This article is part of our Guide to Maximising Your Pension, helping investors build up the maximum possible pension pot – and turn it into the maximum possible retirement income.
Once a year this column urges investors to start investing their annual ISA allowance straight away and not wait for the last minute scramble in the final days of March. The time for action has come round again.
This year the situation is admittedly less clear-cut, as the referendum on Britain’s membership of the EU is looming. It is likely that this will cause some, perhaps much, nervousness in the markets, although such fears may be overdone. The Scottish referendum had remarkably little impact, even when it looked as if there would be a vote for independence.
Life will go on whatever the outcome. Any dips in share prices should be regarded as an opportunity, not a cause to panic.
I was reassured in this view talking to David Smith, manager of the successful Henderson High Income Trust (HHI) this week. He has 90% of his assets in equities and only 10% in bonds, which provide stable income to balance the greater volatility associated with shares.
He sees the run-up to the Brexit vote as an opportunity, arguing that shares in domestic UK companies have underperformed and are typically trading at a 10% discount to the market generally whereas they commanded a premium last year.
Like me, he takes a bottom up approach, looking for promising companies that are at a significant discount to their peers and that should be able to grow their dividend. Last year, for example he increased his holding in Diageo (DGE), which is being turned round under new management, and added to existing holdings in Greene King (GNK) and Victrex (VCT).
He believes that you can still find quality cyclical stocks at the right point in their cycle with stable earnings and a resilient business model.
Victrex he still sees as an opportunity to benefit from investment-led growth. Its capital expenditure is tailing off but free cash flow is being increasingly generated by past capex. Big Yellow (BYG), the storage company, he believes will be driven by increased occupancy and rising rents for storage space. He mentions Pearson (PSON), which has already bounced off recent lows but which he believes has further to go.
He believes that Astrazeneca (AZN) has some exciting drugs likely to come to market in the next three years, particularly in oncology which he says will be the growth driver in the sector. Astra offers a 4.5% yield and attractive gearing backed by strong cash flow. In contrast, he fears that the dividend at Glaxosmithkline (GSK) is unsustainable and is vulnerable to the arrival of a new chief executive.
Immediately after our meeting on the last day of the old ISA year he bought High Street retailer Next (NXT). Now that’s timing. I had intended to buy shares myself the following day with my new ISA allowance but, alas, the shares jumped more than 2% that morning, and added a similar amount the following day.
I curse the missed opportunity but not to worry. As David Smith says, there are plenty of opportunities to buy undervalued shares on the London Stock Exchange. Get looking.
Marks & Spencer: More & Same
Once every 13 weeks this column records that Marks & Spencer (MKS) has reported higher food sales and declining clothing and homeware sales. The fact that this time margins have improved in clothing is a bonus but it is not the main issue.
Offering higher quality for a little extra price is driving food. It used to be the hallmark of the clothing. The answer must be staring new chief executive Steve Rowe in the face. The question is whether he can achieve what has been beyond his predecessors.
M&S isn’t a bad investment. It could be a great one. However, I would like to see some evidence that Rowe is solving mission impossible before I would even think of buying the shares.
Rodney Hobson is a long-term investor commenting on his own portfolio; his comments are for informational purposes only and should not be construed as investment advice.
