Each week, a professional investor tells MoneyWeek where he’d put his money now. This week: Nick Train, investment manager at the Finsbury Growth & Income Trust.
Macro-economics are pulling the British stockmarket every which way. One week investors fear a deflationary recession; the next they are betting on a ‘V-shaped’ recovery in demand and commodity prices, probably accompanied by rampant inflation. Each camp has its wild-eyed adherents, brandishing charts that point to apocalyptic, but divergent, outcomes. Each too can argue reasonably that the economic data, which fluctuate from day to day, support their theory, and theirs alone.
We honestly don’t know what to make of it all. Our uncertainty makes us keen to hedge our bets and build equity portfolios around companies that should be able, at worst, to muddle through whatever storms are to come. In other words, we’re looking for businesses that can survive both a Japanese-style freeze-out or a reprise of Britain’s turn as ‘the sick man of Europe’ in the inflationary 1970s.
We are inspired by this advice from the late lamented Sir John Templeton: “The best time to buy sound common stocks is when economic conditions are most uncertain.” This is so important, on two levels. Buying equities when times are tough makes sense, because that’s when you’re most likely to pick up bargains.
But equities can also be far more reliable as a store of value than you might think. By contrast, holders of assets traditionally thought of as safe, such as cash and fixed-interest securities, particularly long-dated government bonds, are, we think, taking at least as much risk as equity-holders today. ‘Safe’ assets are not immune from default risk or huge loss of purchasing power.
However, Templeton’s qualifier, that word ‘sound’, is essential. The firm you buy must be a survivor. This need for durability is one reason our portfolios are full of what we see as cash-generative firms with strong market positions that have typically survived challenging economic periods in the past. In particular, we look for evidence that their products have pricing power that can protect their owners against insidious future inflation.
Perhaps the most perfect London-listed two-way bet against recession and inflation is the regional brewers. They’ve been around for decades. As long as Britons drink beer, it seems likely they’ll do so in pubs. Brewers’ real estate offers protection against inflation, while cash flows, if not recession-proof, are more reliable than most. We own Fuller’s (LSE: FSTA) and Young’s (LSE: YNGN) and find it hard to conceive of better shares for the long term.
Our bigger portfolio positions are in leading consumer branded-goods firms with similar characteristics, led by Diageo (LSE: DGE), Unilever (LSE: ULVR) and Cadbury (LSE: CBRY). These stocks have recently raised their dividends by 5%, 18% and 6% respectively, at a time when dividends are being cut across the market.
We’re sometimes told that such holdings are boring, but after the excitement of the last 18 months, this surely misses the point. We’re somewhat nonplussed about the share-price performance of this group in recent months: they’ve drifted sideways to down. Yet shares in cyclical, capital-intensive firms with weak balance sheets have soared. The latters’ shares may have been oversold and deserve a bounce, but selling sound stocks in the search for exciting, but unreliable ones, is a risky ploy.
The stocks Nick Train likes
| 12-month high | 12-month low | Now | |
|---|---|---|---|
| Fuller’s | 530p | 304p | 515p |
| Young’s | 480p | 355p | 397.5p |
| Diageo | 1,068p | 727p | 839p |
| Unilever | 1,687p | 1,226p | 1,426p |
| Cadbury | 673p | 445.25p | 534p |