The potential best shares for an ISA from the large cap section have been identified by a fund manager. Amongst some of the large cap shares tipped for success include Rolls-Royce and advertising giant WPP:
James Griffin, portfolio manager of Fidelity MoneyBuilder Growth fund, is focused on making long term investments in industry leading companies with strong balance sheets and diversified end markets. He believes these companies can prosper even with global growth likely to remain lacklustre for the foreseeable future.
He comments: “The long-term earnings and dividend growth prospects of industry winners should be an attractive home for investors’ money. In the UK, we are fortunate that so many of the world’s global winners are listed here. Such companies are able to fund themselves and can drive growth through marketing and research. Strong brands give them pricing power and the ability to pass on the impacts of rising input costs.”
Five potential long-term winners:
Rolls Royce
“Rolls Royce supplies engines to the aerospace, energy and marine industries. Its TotalCare service package is becoming an increasingly significant part of profitability and provides consistent and reliable cash flow generation. While defence spending is a risk, the civil aerospace and marine businesses are performing well and Rolls has strong market share. As its market share grows, so does its ability to sell its TotalCare package.”
Lloyds Banking Group
“Despite strong share price performance in 2012, Lloyds continues to trade at a very depressed valuation. Peripheral European exposure is being rapidly reduced and operational performance is improving. The UK banking market is cyclically depressed given low interest rates and low corporate and retail loan growth. However, this will recover over time, and with over 30% market share Lloyds will be a significant beneficiary of this recovery.”
GlaxoSmithKline
“Glaxo’s shares have underperformed over a number of years on fears over the impact of patent expiries and generic competition to past blockbuster drugs. However, given Glaxo’s strong diversification and emerging markets strategy, we feel that the shares are significantly undervalued and give zero value to what could potentially be a very strong pipeline of new drugs. With the potential to unlock value through a spin-off of its consumer business and a well-covered and growing dividend, we think this represents a compelling long-term investment opportunity.”
Diageo
“Diageo has a very strong portfolio of brands including Jonny Walker, Smirnoff and Guinness. Growth is driven by its emerging markets exposure, which represent over 40% of sales, as well as trading up to premium spirits in the US as consumer confidence recovers. While the shares have performed well recently, they are in line with peers, despite having greater spirits exposure which tends to be more resilient than beer in an economic slowdown. Barriers to entry are also high given Diageo’s strong brands and the requirement to age spirits such as whisky.”
WPP
“WPP is the world’s leading advertising company and benefits from having significant exposure to both digital media and emerging markets, the key growth areas for the industry. Digital was originally seen as a threat for advertisers, but is now seen as a huge opportunity as companies need help in developing their online strategies. Within emerging markets, WPP has an unassailable lead in China given significant investment and first mover advantage. The company is more conservatively managed than in the past with a flexible cost base and strong balance sheet. It pays a good dividend which is well covered and expected to grow.”
James Griffin concludes: “Real industry winners are undervalued by the stock market. For an investor, highlighting industry winners and patiently holding the shares of these companies is as sensible a strategy as ever. Persistently higher-than-average returns on equity and revenue growth allow companies to re-invest the resulting cash flow into generating yet more superior returns and revenues, which is even more relevant in today’s post-financial-crisis world. Over time, this allows industry winners to put clear blue water between themselves and their peer group.”
