I recently outlined how I would invest £20,000 in UK shares to try to generate income. Now I want to share a different approach. Here is how I would invest £20,000 in UK shares right now to try and get long-term growth in my portfolio.
Risk management principles
Growth can be exciting – but also highly unpredictable.
I would seek to diversify my portfolio as a form of risk management. Holding a wider array of companies means I will be less hurt overall by any specific name underperforming.
The same logic holds for sectors. So I will spread my picks across four different sectors and a fifth thematic area.
Growth can come in different guises. I am wary of overpaying for tech stocks that might not deliver. So some of the sectors offer what I regard as attractive but not necessarily massive growth potential.
Choosing the sectors
I’ve plumped for four sectors:
- Banking – I see continued housing demand and pandemic recovery lifting banking overall, though defaults are a risk.
- Construction – a resilient new housing market and public works should help the building trade. But any housing market wobble is a risk.
- Food – two food picks reflect my belief that prepared food is set to keep growing post-pandemic. However, consumer belt tightening could affect this negatively.
- Software – I’ve chosen a couple of software groups with business and government clients. Software often needs development costs to stay competitive which can reduce profitability.
Finally, I include a thematic pick: UK shares which I think are well-positioned for a digitalising economy.
I would spread my £20,000 evenly across 10 names.
UK shares I’d pick
Now onto my choice of UK shares.
In banking, I continue to see high street names Natwest and Lloyds as undervalued. Strong brand names and moves into new forms of customer engagement bode well for future growth. However, they are broadly linked to the UK economy so an economic downturn could hurt them.
Housebuilder Bellway seems like a quality operation to me. It recently restarted its dividend and has a strong order book. Galliford Try is another builder that enjoys a strong net cash position. I like its focus on public construction projects, which helps bring stability. Building tends to be cyclical, though, and both names could suffer if demand falls.
Food might not seem like an obvious growth area. But I see great potential in some food shares. Domino’s Pizza should grow as it expands its network. Meat producer Cranswick grew earnings per share 17% last year. I think its industry expertise could enable more growth. Food shares might suffer from margin pressure in a highly competitive market.
Growth potential from digitalisation
Software house Kainos Group is close to an all-time high. But its growing reputation and government contracts could propel future growth. I do think valuation is a risk: the price-to-earnings ratio of 83 times looks very high. Accountancy software specialist Sage trades at a more reasonable 22 times earnings and I like its focus on SME clients. I currently see more growth potential in Kainos so would include both names despite Kainos’ expensive valuation. Sometimes quality costs.
Finally, I think increasing digitilisation bodes well for S4 Capital with its pure digital focus on marketing services. The Scottish Mortgage Investment Trust offers exposure to global digitalization plays. But any tech pullback could hurt both.