Please note that tax, investment, pension and ISA rules can change and the information and any views contained in this article may now be inaccurate.
Investor diary: looking for value and growth
We’re pleased to welcome back Malcolm from Edinburgh who is sharing his experience as someone in retirement taking charge of their investments for the first time.
After a year-and-a-half of taking responsibility for investing for retirement through my SIPP and Stocks and Shares ISA, matters are becoming clearer. There is no going on endless holidays and checking my portfolio once a fortnight, but there are smaller signs of organised progress.
After setting aside £30,000 for family contingencies, I have 13 shares invested in FTSE 100 and FTSE 250 companies and four in the FTSE AIM 100. Over the 18-month period and buoyed by recent share increases my return on investment is 6.4%, not including dividends, a pleasing result and more than could have been achieved through saving schemes.
In my previous column I evaluated whether investing in 30 shares was too many. However, after reviewing the outlay amount in terms of portfolio percentage, an active investment of £200,000 equates to an average £6,600 (3.3%) investment per share. In terms of risk/reward and maintaining a diversified portfolio this appears reasonable to me.
I tend towards investing higher amounts in ‘value’ shares in the FTSE 100 and FTSE 250, for example Admiral (ADM), Aviva (AV.), Diageo (DGE), Redrow (RDW), UDG Healthcare (UDG) and Unilever (ULVR), and lower amounts in ‘growth’ shares in these indices and the FTSE AIM 100. The terms value and growth are slightly amorphous given that many companies are adapting their business model, but the general notion is helpful.
Shares in new and emerging technologies are more obvious ‘growth’ shares e.g., Blue Prism (PRSM:AIM), Gamma Communications (GAMA:AIM), GB Group (GBG:AIM) and ITM Power (ITM:AIM) from the AIM market. As these shares can fluctuate quite markedly, the amount invested in them is lower, typically £4,000 relative to the £6-£8,000 I have placed in most value shares.
LOOKING TO AIM FOR EXCITEMENT
AIM is where I find the excitement though. Take, Blue Prism, where software robots are being developed to automate routine back-office clerical tasks. ITM Power aims to take excess energy from the power network, convert it into hydrogen and reuse it in industry. What is not to admire about these new and bold ideas?
In share price terms some hybrid value/growth investments have fared better than others. SSE (SSE) has moved relatively successfully from an electricity network provider to generating power from renewable sources. BP (BP.) and Royal Dutch Shell (RDSB) have similar green energy aspirations but due simply to the time the shares were purchased, changes in business orientation are not yet reflected in share price gains.
This raises an ongoing issue of what to do with these shares: hold, sell or buy more of them? Arithmetic comes into this; as in my experience, it is easier for a share/business to half in value than double in value. A £10 share can quite quickly become a £5 share, but it is more difficult for the same £5 share to become a £10 share again.
For this reason, when evaluating companies, I try to review their loss as well as profit making potential. Increased attention is paid to resilience and whether there is something sufficiently distinctive about certain companies that might generate sustained earnings growth during economically volatile times.
‘RULE OF 20’
Added to these reviews is my new ‘rule of 20’ i.e., if a share either falls or rises more than 20% from its purchase price, then it is time to walk around the garden to review whether to sell. I neglected this approach in my earlier investment days and am still holding poorly performing shares in GlaxoSmithKline (GSK), Smith & Nephew (SN.), Vodafone (VOD) and Wood Group (WG.).
Adopting the rule of 20 for shares in surplus has worked better. Reinvestment favourites Drax (DRX), Hills & Smith (HILS), Howden Joinery (HWDN), Kainos (KNOS), Melrose Industries (MRO) and Persimmon (PSN) have risen appreciably in share price at selected times; often to be followed by sufficient dips to enable rebuying to straightforwardly take place.
Arguably, such profit taking is rather short-term thinking, but it accounts for most of the 6.4% return. Shares in Reckitt Benckiser (RB.) highlight the point. For most of 2020 they were my standout performer. Yet I did not sell, and the shares have been in deficit for many months.
The same thing occurred with Scottish Mortgage Trust (SMT). As buying and selling shares is simple, quick and relatively inexpensive, it feels like an opportunity lost. It also highlights that most of the profit gain has come through a relatively small number of companies. As trust in these companies rises, my level of investment in them is likely to increase.
KEEPING THINGS UNDER REVIEW
As for the future, the priority is to read well, to review factors influencing markets and study possible new investments in terms of their contribution and performance figures. No longer is the business supplement in the Sunday papers discarded. I also watch out much more closely than previously to when companies publish their first-half or full year results. This can often lead to excessive price volatility, which might merit a response.
Making progress continues to be a quite serious matter but also a strangely satisfying one and one which for the present is preferable to pursuing a more funds-based, laissez faire investment approach.
DISCLAIMER: The views in this article are those of the author and not of Shares or AJ Bell, the owner of Shares. Readers should consult a suitably qualified financial adviser if they are unsure about managing their own investments. Past performance is not a guide to future performance.