Accountant David Lawson says he has been an “unsophisticated investor” for decades. But as he is now in his early 60s he is looking to take a more structured approach to his savings and investments.
He says: “I first invested in the 1980s, and bought into a number of the privatisation shares, including British Gas and BT (BT.A). I also worked for Shell for many years and invested in a number of the share save schemes they ran.”
As a result Lawson ended up with a sizeable holding in Royal Dutch Shell (RDSB).
Lawson prefers holding individual shares to funds, partly because he says he feels this is a more cost effective way to invest. He says he prefers to make the decisions of which shares to buy, rather than handing this responsibility over to a fund manager.
After his parents died Lawson inherited some further UK-listed shares, including Lloyds (LLOY). Adding these to his existing holdings he realised his portfolio was very unbalanced – largely in oil and utility companies and banks.
When he was made redundant from Shell, it prompted him to review his finances.
He explains: “On principle I like the idea of passive funds that follow the market. However, when you look at it you can see that a FTSE 100 tracker, for example, is quite unbalanced. There have been times when the around half of the FTSE 100 has been in financial and oil companies, so investing in such a fund wouldn’t necessarily help me diversify significantly. My portfolio would still be very overweight in these same sectors.”
Diversifying Away from Oil and Banks
Instead, Lawson has been selling some of his existing holdings and diversifying into different sectors: “I’m divesting some of my Royal Dutch Shell shares over a number of years so I am not hit with capital gains tax. I’m reluctant to sell either the BT or Lloyds holdings at present because the shares have fallen in value in recent years. I’m hoping they will recover.”
According to Morningstar analysts Royal Dutch Shell shares have a four star rating, reflecting the fact that shares are currently trading below their Morningstar analysts’ ‘fair value’ price.
Allen Good, a senior analyst at Morningstar said: “With the BG acquisition on the books, Shell is embarking on the necessary steps to compete in a world of $60-per-barrel oil. Like the rest of the integrated group, Shell is working to reduce its cost base, which has become bloated during the past five years, by reducing head count and improving its supply chain.”
Good notes that it has been fairly successful in these aims, recently posting that the company posted “another strong quarter of cash flow generation”. This has been partly helped by increased commodity prices. But Good adds: “Shell continues to stand out as the most undervalued integrated [company in its sector] as the market fails to recognise the improvement in operations and financial health. We think the quarter demonstrates the potential for improvement over the coming years.”
Lloyds Remains Undervalued
Morningstar also has a positive view of Lloyds, which also has a four-star rating. Analysts point out that the bank has now returning to private ownership, with the Government selling off its remaining stake in the company in 2016. Morningstar says: “We expect Lloyds’ profitability to continue and we believe the group will maintain its dividend policy of a payout ratio of at least 50%.”
If this does turn out to be the case, there may be some share price appreciation which could benefit Lawson. Morningstar analysts describe the bank as a “lean UK retail bank with a strong brand umbrella”.
Lawson says: “My aim is to invest in one or two shares within each sector. I will have the same weighting in each though. If mining shares plummet, which has happened in recent years, this will only affect around 5% of my portfolio.”
Looking for Attractive Opportunities
Lawson has tried to identify what he thinks are the most attractive shares in each sector. He says: “I’ve been investing on and off for years. There are time when the stock market is depressed, often for quite a period of time, but in my experience it always bounces back. Shares seem to produce the best returns over the longer term.”
Lawson has been looking for opportunities to buy his preferred companies; last year’s Brexit vote have him the opportunity to pick up several shareholdings at a reduced price.
These included British Land (BLND), WPP (WPP), Prudential (PRU), and the London Stock Exchange (LSE).
The insurer, Prudential, has a two-star rating from Morningstar analysts, mean they consider it to be currently trading above fair value. Analysts say: “Prudential is predominantly a life insurer with product focuses on highly commoditised fixed and variable annuities and unit-linked health and protection. It is therefore difficult for the business to establish a sustainable competitively advantage.”
WPP is rated three stars, meaning analysts consider the shares to be fairly valued. Analysts note that sales in the first quarter of this year were ahead of expectations: “The firm continued its aggressive acquisition strategy during the quarter, focusing mainly on emerging markets and digital, which we believe could drive growth in the long run.”
But analyst Ali Mogharabi warns geopolitical factors are behind the sluggish growth of advertising.
Taking Risk in Retirement
Lawson, who was widowed several years ago, is taking a long-term view on his finances.
“I invest in ISAs, through AJ Bell, but I didn’t embrace these early enough. I’ve been gradually moving some of my holdings into more tax-efficient wrappers,” he said.
“It seems to me that many financial advisers say you should be looking to take fewer investment risks when you reach my age. I’m not sure I agree. I’m investing to provide myself with some additional funds for later in life, but I’d also like to be able to leave some to my children. On that basis, I’m looking at 20-year investment horizon, maybe more.”
