The key, experts tell us, is to only invest with the money you’re prepared to lose when it comes to direct equity investing.
If you are putting some money away for the extreme long-term for either yourself or a loved one, and view any gains made as a bonus, investing in a stock is a good choice, as the potential for returns can be huge.
Just think, if you had put away £1,000 in a Junior ISA 10 years ago and chose online retailer ASOS, your child could have £741,995 to whittle away at university…and if you’d put your full ISA allowance in? Well that’s not even worth thinking about!
With this in mind, we asked a panel of fund managers and industry experts to highlight the stock they would pick for the extreme long-term. Here are their choices.
Lloyds
Gary Channon, chief investment officer of Phoenix Asset Management Partners, and manager of the Phoenix UK fund, points to Lloyds as a "no brainer" for a long-term investor hoping to make some money from stocks.
It had a dreadful period between January 2007 and January 2012, losing more than 87 per cent of its value; however, since then its share price has recovered strongly, up more than 139 per cent from its lowest point, according to FE Analytics.
Performance of stock since Jan 2007
Source: FE Analytics
However, Channon points out it is still at a fraction of its peak share price, and is backing it to shine over the next decade or so.
"Banking is essential for every modern capitalist economy," he said. "Banking in the UK is locked-in and the barriers to entry are very high."
"After all the regulations and those forecast for the future, the Government hasn’t been able to take away the most important thing banks have: pricing power."
Channon says the fact that Lloyds does not have an investment banking arm, unlike the likes of RBS and Barclays, is a big plus, and also points out that it is likely to start paying a dividend again soon.
"Everyone in our office has 100 per cent of their children’s ISA allowance in Lloyds," he added.
Lloyds is currently 61p a share. Channon says he currently values it at 140p a share and that this is a very conservative estimate.
The company has a 15 per cent weighting in Phoenix UK – a Bahamas-domiciled fund, which does not have the constraints of one listed in the UK where a maximum of 10 per cent is allowed in a single stock.
Overall, 55 IMA funds hold Lloyds in their top-10, including Fidelity Special Situations and the Jupiter Undervalued Assets fund, which has an 8.1 per cent stake in the business.
Lloyds has a market cap of £44bn. It is currently trading on a forward P/E ratio of 14.5x.
AstraZeneca
Nick Kirrage, co-manager of the Schroder Income and Schroder Recovery funds, has chosen his stock from a much more defensive sector – pharmaceuticals.
Kirrage is a value investor, meaning that he targets stocks that he deems to be cheaper than they deserve. As well as being a good growth and income story, he sees AstraZeneca as attractively valued.
"I’d have to go for AstraZeneca," he said. "I see this as a really obvious one to go in to if you have 10 years on your side."
"It’s got all the things you’d want in an investment in that it’s a structural growth story, but its on a depressed valuation because of worries over drug patents and concerns over the wider recovery."
"But ask yourself, what is a more sure bet than medical services being important over the next decade? Not only in developed markets, but you’ve got all the growth to come from emerging markets as well."
"It’s on a P/E [price-to-earnings] ratio of 10, has a dividend yield of 6 per cent and a balance sheet with no debt. On a five- to 10-year view, for me it’s very attractive indeed."
AstraZeneca is the number-one holding in both Kirrage’s Schroder Recovery and Schroder Income funds. In total, 166 IMA funds hold it in their top-10.
As he points out, prior to the recent rally, the stock had not had the best of times, and had a particularly tough time in late 2010 and 2011.
Performance of stock vs index over 3yrs
Source: FE Analytics
Although the share price has recovered since, Kirrage still thinks it is very attractively valued.
Unilever
Hargreaves Lansdown’s Danny Cox has gone down a similar route to Kirrage, picking a company that is high in quality rather than one that is destined to shoot the lights out, because the latter is much harder to do.
He has gone for Anglo-Dutch multinational consumer goods company Unilever, whose products include food, drinks, cleaning agents and personal care products. "There are many quoted companies which have historically provided not only reasonable dividends, but a track record of growing profits and consequently improving dividends," he said.
"These companies tend to be long established and in lower-risk industries. While high-growth stocks may provide you with the greatest total return over the years, the profits are sometimes ploughed back into unprofitable ventures."
"Unilever may not have set the world alight as far as thrusting management and exciting new products are concerned, yet they have managed to improve their dividends year in, year out."
"Thus an investor in 1990 is now obtaining an annual income considerably greater than that when they invested, and indeed the value of the income has more than kept pace with inflation."
"The dividend growth is impressive and certainly enough to make someone with an index-linked pension envious."
A £1,000 investment in Unilever a decade ago would now be worth £2,974, according to FE Analytics.
Performance of stock over 10yrs
Source: FE Analytics
Unilever is by no means cheap, trading on a P/E ratio of 19.7x and yielding 3.2 per cent. However, Cox thinks the quality of the business means that it is well worth paying the extra for.
The company is a popular choice with UK fund managers, appearing in the top-10 holdings of 152 IMA funds. These include Michael Clark’s Fidelity Moneybuilder Dividend and Alastair Mundy’s Investec UK Special Situations fund.
Fenner
Andrew Herberts, deputy head of private investment management at Thomas Miller Investment, tips Fenner – a Yorkshire-based world leader in reinforced polymer technology that sits in the FTSE 250 – as a good long-term bet.
"Fenner occupies a strong niche in the mining/extraction space," he said. "Its products and service contracts enable its clients to reduce the risk of expensive unplanned production interruptions."
"Fenner delivers value to its clients, has pricing power and continues to invest to maintain its lead."
"In our opinion, recent weakness provides an opportunity in Fenner," Herberts added.
The company has had a fantastic three, five and 10 years, up more than 600 per cent over the last decade, for example.
However, as Herberts points out, share price performance has been poor of late. Fenner has lost more than 20 per cent since March, our data shows.
Performance of stock over 10yrs
Source: FE Analytics
Fenner is currently yielding 3.5 per cent, has a market cap of £647m and is trading on a P/E ratio of 13.5x.
Aberdeen UK Smaller Companies is one of four IMA funds that hold Fenner in their top-10.
Diageo
In a similar mould to Unilever, consumer goods Diageo is a company rich in brand power and history.
Investment director at Charles Stanley Douglas McNeil sees it as a good low-risk bet for someone who wants a near-guaranteed return on their capital.
"Even the mightiest company can be brought low by the passage of time, so rule number-one is: pick one that’s going to stick around," he said. "Look for basic products that have stood the test of time."
"Diageo fits the bill – alcoholic drinks have been popular since time began. Its share price hasn’t been puffed up by this year’s bull market, and is consistent with long-run profit growth of 5 per cent a year."
"That’s a decent bet, given that world GDP tends to grow at about 6 per cent."
Performance of stock vs index over 10yrs
Source: FE Analytics
A £1,000 investment in Diageo a decade ago would now be worth £3,907.63, according to FE data. This is around £1,700 more than if you had put it into the FTSE 100.
Diageo has had a good run of late, and is currently on a P/E ratio of 18x. It is yielding 2.6 per cent, and has a market cap of £47bn.
One-hundred-and-fifty-two funds hold Diageo in their top-10, including Nick Train’s CF Lindsell Train UK Equity fund, which has an 8.7 per cent weighting in the company.
