68 Saturday May 28 2022 | the times
Money
Upside of a weak pound
B
ritish investors have been shield-
ed from the plunge in the Amer-
ican stock market this year
because of currency movements.
The S&P 500 index of large Amer-
ican businesses is down 17 per cent in
2022 so far as share prices have tumbled
due to high inflation, rising interest
rates and the war in Ukraine.
However, a UK investor who holds
an S&P 500 exchange traded fund
(ETF), which uses an algorithm to track
the index, will have seen their invest-
ment fall 10 per cent, according to the
data provider FE fundinfo.
This is because if you invest in an
S&P 500 index fund, your cash is held
in dollars and their value relative to the
pound fluctuates. If the value of the dol-
lar increases you make more (or loseless) money. If the value of the dollar
decreases you make less (or lose more).
Over the past 12 months the value of
the dollar relative to the pound has
risen so much that even though the
S&P 500 is down 5 per cent, the Van-
guard S&P 500 ETF has returned
7.4 per cent. Since late May 2021, $1 has
risen from 71p to 79p, a 12 per cent rise.
Giulio Renzi-Ricci from the wealth
manager Vanguard UK doesn’t think
the fall in sterling will continue. “The
return on foreign investments won’t al-
ways match the index returns,” he said.
“The good news is that in the long run
fluctuations tend to even out and an in-
vestor would still benefit from the di-
versification gained from investing
across different markets.”
David BrenchleyIs happy hour for the
drinks giants at an end?
Sometimes there are benefits to flat-
sharing in London. My monthly rent
includes all my bills, which is handy
right now. I’ve not yet succumbed to
the temptation to switch from the
Waitrose opposite my block of flats to
the Aldi near the train station.
Still, food and drink prices are on
the rise, so some trading down will
need to begin soon. I’ll probably startwith the toothpaste: the Colgate and
Sensodyne that pack the shelves can’t
be that much better than the cheaper
stuff, surely?
Maybe I should switch from
Marmite, which costs £2.70 for a 250g
pot, to a supermarket own-brand
yeast extract — Sainsbury’s version is
£2 for 225g. It has fewer carbs and
more protein too.As well as helping my bank
balance, mulling these questions
might improve my investment
portfolio. With a cost of living crisis
well under way, plenty of people have
already made similar choices.
I’m glad I don’t have too much
exposure to these firms that can
easily be traded down by consumers
(11.5 per cent of the stocks that my
funds hold).
How about alcohol? The fund
manager Nick Train thinks that
everyone should invest in Diageo.
“I find it hard to conceive of a
company that offers more certain
protection against monetary inflation
than Diageo,” Train said. He argues
that people are boozing less but
opting for better quality when they
do.
The company’s attractions are
clear: a £1,000 investment 20 years
ago would be worth more than £7,500
today. Part of that return, of course,
comes from its dividend, which has
grown every year since 1999.
The yield may only be 2 per cent,
but only in the past two years has
Diageo seen annual dividend growth
below 4 per cent, which is the level
many expect inflation to be over the
next decade or so.
Still, investors are worried that a
historic squeeze on consumers’
wallets will mean demand for
Diageo’s products, which include
Baileys Irish Cream, Tanqueray gin
and Smirnoff vodka, might not be as
strong as some think. I agree.
Shares are down 11.7 per cent so far
this year, yet the price-to-earnings
ratio, a popular stock valuation
metric, is still on the high side at 28.
Diageo is a consumer staples stock:
a firm that makes or sells goods and
services that people use daily. Other
examples include Nestlé and Coca-
Cola.
Their products are seen as
essentials (food, drink and
toothpaste), so you may think they
would be a sure-fire way of making
money. Think again. The shares of
consumer staple companies,
according to MSCI World, fell 8.7 per
cent on average over three days last
week after the American low-cost
department store chain Target
reported its quarterly
profits had halved, sending
shock waves across the US
economy.
The day before that
Walmart, the world’s
largest supermarket chain,
warned it was expecting
profits to be lower than
previously forecast.
Consumer staples
companies — such as
supermarkets and drink
companies — had been seen
as bulletproof. The theorywent that people would drink when
they had money and also when they
were worried about its absence. But
this crisis is challenging this narrative
and nothing seems certain at the
moment.
My knowledge is good when it
comes to funds and investment trusts.
But when it comes to the twists and
turns of individual companies and
their sectors, I leave the analysis to
the pros.
Those fund managers I’ve
entrusted my savings to aren’t overly
keen on Diageo, Train excluded.
Two of the 18 funds I am invested
in have money in Diageo. One is
Lindsell Train Global Equity, run by
Train, which has 9 per cent of its
portfolio in the firm, and the other is
TB Evenlode Global Equity, which
has just 2.5 per cent.
When it comes to consumer staples
companies, Lindsell Train and
Fundsmith Equity have big stakes
(41 per cent and 32 per cent
respectively). But most,
including Schroder Global
Recovery, Rathbone
Global Opportunities and
Dodge & Cox Worldwide
Stock, have less than 7 per
cent.
It may be that consumer
staple firms have pricing
power, but it’s still going to
be tough going.
There’s only so many
times a day I need to brush
my teeth. Maybe I will
plump for that cheaper
toothpaste. And some of
Aldi’s Irish Cream liqueur,
while I’m at it.Trouble is brewing
Return on £1,000
Diageo
TargetSource: FE fundinfoJul
2021Oct Jan
2022Apr6008001,0001,2001,400pDavid
Brenchley
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global brands