Michael Ely has been an active investor for a number of years and has been trying to build a financial cushion for a more comfortable retirement.
Michael, who is in his late 50s, started investing after collecting a few ‘windfall’ shares when a number of building societies demutualised in the early 1990s and listed on the stock market.
“Initially I did very well out of these holdings, and in most cases they were effectively free money, as I already had savings accounts with these building societies.
“I had some Halifax shares for a few years, and also some Alliance & Leicester shares. In most cases I made a good return – though I did sell out early. I think they funded a couple of holidays, but it got me interested in investing and I subsequently took out a PEP (Personal Equity Plan) and then ISAs.”
Michael, who works as an engineer, initially invested solely in individual stocks, although he he has had his fingers burned on several occasions. “I was holding a number of dotcom stocks when the market crashed at the start of the 2000. This made me wary of buying smaller more speculative stocks.
“But I was also holding a number of large banks when the financial markets crashed in 2008. That certainly brought home the fact that there is risk with any kind of investment even large, well-established companies.”
Patient Investing
However, this has not put him off investing and despite these losses he has made good returns over the longer term. He still holds a number of direct shares, but also invests in more diversified funds within his SIPP and his ISA.
He says: “I’ve learned to be a bit more patient, and to invest for the longer term. These investments are primarily for my retirement, so I can afford to ride out shorter term market volatility.
“I’m less interested in speculative investments where I might make a quick return. Instead I’m looking at larger companies that pay decent dividends and have a good track record, or funds that allow me to effectively get a return in line with the market. This seems to be the best way to grow my money over the long-term. It certainly seems a better option than keeping it in a savings account in the bank.”
When it comes to his direct shareholdings, Michael still holds a number of financial companies. This includes HSBC (HSBA), Lloyds (LLOY) and the insurer Legal & General (LGEN).
Michael says while the performance from the banks has been a bit lacklustre in recent years he has seen a better return from Legal & General, with its share prices appearing to be on an upward trajectory since 2020.
The FTSE 100 stalwart is active in both the investment and insurance areas and is a major provider of pension annuities. While it has a global presence most of its assets and income are derived from the UK and Europe.
It has delivered strong returns in recent years and is a steady dividend payer. According to latest Morningstar data it its dividend yield is currently 6.91%. Over the past five years it has delivered annualised returns of 6.47% to investors, and 12.47% over 10 years — in both cases comfortably outperforming the FTSE 100.
Diageo a Winner
But away from the financial sector, the stock that has produced some of his best returns in recent years has been drinks manufacturer Diageo (DGE).
Diageo was created in 1997 following the merger of Grand Metropolitan and Guinness, and remains one of the world’s leading producers of spirits. It also has a significant (34%) stake in the champagne and cognac maker Moet Hennessy, a subsidiary of luxury goods maker LVMH (MC).
The company’s share price has grown sharply in recent years, and it pays a modest dividend. Over the past five years shareholders have seen annualised returns of 10.37% - significantly higher than the 3.42% that the FTSE 100 has delivered over the same time frame.
Morningstar says the company has a wide economic moat, with its market well protected from competitors with its premium products.
Low Cost Passive Funds
When it comes to his fund holdings, Michael has tended to focus on lower cost passive funds in recent years. One of his best performing trackers has been Legal & General International Index Trust, which as a Morningstar Analyst Rating Silver Rating, alongside a 4-star rating.
Morningstar says this low-cost fund offers investors “a sensible approach to gain exposure to international equity markets in a single fund”. The fund tracks an index that aims to represent approximately 90%-95% of the global equity market, excluding the UK.
Morningstar adds: “The fund has delivered above-average risk-adjusted performance during the past trailing three- and five-year periods when compared with peers in the category.”
As well as delivering good returns, the fund also delivers excellent value for money, according to Morningstar, charging just 0.08% for its C share class. This makes it one of the cheapest world equity offerings combining exposure to developed and emerging markets. Morningstar also praises the fund for its accurate tracking, despite the broad global coverage of the index.
Michael also holds a number of funds with Vanguard, which he holds through Vanguard’s own platform. This includes Vanguard’s LifeStrategy 100% Equity Fund - which also has a Morningstar Quantitative Rating of Silver.
The LifeStrategy range offers risk-rated portfolios for investors, which are actively managed, although the underlying investments are in low-cost passive funds. Michael’s fund is fully invested in equity markets, but there are options for more cautious investors, where equity exposure is limited to 80%, 60% or 40%.
This more adventurous portfolio has delivered decent returns for investors. According to Morningstar data investors have seen annualised returns of 10.43% over the past 10 years.
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