If I had to start from scratch as an investor today with a lump sum of £5,000, I think there are plenty of options available for me to invest my money, especially in the FTSE 250.
Now we are past the worst of the pandemic, and the turbulence of Brexit is moving into the rearview mirror, I think the outlook for the UK economy is encouraging.
The domestic index
The FTSE 250 tends to be a more representative index of the domestic economy. More than two-thirds of FTSE 100 profits are generated outside the country, making this index more of a barometer of global economic health than UK economic performance.
As most of the FTSE 100’s profits are also generated outside of the UK, the index tends to be heavily influenced by the pound. A weaker pound could help produce higher profits for the index’s constituents.
Meanwhile, company and economic fundamentals tend to have a more significant impact on the FTSE 250.
As such, here are my two favourite companies in the UK-focused index. I would buy both of these stocks for my starter portfolio if I had to begin with an investment of just £5,000 today.
FTSE 250 stocks
The first company on my list is a financial services champion.
Liontrust Asset Management (LSE: LIO) has grown rapidly over the past five years. Revenues have increased from around £50m in 2017 to £175m in 2021.
The organisation’s formula is simple. It draws investors to its offering by constructing funds that outperform the market. For example, the firm’s oldest fund, the Liontrust UK Smaller Companies Fund, launched in January 1998, has consistently ranked in the best performing 25% of UK funds since its launch 24 years ago.
The company’s second oldest offering, the Liontrust Balanced Fund, has achieved a similar performance.
These numbers explain why investors are happy to entrust their money to the company. It does not look as if this trend will come to an end anytime soon. Net inflows over the three months to 31 December 2021 were £832m. The net inflows over the nine months to 31 December 2021 were £2.9bn.
These numbers put the company on a par with the UK’s largest online stockbroker, Hargreaves Lansdown.
Bumps in the road
Still, past performance should never be used to guide future potential. Liontrust’s performance has helped attract investors over the past two-and-a-half decades, but a couple of missteps could destroy this track record. In this scenario, the company may find itself having to offer customers expensive incentives to stay on board.
Another challenge the business could face is competition. The asset management sector is incredibly competitive. Liontrust needs to keep investing in its offering, or the firm could be left behind.
Even after taking these challenges into account, I would make this FTSE 250 company a cornerstone of my starter portfolio. As assets under management continue to grow, I expect the firm’s profits to follow suit.
FTSE 250 gold play
I always like to include some exposure to the gold mining industry in my portfolio. I tend to stay away from investing in gold directly because I would rather own shares in a company producing cash flow that can return some of this money to investors with dividends.
That is why I would also acquire FTSE 250 gold mining company Centamin (LSE: CEY) for my starter portfolio.
This Egypt-focused gold miner is incredibly well run, in my opinion. Over the past five years, the group has managed its operations efficiently while expanding production, keeping costs low, and maintaining a solid balance sheet.
On top of these qualities, Centamin has also become a dividend champion. In the past, the stock has consistently supported dividend yields in the high single digits. And of course, these cash distributions are supported by the company’s strong balance sheet, which is stuffed full of cash and gold bullion.
According to the firm’s latest production report, the group is currently profiting from rising gold prices. It sold nearly 100,000 oz of the precious metal in the fourth quarter of 2021, at an average price of $1,828/oz. That is compared to the full-year average of $1,797/oz.
Costs have also increased modestly, is although rising gold prices are offsetting some of this group. The cash cost of production per ounce was $972 in the fourth quarter compared to the full-year average of $859.
These figures illustrate the company’s defensive nature. The cost of production is rising due to inflation. However, the price of gold has been an excellent hedge against inflation pressures for much of the past century. This suggests that the enterprise is one of the best FTSE 250 enterprises to own in the current economic environment.
That being said, Centamin is not wholly immune to economic and political challenges. It has faced challenges in the past operating with the Egyptian government. Further, there is no guarantee the price of gold will continue to reflect inflation. If gold prices stagnate and costs continue to increase, the company’s profit margins will come under pressure.
Still, even after taking these headwinds into account, I am encouraged by the FTSE 250 company’s potential over the next couple of years. It is looking to hike gold output by more than 10% in 2022. Increasing sales and profits will help the business fund its exploration activities as it looks to diversify away from its core projects.
City analysts believe the corporation can pay out a dividend yield equivalent to 6.2% of its current share price for the current financial year. Even though that is a decline of 43% on 2020 levels, it still makes this company a desirable income prospect.
As such, I believe this enterprise would make the perfect addition alongside Liontrust to my £5k FTSE 250 starter portfolio.