I wouldn’t recommend owning a portfolio of just three stocks. But if someone put a gun to my head and told me I had to buy a trio of FTSE 100 companies in an ISA and hold them forever, which three would I pick, and why?
I’d be looking for a few key things. First, diversification across different industries (more specifically, industries that are likely to be around for decades to come). Second, geographical diversification. And third, a culture and history of prudent, long-term management.
With these things in mind, the blue-chip stocks I’d buy are Associated British Foods (LSE: ABF), Hikma Pharmaceuticals (LSE: HIK) and Schroders (LSE: SDR). Let me tell you more about these businesses and my thinking.
Industry diversification
ABF’s revenues are split approximately 50/50 between consumer goods (grocery, ingredients, sugar and animal feeds) and consumer services (clothing retail, namely Primark). Healthcare firm Hikma’s revenue comes entirely from pharmaceuticals, but is diversified across three segments (injectables, generics and branded). Schroders is in the financial industry, and the majority of its revenue comes from asset management, but some from private banking and associated wealth management services.
Will there ever come a time when the world no longer needs food or clothes? I can’t see it, and I reckon ABF owns attractive businesses in these areas.
Meanwhile, it’s widely believed ageing populations in the western world and rising wealth in emerging markets will fuel demand for healthcare in the coming decades. I think Hikma’s pharmaceuticals businesses should benefit from this long-term tailwind.
Finally, Schroders, as an asset manager, is essentially a geared play on stock markets, which we know tend to rise over the long run. As such, provided the company is well managed, the stock should outperform a market like the FTSE 100 over a long holding period.
If I had to use my ISA allowance to buy these three companies, I’d put £10,000 in ABF and £5,000 in each of the other two. This would give me an equal 25% exposure to 4 of the 10 broad industry categories. Namely, consumer goods, consumer services, healthcare and financials.
Geographical diversification
As well as being happy with the business diversification, I’d also be happy with the geographical diversification. ABF, Hikma and Schroders all generate international revenues, and I calculate the aggregate exposure as: Europe, Middle East & Africa (37%), UK (27%), Americas (23%) and Asia-Pacific (13%).
Prudent long-term management
Management change at companies is inevitable over time, but I think the cultures and histories of Hikma, ABF and Schroders put them at an advantage in terms of maintaining continuity. They were founded in 1978, 1935 and 1804, respectively, and at all three companies, descendants of the founding families maintain a significant presence both on the shareholder register and in the boardroom.
At such companies, a strong balance sheet and prudent stewardship of the business ensure future security to the family, so longer-term planning takes priority over short-term results. I think this philosophy is well-aligned with the interests of an investor who is looking to buy a stock and never sell it.
Finally, I’m not too worried about near-term earnings multiples and dividend yields. All three stocks are currently trading at discounts to previous highs, and that’s good enough for me for a holding period of forever.
