We follow a simple process to allow our portfolio to generate real returns over the long term. The process comprises stock selection and risk management. In stock selection, we are trying to find companies that satisfy three crucial criteria.
One, economics: it must make an economic return, meaning that the outputs are more valuable than the inputs and there is some reinvestment opportunity. Two, sustainability: a qualitative assessment of whether the economic return determined in point one can be continued into the foreseeable future, meaning a decade or so hence.
Three, management: the company must be stewarded by competent people whose incentives are aligned with shareholders and – crucially – act with integrity and honesty.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
How to manage risk
Risk management is where we consider what can go wrong. There are two elements to this process: concentration and valuation. As far as the former is concerned, we want to ensure a balanced portfolio. We can gauge how our selections are geared to disparate economic outcomes, which helps us recognise when the portfolio could become overly skewed towards one scenario – perhaps an over-optimistic one.
Valuation is where stock selection and risk management meet. We concentrate on where a company sits within its cycle: rather than focusing simply on price, we look at earnings too. We avoid investing when earnings are too high, not simply when the price relative to those earnings is too high. This helps us steer clear of companies whose profits are peaking and set to fall.
The pick of the banks
Banking stocks in general are attractive to us, but we consider Barclays (LSE: BARC) particularly compelling. The years of gruelling balance sheet repair are behind us and what is emerging is a franchise that we believe can generate decent returns in a relatively low-risk manner.
Investors remain reluctant to consider banking stocks, which has created a scenario where we struggle to find a greater divergence between the quality of a business and investors’ perceptions of it.
An exemplary publisher
Notwithstanding the current global crisis, we believe that Euromoney Institutional Investor (LSE: ERM), a financial publisher and events organiser, is well positioned for the future given its recurring revenue streams coupled with sustainably high returns and exemplary balance sheet strength. The strong balance sheet is to be expected given that Euromoney is a capital-light business.
With regard to sustainability, Euromoney is a business where we can make a strong case that profitability could actually improve over the long term. Nevertheless, because a part of the business is involved in events, the shares have been marked down substantially recently.
Superbly managed construction materials group
Finally, Breedon Group (Aim: BREE), a construction materials group whose products include specialist concrete and clay products, asphalt and aggregates, has a simple but hugely effective business strategy with predictable earnings power and a superb management team at the helm. Not only are quarries highly lucrative, but the company would also be a prime beneficiary of a probable fiscal stimulus resulting from the extreme economic slowdown.
-
UK-US trade deal announced: US cuts tariffs on UK car imports to 10%Keir Starmer and Donald Trump have announced a UK-US trade deal, but the US president has refused to lift baseline tariffs on most UK goods. What does it mean for the UK?
-
How to use mid-caps to diversify from the USMedium sized companies are overlooked by investors but could offer an attractive ‘sweet spot’. We consider the case for mid-caps amid market volatility.
-
Halifax: House price slump continues as prices slide for the sixth consecutive monthUK house prices fell again in September as buyers returned, but the slowdown was not as fast as anticipated, latest Halifax data shows. Where are house prices falling the most?
-
Rents hit a record high - but is the opportunity for buy-to-let investors still strong?UK rent prices have hit a record high with the average hitting over £1,200 a month says Rightmove. Are there still opportunities in buy-to-let?
-
Pension savers turn to gold investmentsInvestors are racing to buy gold to protect their pensions from a stock market correction and high inflation, experts say
-
Where to find the best returns from student accommodationStudent accommodation can be a lucrative investment if you know where to look.
-
The world’s best bargain stocksSearching for bargain stocks with Alec Cutler of the Orbis Global Balanced Fund, who tells Andrew Van Sickle which sectors are being overlooked.
-
Revealed: the cheapest cities to own a home in BritainNew research reveals the cheapest cities to own a home, taking account of mortgage payments, utility bills and council tax
-
UK recession: How to protect your portfolioAs the UK recession is confirmed, we look at ways to protect your wealth.
-
Buy-to-let returns fall 59% amid higher mortgage ratesBuy-to-let returns are slumping as the cost of borrowing spirals.
