Three managers who staged a comeback
FundCalibre is an advocate for good active management: finding fund managers and funds that can...
It’s January, the New Year sales are in full swing and shoppers are out in number. Everyone loves a bargain and, for some, investing is no different: after all, if you buy a stock when it is cheap, you’ve got a better chance of making decent money than if you buy it when it’s expensive. Or at least that’s the theory. We asked six Elite Rated fund managers which bargains they picked up last year that proved to be good investments and didn’t give them ‘buyer’s remorse’:
James Henderson, co-manager, Lowland Investment Company, bought Severn Trent in February 2018 when shares were valued at £17.28. “The background for the water company has remained very difficult, as political worries and more general concerns about Brexit have intensified,” he said recently. “However, in spite of the difficulties, the share price is now £19.50* and the dividend payment is around 5%. The company today is a much better operating business than it was. Leakages are down and consumer satisfaction is up. The dividend also looks set to modestly grow and the regulated asset value is increasing.”
Alex Savvides, manager of JOHCM UK Dynamic fund, focuses on companies going through positive change. “Supermarket chain Morrisons is one such story,” he said. “It was widely unloved by the UK stock market when we first invested back in 2014 and isn’t it a great deal more popular today, with a number of investors still betting against the shares.
“However, the company has moved beyond recovery and is now firmly in growth mode, as management continues to deliver on a customer and shareholder-friendly strategy: for the customer, a cheaper shopping trip with more competitive prices; for the shareholder, improved returns on capital, better cash generation and less debt. It has been a good holding and we think there is still upside potential in the shares.”
John Laing is one of the world’s most trusted brands in the field of major transport, social and environmental infrastructure. It has managed more than 100 projects in the last 30 years. Thomas Moore, manager of Standard Life Investments UK Equity Income Unconstrained fund, said: “In early 2018 the share price had weakened due to political rhetoric in the UK, when the Labour opposition stated it would nationalise public-private partnership programme (PPP) assets if elected.
“However, the company’s UK exposure is decreasing, as it grows rapidly overseas – so much so that the company did a rights issue to fund an acceleration in that growth. Since then, John Laing has continued to deliver strong progress in terms of bidding pipeline, investment commitments and realisations. Geographical diversification is helping to ensure continued flow of new opportunities, allaying market fears over political risks in the UK.”
Investec UK Special Situations manager, Alastair Mundy, bought McCarthy and Stone, the retirement home builder, during the first part of 2018. “The company had not met the growth ambitions promised at IPO,” he told us recently. “It had over-specified its developments and put too much cost in the business. Whilst it had not been helped by the weak residential property market, I bought the shares as I believed, under new management, the opportunities for self-help could protect profitability despite the macro environment.” The stock price continued to fall until the end of June. Since that date it has started to recover and is up 39%*.
“Pearson is a complex business and has struggled to deliver for several years with multiple profit warnings,” Alex Wright, manager of Fidelity Special Values investment trust, commented. “The company has been deeply unloved by investors, but sentiment is beginning to shift following better than expected half-year results.”
The company’s earnings have almost halved since it was a major beneficiary of increased spending on education programmes for the unemployed in the years following the 2008/9 recession. However, as unemployment has fallen, in the intervening years, so has educational spending. “Alongside this cyclical issue, the company has faced a structural challenge, as Amazon has facilitated the development of a market in second hand academic textbooks,” Alex continued. “However, this should become less problematic in time, as the second hand market finds its appropriate level, and academic institutions transition towards digital content.”
Hugh Sergeant, manager of R&M UK Recovery fund, added to a holding in Faroe Petroleum in early 2018. “The shares sold off in February despite evidence that the oil price had bottomed in mid-2017,” said Hugh. “This offered an attractive entry point in a company with significant producing assets providing cash flows which had bolstered the balance sheet. With a best-in-class exploration team delivering strong organic production growth and an active drilling programme, the shares offered an attractive discount to our conservative estimate of net asset value and a discount to peers. The company basically has ‘cheap barrels in the ground’. This has attracted the attention of larger a Norwegian company, DNO, who recently made a ‘hostile’ bid of 152p.
*As at 26 November 2018