A professional investor tells us where he'd put his money. This week: Robin Geffen, Head of the Liontrust Global Equity Team, selects three favourites.
We believe investors looking for income from UK equities should look for an attractive yield, income growth and, importantly, corporate resilience and growth. Our approach to building a portfolio follows these rules. We split our holdings evenly between what we call "steady-Eddie", "hidden fruits", and economic-recovery stocks.
Using a combination of differing styles provides diversification and scope for strong performance at various stages of the market cycle. We also believe that seeking out large caps with high levels of dividend cover is crucial to future income and capital growth.
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Slow and steady wins the race
Our so-called steady-Eddie holdings, which are core income stocks with structural growth drivers, are typically lower yielders but offer strong and consistent dividend growth.
These businesses tend to be defensive, helping to protect the overall portfolio during times of market weakness. Consumers' staples company Reckitt Benckiser (LSE: RB) is a steady-Eddie we favour thanks to its diverse portfolio of everyday power brands (such as Dettol, Nurofen and Vanish).
Reckitt Benckiser produced a total shareholder return of 219% between 2007 and 2018, driven by stable earnings and dividends. The business is evolving into a consumer-health company, a structurally attractive subsector supported by organic growth drivers such as rising wealth in emerging markets.
Then we have our hidden fruits, which are value stocks where we have identified a catalyst for change. These tend to be our highest yielders, as they are usually companies that have gone through a difficult period. AstraZeneca (LSE: AZN)is a recent addition to our hidden-fruit stocks. It has underperformed recently, but several positive developments suggest the company's valuation has fallen too far.
For example, sales growth has recently increased considerably and we expect the stock to continue to improve its cash-flow generation and product pipeline, driven by both geographical and product-specific growth opportunities.
Geographically, attractive emerging markets now represent Astra's largest region by sales; China is its second-largest market. At a product level, 157 projects in the pipeline should sustain top-line momentum as Astra reinvests heavily in its new drugs, particularly cutting-edge cancer treatments with hitherto encouraging clinical success.
RSA has room to run
The final group consists of economic recovery stocks. Stocks in this category also generate higher-than-average yields. They do tend to be more volatile, but in return they offer considerable upside, given that their fortunes are more tied to the economic (or a more sector-specific) cycle.
This group includes financials such as RSA Insurance (LSE: RSA), which can be volatile depending on sentiment towards the economy. But it is a stock we have researched carefully and favour given the quality of the underlying businesses, its clear operational improvements and the fact that it offers geographical diversification, with some 70% of its earnings generated overseas. It is one of several financial stocks we hold to ensure a sector-overweight position.
