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In the lead-up to Christmas, many investors might be thinking of using the share market to choose a gift, on the theory that the right shares can be the gift that keeps on giving, over very long periods of time. So, in the spirit of Christmas, here’s a selection of six shares that I think would make great gifts for the kids; or even better, the grandchildren.
Given that the share market generates very good returns over the long run, I’d contemplate giving them the share market – in the form of an exchange-traded fund (ETF) over one of the major share market indices, which is listed on the Australian Securities Exchange (ASX). The nature of this beast is that it will own companies’ shares as long as those companies are part of the index: if they fall out, the ETF will not own them.
Owning the ETF – which you can buy very cheaply – allows you to “own” the market, through owning a share designed to give investors the benchmark index return, minus relatively low fees. The investor owns the index’s top performers, but also owns its “dogs” – over time, however, the investor gets the market’s return, in one stock. The investor can invest any amount of money, and sell any proportion of their holding at any time.
Using an ETF over a broad market benchmark index can enable you to give the gift of exposure to the market. It’s a great present for a novice investor, who can hold the investment for many years, as the “core” of their investment portfolio, compounding away, while they add other investments – such as directly owned shares in individual companies – as their knowledge grows.
For this person, consider giving our young person a broad ETF such as the Vanguard MSCI International Shares ETF (ASX: VGS), which offers unhedged exposure to more than 1,500 stocks across 22 of the world’s major developed-economy share markets. In one stock, our young investor now has exposure to some of the world’s largest companies, including Apple, Microsoft, Alphabet (Google’s parent company), Amazon, Tesla, Exxon Mobil, Johnson & Johnson, JPMorgan Chase & Co. and Berkshire Hathaway (Warren Buffett’s investment firm).
This ETF is cheap, only costing 0.18% a year in management fees. It is unhedged – meaning that its performance will be affected by changes in the A$ against the US dollar and euro and other currencies in which it might buy stocks, but that can be a positive sometimes, as well as a potential negative. Look at this way: by being unhedged, you are giving your young gift recipient an extra level of diversification, in currency, as well as an investment in the global share market.
Since inception, which was in November 2014, the VGS ETF has earned investors 11.4% a year, after fees. It’s a great way to get a young person invested in shares and have the power of successful companies working for them over the long term.
You can tap into the same effect in a broad range of ETFs over both world share markets and the Australian share market.
Next it’s time to look for some outstanding shares to buy. In owning company shares, of course your gift recipient is running the risk of the company failing, but if you choose wisely, that likelihood recedes into the distance.
Take CSL (ASX: CSL), for example.
Australia’s home-grown biotech heavyweight CSL has become a true global leader, the world’s largest maker of plasma-based therapies (CSL Behring), a global leader in treatments for immunodeficiency and bleeding diseases such as haemophilia, and one of the world’s biggest suppliers of flu vaccines (Seqirus). CSL underpins its position by investing hugely in research and development to create new products, creating a pipeline of products that continually opens up new revenue streams and keeps the company ahead of competitors.
In 2022, CSL finalised its latest big acquisition, Vifor Pharma, the Swiss renal therapy and iron deficiency products business that brings CSL into the renal disease and cardiovascular markets. CSL has a booming pipeline of biological medicines coming through its R&D department, including the cardiovascular drug CSL112 (aimed at reducing secondary heart attacks, CSL112 is the biggest R&D program CSL has ever done), the gene therapy EtranaDez and Garadacimab, to treat hereditary angioedema (HAE), which could also have potential application in various other disorders (including fibrosis, cardiovascular and inflammatory indications).
CSL management is optimistic in terms of the future, “conservatively” estimating that at least ten of its compounds (about one-fifth of the total pipeline) have the potential to become the standard-of-care for the targeted patient group, which effectively means the best treatment available. CSL has been an outstanding long-term performer on the ASX – despite the occasional share price fall – and is going to be around for a long time, compounding its success and its earnings.
Another great stock to give a young person is Cochlear (ASX: COH), the global leader in the design and production of cochlear implants. A cochlear implant consists of an external microphone and speech processor, which interact with a transmitter surgically placed behind the ear under the skin. The transmitter connects to electrodes feeding directly into the cochlea to stimulate the auditory nerve for comprehension by the brain. Cochlear pioneered the multi-channel cochlear implant (the “bionic ear”), taking the ground-breaking work done by Professor Graeme Clark at the University of Melbourne to the global market.
The company has a market share of more than 60% and invests heavily in R&D to keep it that way. For example, this year it brought out the Nucleus 8, the world’s first cochlear implant sound processor providing direct audio connectivity to everyday consumer electronics using next-generation Bluetooth low-energy (BLE). Approved for sale by the US Food & Drug Administration, Nucleus 8 is now the smallest and lightest behind-the-ear cochlear implant in the industry, offering what Cochlear says is a “smaller, smarter and better-connected cochlear implant technology.”
Also a wonderful introductory share for a young person is investment company Washington H. Soul Pattinson and Company (ASX: SOL), which has been listed on the Australian share market since January 1903. It was originally a pharmacy business, but although Soul Pattinson is still a major pharmacy chain in Australia, it is no longer owned by Washington H. Soul Pattinson and Co. Instead, Washington H. Soul Pattinson is now a major investment company, with a portfolio encompassing many industries including telecommunications, resources, building products, retail, agriculture, property, financial services and other equity investments.
The company owns major stakes in telecommunications companies TPG Telecom (12.6%) and Tuas (25.4%); building products, property and investment firm Brickworks (43.3%), Apex Healthcare (29.8%), thermal (electricity) coal and agriculture company New Hope Corporation (39.9%) – which might be a problem for your younger investor, but talk them around – and base and precious metals producer Aeris Resources (30.3%). Its $10 billion portfolio also includes funds management businesses that hold shares, property, fixed-income and agricultural investments.
The company has paid a dividend to shareholders every year since listing in 1903; moreover, Washington H. Soul Pattinson has increased its ordinary dividend every year since 2000. It is the only company in the S&P/ASX All Ordinaries index to have achieved this. An investment in WHSP has grown by nearly 9 times over the last 20 years while an investment in the index has increased by less than half of this for the same period. This includes the reinvestment of dividends.
If a shareholder had invested $1,000 in WHSP 1982 and reinvested all dividends, the shareholding would have appreciated to over $256,000 as at 31 July 2022. This equates to a compound annual growth rate of 14.9% a year, for 40 years. This growth does not include the value of the franking credits which have been passed on to shareholders by WHSP but includes the reinvestment of dividends. Quite simply, WHSP is one of Australia’s great stocks – and it’s a great way to show a young investor the benefit of an outstanding record of paying dividends, and the compounding of total return.
And many younger investors would also find the Future Generations pair of stocks very suitable introductions to the stock market. Future Generation Global Investment Company Limited (ASX: FGG) is a listed investment company (LIC) – meaning a listed share that represents a portfolio of investments – that provides access to a global portfolio of companies, but with a definite philanthropic focus.
Future Generation Global invests in funds that invest in global shares, run by some of Australia’s best international fund managers. But those fund managers work for free, so that Future Generation Global can donate 1% of its net assets to youth mental health charities each year
Future Generation Global has engaged 14 managers to manage its $542.7 million in assets (as at 31 October 2022). Since inception in September 2015, the portfolio has gained 6.9% a year, which is actually below its benchmark (the Morgan Stanley Capital International [MSCI] All Countries World Index, in A$), on 9.3% a year, but the Future Generation Global portfolio has been less volatile. The Future Generation Global portfolio is also a solid dividend-payer – its annualised yield is running at 6.2%, fully franked, or 8.9% grossed-up. The underlying diversification of the global investment exposure is excellent, and along the way, $6.4 million has been generated for the charities in 2022 alone.
The stablemate LIC, Future Generation Investment Company Limited (ASX: FGX), does the same thing, but with the Australian share market. Since inception in September 2014 the $525 million (as at 31 October 2022) FGX portfolio has earned its investors 8.6% a year, beating its benchmark, the S&P/ASX All Ordinaries Accumulation Index (which counts capital gain plus dividend income) on 7.1% a year, and with less volatility. Its annualised yield is running at 5.6%, fully franked, or 8% grossed-up.
Along the way, between them, the Future Generation LICs have generated a combined $65 million in social investment over their listed lives. Either would represent a great starter for share market investment with the kind of social impact that younger investors want to see, to ensure that they are doing good with their investments, while also doing well for themselves. (The fund managers, too, like the opportunity that Future Generation gives them to use their skills to benefit others). I would simply lean toward Future Generation Global as a Christmas stocking share because of its broad global scope, and how it establishes for a young investor a well-diversified international share portfolio, tapping into a wide range of economic “themes” and geographical growth areas.
All prices and analysis at 8 December 2022. This information was produced by Switzer Financial Group Pty Ltd (ABN 24 112 294 649), which is an Australian Financial Services Licensee (Licence No. 286 531This material is intended to provide general advice only. It has been prepared without having regard to or taking into account any particular investor’s objectives, financial situation and/or needs. All investors should therefore consider the appropriateness of the advice, in light of their own objectives, financial situation and/or needs, before acting on the advice. This article does not reflect the views of WealthHub Securities Limited.