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  • Five shares for an ISA

    Investing in individual companies isn’t right for everyone. Our five shares for an ISA are for people who understand the increased risks of investing in individual shares. If the company fails you risk losing your whole investment.

    You should make sure you understand the companies you’re investing in, their specific risks, and make sure any shares you own are held as part of a diversified portfolio.

    five shares for an ISA

    Important notes

    This isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investments will rise and fall, so you could get back less than you put in. Past performance isn’t a guide to the future.

    Nicholas Hyett and Sophie Lund-Yates, Equity Analysts

    It’s looking more and more likely we’re past the worst of the pandemic.

    That means things have changed since we picked our five shares to watch at the start of the year, and these picks are a bit more adventurous because of that.

    But as you’d expect, a couple of names from earlier in the year make a return. What makes a good company doesn’t change that quickly. So alongside three new additions, two familiar names make this list too.

    This isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investments will rise and fall, so you could get back less than you put in. Past performance isn’t a guide to the future. Information published 12 March 2021 unless stated otherwise.

    Keep an eye on these ISA share ideas

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    To follow these shares, tap the ‘add to watchlist’ button below the name of each pick. Then log in to your account to keep track online or with the HL mobile app.

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    Anglo American

    Consumer commodities

    Anglo American is among the world’s largest miners. Its portfolio ranges from an 85% stake in De Beers diamonds through iron ore, to platinum, nickel and manganese.

    Mining is a cyclical business; during a boom construction and manufacturing increases and demand for commodities rises. But when economies struggle demand can nosedive, seriously denting miners’ profits.

    Miners’ fixed costs are high, but once those are covered each additional sale is far more profitable. That’s great news when things are going well, but also means profits can fall faster than revenues if things go into reverse.

    2020 UNDERLYING CASH PROFITS

    Source: Anglo American 2020 Full Year Results.

    Anglo American has tried to reduce the ups and downs in its portfolio by focusing on “consumer driven” commodities. Platinum and diamonds fit into that category, as does copper, nickel and manganese – crucial to many consumer electronics including electric cars. Consumer spending tends to be more resilient in a downturn, and steadily increasing global consumption offers a long-term tailwind.

    As part of its strategy, Anglo has a major new copper mine in Peru due to begin production in 2022, and also bought out the former Sirius Minerals fertiliser mine in Yorkshire. The group plans to dispose of its remaining thermal coal assets, helping to reduce cyclicality while also improving its Environmental Social and Governance (ESG) credentials.

    Meanwhile, massive government spending and low interest rates have got many investors worried that inflation could pick up this year. That would be good news for miners. The value of the commodities they produce usually rises in line with inflation, but the debts they used to buy and build the mines remains relatively fixed.

    We think there’s a lot to like at Anglo. A balance sheet with less than one times net debt to cash profits, diverse commodity exposure and potential for rising commodity prices all play in the group’s favour. A price to book value of 1.4 is lower than major UK listed peers, and there’s a 4.2% prospective yield on offer. Yields are variable and not a reliable indicator of future income. Remember though that even the consumer focus won’t make it immune to a commodity slump.


    Facebook

    Like this?

    Facebook makes a return from our five shares to watch in 2021, despite some more recent clashes with regulators. We still can’t knock its 3.3bn monthly active users and its formidable competitive position across multiple apps. That makes it irresistible to advertisers.

    And Facebook is basically an advertising business. Ads accounted for 98% of revenue last year, most of which comes from Facebook itself. And while the core business carries on, there’s big growth potential as the group looks to monetise WhatsApp and Messenger.

    New products and ever-increasing scale don’t come cheap though. Capital investment has spiked from under $2bn in 2014 to over $15bn in 2020. Most of that’s going on data centres, servers and network infrastructure – creating barriers to entry for those after a piece of Facebook’s pie. Even with those extra costs, the group churned out $23bn in free cash last year.

    Since we chose Facebook as one of our five shares to watch in 2021, the advertising giant has announced its fourth quarter results, which showed a 33% increase in revenue and a 53% increase in profits. Both were ahead of market expectations. In a year where advertising spending came under pressure due to the pandemic, we think that’s pretty impressive. It shows how much advertisers value Facebook’s services.

    FACEBOOK REVENUES & PROFITS

    Past performance is not a guide to future returns Source: Refinitiv, 25.02.20.

    And yet, the group’s PE ratio has fallen from 26.9 to 22.5 between November 2020 and March 2021, both well below the long run average. Take out the $62bn in cash sitting on the balance sheet and the valuation starts to look even less demanding.

    However, Facebook is increasingly becoming a target for politicians. The group faces regulatory pressure over the unsavoury content users post and its influence on elections. What’s more, competition regulators are circling, perhaps threatening to break the group up or levy a large fine. While this would be regrettable, if Facebook, WhatsApp and Instagram get split up we think investors are likely to be left with three smaller, but still great, businesses.


    National Grid*

    An intriguing ‘boring’ stock

    Utilities like National Grid have tended to be boring but reliable investments. That’s because they’re essentially government-regulated monopolies with a great deal of income visibility. National Grid owns the electricity grids across the UK and parts of the US. Since keeping the lights on is a necessity for most people, that equals very predictable demand.

    Regulators dictate how much revenue the group can collect each year. When revenue comes in below expectations, NG can make that up by collecting more from its customers in the future. But if it collects more than allowed, it must return that cash to customers via cost savings in the years to come. That translates into steady, predictable income.

    Plans to acquire Western Power Distribution (WPD) and sell a majority stake in National Grid Gas will increase the weighting of National Grid’s UK electricity exposure to 70% from 60%.

    Becoming more heavily weighted to electricity is a strategy we admire as we shift to a lower-carbon world. The deal still needs to be approved by regulators, who already have some concerns about National Grid’s UK dominance, and it’s important timings go to plan. NG’s credit rating could be affected otherwise.

    So what’s the appeal of a company whose revenue is at the mercy of regulators?

    First of all, there’s the dividend. Over the past five years National Grid’s share price has lost ground. But the group’s 6% dividend yield meant total returns (reinvesting any dividends) were 8.5%. Remember though that yields are variable, not guaranteed and are not a reliable indicator of future income.

    NATIONAL GRID - RETURN WITH AND WITHOUT DIVIDENDS REINVESTED

    Past performance is not a guide to future returns Source: Refinitiv Datastream, 18/03/21.

    Because utilities have such a predictable income, their dividends have tended to be relatively reliable, although no dividend is ever guaranteed.

    NG offers some shelter against inflation. The group has pledged to grow its per-share dividend at least in line with the UK Retail Price Index for the foreseeable future.

    There are some growth opportunities as well. The profit the group’s allowed to make is based on the money it invests in the grid. Much of its infrastructure will need updating soon to reflect things like the introduction of electric cars, and that opens the door to further investment and higher profits.

    Put reliable profits together with some growth opportunities and we think National Grid stands out in the utility space.

    *Figures and comments for National Grid correct as at 18/03/21.


    Sanne Group

    An alternative to alternative assets

    Sanne Group specialises in providing administration services to alternative asset managers, which accounted for well over 90% of total revenue in the first half of 2020.

    Customers include hedge, real estate and private equity funds, with Sanne providing back-office support across a range of functions stretching from regulatory reporting to transaction management. Once a fund’s established, changing administrator is sufficiently complex to be essentially impossible – making much of Sanne’s revenue very sticky.

    As a market, “alternative asset” funds have several particular attractions. They have enjoyed a boom in a low interest rate world as investors look beyond traditional investments in the hunt for returns. An increasing number of these funds are seeking Sanne’s services to deal with regulatory complexity as they outsource back office functions to focus on value adding investment activities.

    GLOBAL ASSETS UNDER MANAGEMENT (US $TRN)

    Source: PwC AWM Research Centre, accessed 26/02/21

    Those trends have underpinned average annual revenue growth of 38% since the group listed in 2015. Future growth expectations are more modest, but we see scope for margin improvement after a recent slump from the low 30s to high 20s. Put even high single digit revenue growth together with margin potential and profits could do well.

    Margin growth relies on Sanne keeping rivals at bay – who might otherwise poach clients, staff or introduce aggressive price competition. In Sanne’s favour here is its fundamentally niche market as well as the group’s size and international footprint. Offices across North America, Europe and Asia give it the in-market expertise to handle the increasingly cross-border nature of fund investors and flows.

    The shares currently trade on a PE ratio of 20.4 times earnings, below the long run average, but by no means cheap. There is a 2.6% prospective dividend yield on offer, but still the group will have to grow if it’s to deliver for investors. Yields are variable and are not a reliable indicator of future income.


    Tesco

    Online shopping, the plan checks out

    We picked Tesco as one of our five shares to watch this year. We think its core attractions and growth opportunities remain very much intact, which is why it’s on this list too.

    You might be thinking, “how does a retail giant as big as Tesco, grow?”

    The answer is online shopping. A store footprint of around 3,800 (UK and Ireland) puts it in a strong position to capitalise on the long-term digital shift sparked by coronavirus. 25 UK urban fulfilment centres are expected to open in the next three years, as part of their plan to double the capacity of the online grocery business.

    7m orders were delivered over Christmas 2020, and online orders shot up over 80% in the third quarter.

    This opportunity sits on top of an already thriving store business. The pandemic hasn’t done anything to deflate Tesco’s dominant market share.

    UK GROCERY MARKET SHARE

    Source: Kantar 24/01/21

    It also hasn’t distracted from other efforts. The group recently completed a plan to rebuild operating margins, up from 1.8% in 2016 to 4.6% in 2020. Plus it’s sold less compelling overseas businesses, making the path to revenue and profit growth smoother.

    And as a leading supermarket, some revenue should be reliable. We’ll always need to eat. This helps underpin Tesco’s ability to pay reliable dividends. The dividend yield is a market-beating 4.9%. Remember, no dividend is guaranteed and yields are not a reliable indicator of future income.

    Revenues are being further supported by an improved pricing proposition. But pricing pressure remains an industry-wide issue. Consumers always want more for less, and the recent sale of Asda raises the possibility of another margin-diluting price war. Coronavirus has also dented margins, including permanently hiring 16,000 new employees. Operating profits are expected to be 37.4% lower this year.

    Tesco’s primed to make the most of the shift to online, while the store businesses keep simmering away. Reliability is something of a rarity in today’s stock markets, and with a PE ratio of 10.2 that makes Tesco stand out.

    HL’s Non-Executive Chair is also a Non-Executive Director at Tesco plc.


    If investing in US shares you’ll need to first complete a W-8BEN form. Find out more about the overseas share dealing charges.

    This article is not personal advice or a recommendation to buy, sell or hold any investment. If investors are not sure of the suitability of an investment for their circumstances, they should seek advice. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv.

    These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Past performance is not a guide to the future and investments rise and fall in value so investors could make a loss.

    This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing.

    Please see our full non-independent research disclosure for more information.

    Important notes

    This isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investments will rise and fall, so you could get back less than you put in. Past performance isn’t a guide to the future.

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