Share guru’s top ten tips to boost your portfolio
HUGH Young, star fund manager at Aberdeen Asset Management, has developed ten golden rules for investing in shares over more than 25 years in the markets.
1) Ask who controls the company, and do you trust them to treat minority shareholders fairly? Minority shareholders are just one of many stakeholder groups and as such need to know they will be treated properly by whoever controls the company, whether that be a government, founding family or an individual. 2) Remember companies are about people not assets Rolls-Royce is a great example of a company that always had good technology and operated in a growth market, but for years failed to live up to its full potential.
It took an outstanding CEO in the shape of Sir John Rose to recognise its strengths, to develop a business model and execute a long-term strategic plan to turn the promise into profits. 3) Balance sheet strength is critical Premier Foods always stands out as a notable lesson to us. It should have been a very stable company with a portfolio of well-known UK grocery brands.
Yet it managed to bring itself to the brink of insolvency by taking on a large amount of debt to buy a competitor business just as the financial crisis struck in 2007. 4) Know what you’re buying Facebook is a global success and extremely popular but we didn’t invest in it at the IPO and have not invested since. We struggled to understand how it would achieve the future revenues that were implied in its valuation, particularly considering it is in a fast-moving and evolving industry where new entrants can quickly establish themselves. 5) Be wary of over-ambition Rio Tinto’s acquisition of the Canadian company Alcan for $27bn in 2007 and its resulting diversification into aluminium production and away from its core iron ore and copper assets proved nearly fatal for the company.
It picked the top of the commodity boom to invest, borrowed heavily to do so and then saw the profits generated by Alcan collapse as aluminium prices crumbled. 6) Think long-term Unless you need your money back soon, you should think long-term and avoid getting caught up in the daily noise of markets. This is for two reasons. First, it makes sense to align your own investment time horizon with that of the companies in which you invest. If a company builds a factory, for example, it expects to generate returns from it for at least ten years, as you should from its shares.
The second reason is that shortterm price movements are mostly inconsequential. What you should be worried about is permanent loss of capital and this is about assessing a company’s long-term business prospects. 7) Benchmarks are just measuring devices – not tools for constructing a portfolio To my mind, the corporate equivalent of an index fund would be a company that did everything, and in a mediocre, average way. I doubt such a company would last long.
Success is about being different, not average. Tracker funds are constructed to reflect indices based on weights in securities with no distinction between good and bad and based on their historic performance.
In 2000, the MSCI World index had a 56pc weighting to US equities, 17.3pc to European equities, 11.5pc to UK equities, 10pc to Japanese equities, 2.3pc to Canadian equities and 2pc to Australian equities.
If investors used this as a portfolio construction tool they would have missed out on some great companies in Asia and emerging markets which went on to perform fantastically well through the subsequent decade. 8) Take advantage of irrational behaviour The bout of rights issues of 2008/09, while highlighting the significant distress in stock markets at the time, in most cases proved an outstanding investment opportunity to buy more shares in good quality companies extremely cheaply. 9) Do your own research Aberdeen’s equity teams around the world last year conducted more than 4,000 meetings with company management in addition to meticulously going through results and annual reports.
Small investors cannot hold thousands of meetings with companies but they can do their homework and make up their own minds, rather than just following tips.
Glencore, the global commodity trader, stands out as a company heavily tipped by investment banks at the time of its float in 2011, when it placed shares at 530p, but we saw a complex corporate structure. The shares currently trade at 385p. 10) Focus on industries Look for industries in which it is possible to have a sustainable competitive advantage.
Unilever stands out as a company that has a portfolio of consumer brands that have been providing an enduring competitive advantage and associated excess returns for many years. Brands such as Lipton, Vaseline and Hellman’s have well over a century of heritage behind them.