more art than science. But a wide variety of sources is likely to produce better results than a narrow view. You may find Fundsmith boss Terry Smith’s top three lessons for investors helpful to start with. Now take a look at the UK’s most successful fund managers to learn their strategies for yourself.
How to buy shares like Lindsell Train
Mike Lindsell and Nick Train started their investment fund in 2000 at the peak of the dotcom boom. Their investing mantra has changed very little in the intervening years. To outperform the market, Lindsell and Train want:
- Exceptional companies that generate solid cashflow and strong profits
- Truly sustainable, long-term, durable business models
- Established, resonant brands
Train manages the £7.3bn UK Equity Fund, focusing on 24 large-cap firms with a 40% weighting towards consumer defensive stocks, 25% to consumer cyclical, and 25% to financial services. The top three shares are the £38bn market cap scientific publisher RELX, drinks distributor Diageo of which I’m a big fan and household goods manufacturer Unilever, which tops the lot with a market cap of £135bn.
Individually, each of these shares trades with a price-to-earnings ratio of well over 20, so you may struggle to get them at knock-down prices. Dividend yields also are not outstanding at around 2% each.
However, the heavy focus on so-called defensive products like food, household goods and beverages should be of interest because these items are popular whatever the weather and offer some downside protection when the UK economy is struggling.
How to buy shares like Merchants Trust
The Merchants Trust (LSE:MRCH) managers are self-avowed income seekers with a mandate for a cast-iron 5%+ dividend yield. Portfolio manager Simon Gergel confirms: “Income is our focus…we make no apology for buying shares that provide the high yield we require.”
Merchant’s top 10 holdings — which make up 45% of the total fund — are mostly household names. In order, that’s the oil giant Royal Dutch Shell (7.6%), pharma king GlaxoSmithKline (6.5%), bank HSBC (5%), tobacco firm Imperial Brands (4.4%), the weapons manufacturer BAE Systems (4.1%), the Lucky Strike and Cutter’s Choice owner British American Tobacco 3.9%, insurer Legal & General (3.8%), asset manager Standard Life Aberdeen (3.7%), mining and metals giant BHP Group (3.5%) and investment manager St James’s Place (3.4%).
All of the above are international businesses that are globally diversified. Imperial Brands is struggling at the moment with major shareholders demanding that underperforming assets be sold off, but that makes my point, really. Spreading your risk to make sure your portfolio is insured against drops in any one sector or country will make you richer in the long run.
Gergel adds that the fund’s mission is to provide “an above average level of income and income growth by investing in higher yielding UK companies“.
At time of writing, Royal Dutch Shell is offering a 6.4% dividend yield. The difference between a 3% and 6% yield really ramps up over time if you can try not to panic when the market is volatile. Compound interest, remember. Get rich slowly.