Each week, a professional investor tells MoneyWeek where she'd put her money now. This week:Lucy Macdonald, co-manager, Brunner Investment Trust.
We aim to find well-run companies with strong balance sheets and good cash returns, as well as the potential for long-term growth and to buy such stocks at levels where these attractive characteristics are not fully priced in.
The investing backdrop over the last five years has been favourable. Returns have been high, and volatility low. That's due to plenty of liquidity from central banks, recovering company earnings, and the fact that valuations were rising from a very low base. But 2015 doesn't look as though it will be quite as favourable.
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The Federal Reserve in the US, the main source of liquidity in recent years, is now ending its quantitative-easing (QE) programme of bond purchases. Of course, the Bank of Japan is increasing the size of its balance sheet (via more QE) and Europe is under pressure to do likewise. But the combined impact is unlikely to offset the end of US QE.
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Meanwhile, corporate earnings are growing at a more normal pace after the initial sharp recovery, with the paying off of debt still squeezing demand. Lastly, while equities still look attractive compared to other assets, they are more expensive than the historic average, particularly in America.
As a result, we believe nominal (ignoring inflation) returns in stockmarkets will be more muted in the next three years, which is why we think active stock picking is vital to drive some additional gains. So here are some of our highest-conviction holdings for the next year.
Accenture (NYSE: ACN) is a leader in the fields of technology consulting and application services, and is benefiting from the long-term growth in the importance of the digital realm to most industries. Its market share is growing and revenue growth is accelerating.
As its clients expand further into digital business, they are increasingly paying Accenture for marketing expertise and its IT knowledge. The order book is strong as a result. Cash returns are high above 30% and stable.
The strong, experienced management team has a good track record and its incentives are aligned with shareholders' interests. It trades on a price-to-earnings ratio (p/e) of around 17.5 for 2015.
United Internet (Xetra: UTDI) is now the second-largest broadband operator in Germany, following its recent acquisition of Versatel.It is benefiting from strong growth in mobile and fixed-line access. With a sizeable customer base and subscription model, a high proportion of its revenues are high quality and recurring.
Profit margins are 15% and rising due to growth in sales of more profitable applications, and some cost benefits from the acquisition.
On a p/e of 19, the valuation is fair, but we believe the visible growth and strong free cash flow of the company suggests that in time it should have a share price in the 40s rather than the 30s.
Monsanto (NYSE: MON) is an agrochemical and biotechnology company. Its sales are driven by the need for gains in agricultural productivity to feed the growing population.
Barriers to entry in the sector are high, which is reflected in a return on equity of more than 20%. Starting with cyclical lows in grain prices, the stock looks set to perform well into 2015 as these prices stabilise. The p/e is 20 for growth that is accelerating into the high teens.
In short, the investment environment is likely to become tougher than it has been for the last few years, but there are still gains to be made in equity markets globally.
