Investor Views: I'm Taking Profits Before Market Shake-up

Private investor Gary Barnes is optimistic his share portfolio is well-placed to cope with both bull and bear markets

Emma Simon 24 October, 2018 | 2:28PM

Fevertree drinks

Gary Barnes is nervous about the effect that current political upheaval could have on returns for both property and shares.

“I’ve been investing for around 20 years and understand that you need to take a long-term view. Over the past five years or so it has been a very benign environment, and it’s been relatively easy to make decent returns. I am not sure the next five years are going to be quite the same.”

Barnes works in the property industry. His main investments are a number of buy-to-lets that he and his wife have bought over the past 15 years. He has also more recently started to concentrate on his share portfolio.

“I hold a portfolio of around 30-plus shares. These are a combination of larger company shares, plus some small AIM-stocks for growth. I hold a couple of funds too, though on the whole I prefer researching individual stocks myself.

“I don’t trade too actively as this can be costly. But I still think holding a balanced portfolio of shares can be more cost-effective than paying a fund manager to do this for you.”

Barnes, who lives in Sussex, makes the most of tax-efficient SIPPs and ISAs and also has a couple of pensions from different employers.

He thinks that it would be “foolish” to completely realign his portfolio. “One thing I’ve learned is that no-one has a crystal ball, and I’ve certainly been negative about the outlook before, then seen share prices roar away.”

More recently he has started to take profits from some shares that have performed well.

Taking Profits in Fevertree

He explains that he recently cashed in a significant part of his holding in Fevertree Drinks (FEVR), which has seen astonishing growth in the value of its shares over the past three years.

Fevertree manufactures premium mixers for alcoholic drinks and supplies these to hotels, restaurants, pubs and supermarkets. Its success has been linked to increased sales in craft beers and premium gins.

Barnes says: “I didn’t even get in at the start of this rise, but have made a decent return. I decided to cash some of my shares over the summer, which proved to be a good decision as share prices then dipped in October. But I do retain part of this holding. I think it has long-term potential, although I doubt it will enjoy the same share price gain we’ve seen in recent years.”

According to Morningstar data Fevertree shares have delivered an 80.14% annualised return over the past three years. This compares with just a 6.76% return in the FTSE 100 over this period.

The problem, according to Barnes, is not what to sell, but where he should invest his gains.

He says: “The received wisdom would be to invest in more defensive stocks. But I already have a some exposure to these, and valuations are looking high at present.”

Steady Defensive Stocks

His more defensive holdings include stakes in companies like Royal Dutch Shell (RDSB), British American Tobacco (BATS), Unilever (ULVR) and Smith & Nephew (SN.)

These have all been good steady holdings within his portfolio. None have delivered returns anywhere near Fevertree but he says these are mature companies that pay decent dividends which help boost overall returns.

According to Morningstar data, Smith & Nephew for example has delivered annualised returns of 11.42% over the past three years.

Morningstar senior equity analyst Debbie Wang says: “Smith & Nephew's impressive innovation has allowed the company to carve out a slice of the orthopedic and wound-care markets. Though Smith & Nephew is smaller than the dominant orthopaedic competitors, it has been a strong contributor in terms of introducing meaningful innovation.”

However Wang points out that the company “continued to tread water in the first half of 2018”. Morningstar gives the stock a three-star rating, though points out it has only a narrow economic moat, meaning its market is not strongly defended from competitors.

Barnes has more recently invested back into the financial sector, with a small shareholding in Lloyds Banking Group (LLOY). He says: “I did lose a reasonable amount by holding both Lloyds and RBS prior to the financial crash. In both cases, it was clear that shares weren’t going to simply bounce back to pre-crash levels, so I decided to cut my losses.

“By investing elsewhere I think this has been the right thing to do. Lloyds though is looking like a more secure offering so I have reinvested a small amount again.”

Lloyds has a four-star rating from Morningstar, meaning it is below its fair value. Its share price has recovered since the financial crash, but according to Morningstar data it has made an annualised loss of 5.56% over the past three years, and annualised losses of 2.95% over five years.

AI Funds Appeal

Elsewhere Barnes wants some growth prospects to balance his more income-orientated share portfolio. He has invested in technology-focused shares, and AIM-listed stocks in the past and has had “mixed returns” from these. “Some have delivered excellent returns, others less so. I accept that this is a higher risk area though.”

Barnes has a small holding in the AIM stock XLMedia (XLM) – a digital publisher and marketing company. This has seen impressive share price gains, although Barnes notes that the share price has waned more recently.

Although he tends to steer clear of funds he is looking at some specialist funds that invest solely in robotics and AI.

He adds: “My wife tends to stick more to funds rather than shares in her ISA. She has one or two tech funds that look quite interesting.

“I think there is going to be quite a shake-up in market, but you would expect that some companies developing this new technology might be well placed to profit from this disruption. Also a lot of the companies are based in the US or overseas, so a fund is a good way to access these shares.”

Barnes is looking at different fund options. “I will probably go for a passive fund that tracks an AI index as this seems the most cost-effective option, although of course you are relying on the manager to ‘build’ this index.

“But I’m also looking at what individual companies are in these indices as I may also , but I want to see invest in one or two individual stocks as well.”

He says: “At the moment we are not looking to increase our property holdings at all. We are quite leveraged and while this is fine as interest rates are still very low, I am not looking to increase this at present.”

The changes to Stamp Duty - which impose a 3% surcharge or buy-to-let properties or second homes - make buying another property a less attractive option, he says. “The ones we hold are certainly still solid investments. The income helps cover the mortgage costs, but the main attraction is the long-term growth prospects. We have seen their value rise considerably over the past 10 years and are hoping this will help fund our retirement when we do eventually stop working.”

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
British American Tobacco PLC2,696.00 GBX-1.12
Fevertree Drinks PLC2,625.00 GBX-2.02-
Lloyds Banking Group PLC55.74 GBX0.69
Royal Dutch Shell PLC B2,438.50 GBX1.86
Smith & Nephew PLC1,386.00 GBX0.07
Unilever PLC4,278.00 GBX0.19
XLMedia PLC100.40 GBX-0.10-

About Author

Emma Simon

Emma Simon  is a financial journalist, specialising in investment and consumer issues, writing for Morningstar.co.uk