Every week, a professional investor tells MoneyWeek where he’d put his money now. This week: Nick Train, investment adviser to the Finsbury Growth & Income Trust
History shows it’s usually good to be invested in the UK stockmarket at this time of year – and that’s especially the case this year after the summer declines. The FTSE All-Share Index offers a wide range of stocks in which to invest, in every industry and geography imaginable. So to be bearish on the London market is to be bearish about global capitalism’s propensity to generate wealth into the future. This would be a bet against history – and such bets are invariably loss-making.
We think the wobbles of summer 2007 can best be understood as the correction necessary to ensure an easing of incipient inflation pressures. Once those pressures subside, UK equities will make new highs. What I would actually buy today is what I’ve been buying persistently through most of my 26-year investment career; namely, shares in those relatively rare UK-quoted owners of major consumer brands, preferably global brands and, better still, brands with a presence in the emerging markets. Our current favourites are Cadbury Schweppes (CBRY), Diageo (DGE) and Unilever (ULVR). There are five aspects to this recommendation.
Perhaps the best piece of investment advice I ever received came from a former boss: “If the company’s products taste good, buy the shares”, he said. That advice has never failed me and is not flippant. Products that taste good tend to win consumer loyalty, often over generations. Dairy Milk, Bailey’s and Walls ice-cream may not suit every palate, but are more likely than most to be enjoyed by our children’s grandchildren. That loyalty will literally pay dividends for years to come.
Investors get too worried about companies’ relatively short-term operational performance. The way to make really serious investment returns is to buy into a company likely to trade profitably and predictably into the distant future. All three of the aforementioned firms offer an immediate, specific opportunity. Cadbury’s botched sale process, Diageo’s struggles with the black stuff (Guinness sales are declining in Ireland) and Unilever’s perceived inferiority to its peers – all these factors are temporary dampeners, which render their shares cheap today. Nelson Peltz, the US raider, bought his chivvying stake in Cadbury’s at around current prices earlier this year and his track record suggests that its brands are very undervalued. Diageo and Unilever pay dividends ahead of the market average, and we think they’ll grow those dividends faster than the average in the long term.
Some investors today fear accelerating in global inflation. Do you? If so, buy consumer-goods firms. That consumer loyalty will enable them to increase their brands’ prices with, or ahead of, inflation. Others worry about a consumer recession. If you fit that description, buy consumer-goods firms. Chocolate, vodka and Marmite will be among the last pleasures cash-strapped folk give up on. The history of the great consumer brands to date is, essentially, a history of their success in the developed world – markets comprising hundreds of millions of consumers. The future of these great brands, their destiny, will be their success, or otherwise, in the emerging economies, in which there are billions of new customers to entice. Johnnie Walker (Diageo’s whisky brand) is already 187 years old, but last year its volumes rose 16%, with a 22% increase in Asia Pacific. At 187 years young, JW has its best days still to come.
The stocks Nick Train likes
Stock, 12mth high, 12mth low, Now
Cadbury, 728p, 514p, 602.5p
Diageo, 1,118p, 947.5p, 1,099p
Unilever, 1,722p, 1,281p, 1,580p