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David Kempton: the blue chips I'm buying for global exposure

It is no time to go out on a limb, but we are fortunate in the UK to have truly international world-class companies that are undervalued, paying a decent dividend, and even have takeover potential.

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by David Kempton on Aug 17, 2010 at 00:01

David Kempton: the blue chips I'm buying for global exposure

It is no time to go out on a limb, but we are fortunate in the UK to have truly international world-class companies that are undervalued, paying a decent dividend, and even have takeover potential, writes experienced investor David Kempton.

I had intended to follow my last article on the case for investing in junior gold shares with similar comments on holdings in small oil companies, where I have had an eventful few weeks. However, the current economic conditions, with so many powerful negative factors on every continent, make investment decisions as difficult to assess as most of us ever recall, whilst the sanctuary of cash has virtually nil reward.

Returns from bonds

Short and medium gilts offer only marginally better rates, whilst longer dated yields are a more attractive 4.2% or so, but beware any hint of inflation or first sign of an increase in interest rates, when your capital value would be eroded very quickly.

Corporate bonds are more attractive with better yields, but stay quick on your feet at any sign of inflation and rush for the exit, since you may become one of a large crowd with liquidity difficult and an inability to sell.

Seeking international exposure

So where to go in such an environment? It really is no time to go out on a limb, but we are fortunate in the UK to have a choice of truly international worldclass companies, so undervalued in the world, paying a decent dividend, and even having takeover potential. Germany is similar, where current growth from a falsely low euro (for them) is creating an embarrassment of growing riches that they attempt to downplay, lest their poorer neighbours attempt to get their hands on it. Siemens is not alone in having the highest ever order book.

Funds for global exposure

Investing in international blue chips is a boring scenario compared to small oils, but it is important to get the core holdings right first, subject to current economic circumstances and risk.

You can play this in various ways. Buy a collective fund which would do it all for you, such as Invesco Perpetual Income, a £9 billion big hitting fund that has achieved 16.2% and -1.6% in one-year and six months respectively, or the much smaller, quick on its feet, Hawksmoor Vanbrugh Fund, achieving 21.9% and 4.3% in the same period to end June. The Invesco Fund is primarily invested in UK large companies, whilst the Hawksmoor Fund is a fund of funds, best of the best, and has no specific geographical objectives.

Build your own portfolio

Alternatively you can build your own portfolio, which I have done, whilst also investing in the Invesco and Hawksmoor Funds. I am struck by the significant variations displayed in the last 7 days by the FTSE 100, up 8%, and the FTSE 250 down -3%, which demonstrates my point. Incidentally note also that over one year and six-month periods the FTSE 100 is up 23% and 12%, whilst the 250 lags with 15% and 8%. If you exclude BP and the banks from these numbers, the variation is even more marked.

Aviva

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16 comments so far. Why not have your say?

Re National Grid, someone posted on Interactive Investor suggesting that USA states were uncooperative as they would prefer to deal with a local company, and would not even be happy if the head office was in another state. As a shareholder I would be grateful if anyone here can tell of evidence one way or another.

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Re: Aviva, I got some a few months ago after Money Week tipped Catlin (although I also lumbered myself with some Catlin as well). Now the financial media seem awfully excited about Aviva. The results were good but not sensational.

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I bought Shell, great yield and seemingly somewhat undervalued.

With the industrial parts of Europe, particularly Germany, coming out of recession the oil price is to an extent now being under-pinned.

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National Grid's gearing (85%) seems rather too high for me. Does anybody else have a view on this?

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Best advice I had was not to invest in anything that made the front page of a newspaper or was in a share tips magazine since any gains are already priced in. (having said that I bought some BP during the oil spill) . It's generally best to pick companies out of the news and follow carefully the changes in directors purchases.

Second strategy is to buy income funds and reinvest the income in the same fund, the rationale is that growth funds can drift but income funds have the discipline of needing to deliver a regular stream of cash. I have followed this for the last 20 years and my income funds have generally grown more than growth funds.

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A quick look at the folios of all the major ' Income' unit trusts will be a better guide to the companies who return a decent dividend, also blue chip.

I spent some time building an equity portfolio over 6 months only to find it mirrored what the experts had picked ... hardly worth the research.

The real money is is small caps, who are about to take off, or are being bought out. What about some article in this area where the high risks are worth the balancing high rewards !!

Erwyn

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FAO Peter J, not sure if this helps but from memeory whilst National grid have a high gearing they also have a high percentage of guaranteed fixed income approx +90%, for the duration of thier liabilities.

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and please get rid of the horrible picture of Putin in the header. Bleeeaaagh

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To Victor Meldrew above

I had shares in Wolsley, Stagecoach and various other companies w ith deelings in theU.S.A..They all seemed to get abloody nose.I personaly think theYanks are protectionists

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I am a Shareholder and bond holder in National Grid.

Yes they are very highly geared but they are a virtual monopoly. Where will the price go if there is a serious bid ?

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Thanks Tony.G. for the info, hope your other investments went better.

Re debt, personally I don't like the way that if anything looks safe it has to be loaded with debt.

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What on earth is Kempton on about? he talks about longer bond yields at a miserly 4.2% and says but beware of inflation increasing. I believe that King wrote another letter to Cameron yesterday re the UK inflation rate exceeding 3% so a yield of 4.2% less inflation 3% + less tax equals very little!! what about vodafone or any other blue chip yielding 6% plus? much better. Go back to sleep Kempton

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why invest in invesco perpetual income when you could invest in edinburgh investment trust run by the same man with less charges and hence greater yield; and smoother, quarterly, dividends?

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Earlier this year David Kempton picked Greenland Minerals as a good proposition.

As its share quote has been suspended on the Australian Exchange since 30 July I would welcome his comments on the situation.

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Agree with Peter J re NG. gearing - in the near future they will be hit with humongous finance costs, which they'll struggle to cover, as will all the highly geared utilities. Then they'll use borrowings to cover the interest and divi and the price will spiral down, just like UU. in recent years.

Drax is much less highly geared and the divi has recovered, at least for the interim.

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Thomas Winspear

Jan 06, 2011 at 11:18

I was wondering if anybody would like to comment on the current situation at Parkmead

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