Each week, a professional investor tells MoneyWeek where he’d put his money now. This week, Dan Hanbury, manager of the River and Mercantile UK Equity Unconstrained Fund.
The events of the past 18 months or so have underlined the importance of putting a range of different assets in your portfolio. All investors know about diversification, but in tough times its importance comes into sharp focus.
Global economies and markets are currently at the mercy of debt and deflationary forces, despite the best efforts of governments and central banks to improve conditions in the credit markets and stimulate economic activity. With cash deposits yielding increasingly unattractive returns, as a sterling-based investor I currently favour exposure to gold, foreign currencies and a range of stocks that offer the prospect of solid long-term returns.
When it comes to UK stocks, the core of my portfolio is in a broad range of large caps, with some exposure to particular small firms. The stocks I prefer have a number of key defensive characteristics: visible sources of earnings (such as government contracts); the ability to influence capacity within their sector (and so have some degree of pricing power); strong balance sheets; and the potential for profitable growth and/or improving return on capital.
My first pick would be Babcock International (LSE:BAB), a support services company with customers ranging from Britain’s armed forces through to rail network projects, power transmission network maintenance and telecoms network maintenance. The company has delivered unbroken earnings growth for several years and is set to benefit from the investment required in Britain’s nuclear industry. Increased infrastructure spending, a key part of global governments’ attempts to stimulate their economies, should also be good for the group. Another stock that should be a beneficiary of increased infrastructure spending is Mouchel Group (LSE:MCHL), a white-collar consulting and business services group providing design, managerial and engineering services. It works with several government agencies (including the Highways Agency), regulated industries (such as water) and the private sector. Despite government budget constraints, Mouchel has good visibility in its future growth.
Pricing power among consumer-facing stocks is rare in this climate. But I believe Imperial Tobacco (LSE:IMT) is in a strong position to improve profit margins. Its purchase of Altadis allows it to control capacity and take full advantage of the defensive nature of its markets. I expect the company’s strong management team to continue its excellent track record in creating value for us as shareholders and paying a rising stream of dividends.
I also think there are attractive opportunities in media. My final pick would be British Sky Broadcasting (LSE:BSY), a high-quality consumer-facing franchise. Readers will know that Sky dominates the British pay-TV market. Having spent many years acquiring that market share position, its shareholders are now starting to benefit as the growth rate in the company slows and set-top box subsidies and programming costs fall – resulting in their return on capital improving substantially from here. Indeed, staying in and watching the box has never been more popular.
The stocks Dan Hanbury likes
| 12-month high | 12-month low | Now | |
|---|---|---|---|
|
Babcock International |
650p |
306p |
521p |
|
Mouchel Group |
477.75p |
250p | 362p |
|
Imperial Tobacco |
2,292p | 1,368p | 1,769p |
|
BSkyB |
599.5p | 310.5p | 494.75p |