The don’ts are far more straightforward than the dos. Don’t buy retailers, banks, businesses with supply chains embedded into the European Union. Stay away from consumer goods suppliers, technology shares, airlines, estate agents and housebuilders; leave alone any company exposed to the variables of the British economy.
So where does the investor who is looking for four shares to tuck away in the portfolio and leave untouched for at least the next 12 months start?
First, the backdrop. In three months’ time Britain is due to leave the EU, chaotically or otherwise. Any investor must work on the assumption that Brexit will happen.
That places a large question mark over the UK’s economy, likely to suffer at the very least a short-term setback, even if a series of potentially attractive trade deals is negotiated. Consumer confidence is fragile, so the spending of shoppers and homeowners over the coming 12 months cannot be relied upon.
The US economy is in growth mode, albeit at a potentially slower clip, held back by the tribulations of President Trump’s war with China over trade tariffs. Growth in the world’s second largest economy is also looking increasingly tenuous, for trade-related reasons. Emerging markets are politically volatile; and even Europe appears to be heading for a GDP slowdown.
That must surely mean that the best approach for the share seeker is to look for diversity, widespread global exposure, to a collection of business sectors, at least some of them counter-cyclical. That’s straightforward in theory, extremely difficult in practice. But here goes.
Prudential
This FTSE 100 insurance and fund management group offers investors options, diverse ones at that. Either this year or next it will be all change for the Pru, which was set up 170 years ago and sells life and health insurance savings and investments in Britain, Europe, America, Asia and Africa.
In what is widely expected to be the first part of a stage-managed break-up of all its businesses, the Pru is preparing to separate its life and pensions unit and fund management operation in the UK and continental Europe, known as M&G Prudential, from its Asian, US and African divisions, plus the Eastspring Asian fund manager, which will form the present Prudential plc quote.
The thinking is that separating the two will simplify them for regulation, capital and management and create substantial additional value. Investors assume that when the American business is more highly valued, it, too, will be sold and that M&G, the fund manager, will also take on its own separate listing, offering considerable potential value.
The Pru’s shares, down a quarter last year, trade for less than nine times this year’s forecast earnings and yield just under 4 per cent. They offer rich exposure to Asia and Africa, a recovering US division, a fund management business set for growth and a highly cash-generative UK arm.
3i
3i offers investors a reassuringly diverse exposure, geographically and by business sector. Its portfolio includes holdings from a Minnesota-based designer of medical devices to a furniture maker in Denmark and, while it may be a quoted business and a constituent of the FTSE 100, it remains driven by the quest for private equity returns.
The group invests in unlisted as well as quoted companies, is little exposed to the UK and has some serious gems, including Action, a Dutch discount retailer that is held on the books for less than its €3 billion in annual revenues.
There will always be setbacks — indeed, Action itself had its share last year — but the richness of 3i’s portfolio makes it highly attractive. Unlike other private equity players, 3i is not under pressure to find a home for its money; in fact, it hasn’t raised external funds for 12 years and is as likely to reinvest at a sale or listing as make its exit.
3i’s shares lost more than 16 per cent of their value last year and, at only 6.5 times forecast earnings for a prospective yield of 4.5 per cent, they should perform well in the long term.
Lindsell Train Investment Trust
This portfolio is going to need an investment trust, so how about the high-octane Lindsell Train? It is extremely well valued and the shares trade at a premium of about 43 per cent to the value of its assets, but its performance speaks volumes.
The £227 million trust has increased in value by nearly 900 per cent over ten years and has gained almost 50 per cent in the past 12 months, showing a clean pair of heels to its sector rivals, including Scottish Mortgage.
Lindsell Train was set up in 2000 as an investment manager by Michael Lindsell and Nick Train and they launched the trust a year later. It has a stated aim of generating value over the long term, while at the same time paying out the maximum permitted each year in dividends.
Its holdings, including the unquoted Lindsell Train investment manager, are intriguing and look like sound global plays, ranging from Relx, the publisher formerly known as Reed Elsevier, and Mondelez, the consumer goods group, to Paypal and Ebay.
The trust’s preference for assets denominated in sterling should have been problematic, given the fall in the pound since the Brexit vote, but Linsdell Train has made money on currency movements this year. The shares yield a respectable 2.1 per cent, but the capital appreciation has been highly impressive.
Diageo
For stable, solid, reliable, global and affordable growth, it probably has to be Diageo, the global drinks group that makes and sells 200 brands of alcoholic drinks, from Guinness to Johnnie Walker whisky, and sells them worldwide.
While the group is locked into the economic and consumer-led fortunes of the global economy, and the fluctuations of its numerous currencies, it is so widespread that weakness in any single region almost certainly will be offset by strength in another. Ironically, it is one of the few UK-listed businesses that could profit from Brexit as it would not be hit by any EU tariffs on spirits and newly negotiated trade deals could take it into new markets.
There is an as yet untapped opportunity in the US market to take advantage of liberalising cannabis laws. The caution the drinks group is exercising in tying up related acquisitions or partnerships in this new and unfolding area instills confidence in its ability to pick wisely when it comes to it.
Diageo’s shares were volatile last year, but taken over two years they have improved by 35 per cent, and by 42 per cent since 2013, supported recently by healthy buybacks. The shares trade for 22.8 times 2017’s earnings and yield about 2.3 per cent.
