Top 5 Portfolio Holdings – UK Index Fund

uk index fund investingHere are the top 5 companies in a typical United Kingdom (UK) Index Fund. Investing in index funds is a way of owning slices of real companies which provide value and generate income. It is like having millions of workers doing their best every day to make you wealthier, even if it is at a small scale initially. This is part of a series of posts outlining the top company holdings within index funds for various global regions.

Investing in stocks is not like gambling as some people might imply; if you take the long term view, buy and hold while treating stocks as a real business, you will do well. It is important to think like an owner of a business to get into the right mind frame for investing. This overview of the top 5 holdings will show how these companies perform and how they bring massive value through the provision of goods and services, confirming that stocks are valuable financial assets.


UK economy, investing strategy and target asset allocation

The UK currently has the fifth largest global economy as measured by nominal Gross Domestic Product (GDP) as well as being the tenth largest goods importer and fifth largest goods exporter. Consisting of England, Scotland, Wales and Northern Ireland, the UK represents about 5% of the global economy.

While the service sector, particularly financial services dominates the UK economy, other main sectors include pharmaceuticals, energy, engineering, Information Technology, aerospace and tourism. The UK currency, Pound Sterling, is the third largest reserve currency in the world. UK companies tend to pay out large dividends relative to to other global companies.

In terms of asset allocation, I have a target of holding 15% of my overall portfolio in UK stocks. This is deliberately higher than the 4% global share of the UK economy to minimise the impact of currency risk to my portfolio as I am based in the UK. To invest in the UK I use the Vanguard UK All Share Index Unit Trust. This low cost fund simply tracks the performance of the FTSE All Share Index; an index of around 600 of the largest companies traded on the London Stock Exchange encompassing the large cap FTSE 100, mid cap FTSE 250 and FTSE Smallcap components.

Here are the top companies in a typical UK index fund:

HSBC Holdings PLC (HSBA.L)

hsbc bank logoHSBC Holdings is a global financial services company involved in wealth management, global banking, commercial banking, personal finance and other services. The company, headquartered in Canary Wharf, London, is one of the largest global banks and among the UK’s four big clearing banks. HSBC bank is the only large bank which holds more deposits than loans, resulting in the bank being viewed as low risk when compared to other major banks.

HSBC makes up 5.54% of my UK index fund and has a projected dividend yield of a huge 6.08%. The company’s 10 year annual return is -3.02%. Latest 5 year returns for HSBC stocks are:

20122013201420152016
44.678.40-9.89-11.148.26

British American Tobacco PLC (BATS.L)

British American Tobacco (BAT), based in  London, is one of the five largest tobacco companies in the world. With operations in over 180 countries, the company’s brands include Dunhill, Lucky Strike, Rothmans, Pall Mall and Benson & Hedges. To take into account the concerns of risks due to tobacco intake, BAT is now involved in the development of vapour e-cigarettes and Next Generation Products (NGPs) as an alternatives. This is a potential market with huge opportunities.

BAT makes up 4.20% of my UK index fund and has a projected dividend yield of 2.99%. The company’s 10 year annual return is 10.65%. Latest 5 year returns for BAT stocks are:

20122013201420152016
11.1510.374.866.665.96

Royal Dutch Shell PLC (RDSa.L)

shell logoRoyal Dutch Shell (Shell) is a British-Dutch global integrated oil and gas services company. Shell is involved in exploration for oil and natural gas from sources such as oil fields, rock, coal formations and shale. The company’s main segments are upstream, downstream, integrated gas and corporate. One of the six oil “Super-majors”, Shell has the largest market capitalisation on the London Stock Exchange. The company’s performance has been affected by the recent downturn in oil prices but it continues to pay a healthy dividend to investors.

Shell makes up 4.20% of my UK index fund and has a projected dividend yield of a high 6.91%. The company’s 10 year annual return is 1.74%. Latest 5 year returns for Shell stocks are:

20122013201420152016
-0.998.53-0.84-25.9926.97

BP PLC (BP.L)

BP is a global integrated oil and gas company. Founded in 1908 and with operations in 72 countries, the company’s main segments are upstream, downstream, integrated gas and corporate. BP delivers energy products to customers across the world and utilises major technology programmes to enhance safety and improve efficiency in resource exploration, extraction and processing. The company is also involved in the development of alternative low carbon and renewable energy initiatives.

BP makes up 3.64% of my UK index fund and has a projected dividend yield of a high 6.59%. The company’s 10 year annual return is -1.31%. Latest 5 year returns for BP stocks are:

20122013201420152016
2.0622.00-16.77-11.7027.26

GlaxoSmithKline PLC (GSK)

gsk-logoGlaxoSmithKline (GSK) is a global pharmaceutical company based in London, UK. GSK’s main segments are consumer healthcare, vaccines and pharmaceuticals. The company is heavily involved in research, marketing and manufactures a wide range of products including vaccines, over-the-counter (OTC) prescription medicines and consumer healthcare products. GSK strives to develop a sustainable business, provide health benefits to patients and consumers, improved shareholder returns as well as supporting wider society.

GSK makes up 3.29% of my UK index fund and has a projected dividend yield of 4.58%. The company’s 10 year annual return is 2.26%. Latest 5 year returns for GSK stocks are:

20122013201420152016
0.7028.36-14.980.042.02

Above are the top five holdings in the UK index fund in my portfolio. For overviews of the top 5 companies in typical index funds for other world regions click below:

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