Up close and personal with three investment trust managers
Global equity markets look expensive again. Even though stock markets around the world fell in February, most have recovered and are back near all-time highs – including the FTSE All Share index here in the UK.
With everything going up, are there any pockets of value left? Are there any investments where the growth prospects justify the share price or that are even undervalued?
We asked three Elite Rated managers for their sector picks.
While he is significantly underweight the expensive consumer staples companies – like Unilever, British American Tobacco and Diageo – Alex Savvides, manager of JOHCM UK Dynamic fund, said supermarkets in the UK look particularly cheap at the moment.
Over the last financial quarter he increased his allocation to Tesco shares by 57%, so that 2% of the fund is now held in the stock*. Approximately 7% of the fund is held in a combination of Morrisons, Tesco and Marks & Spencer.
Alex believes there is still a future in physical stores, despite the rise of e-commerce. While Amazon recently purchased US-based Whole Foods Market, he argued that the conglomerate would need more physical supermarket stores and distribution networks in the UK in order to be a significant threat.
He pointed out that cruise holidays are both in universal demand and are not especially price sensitive. Carnival, the cruise company, is a top ten holding in the Jupiter European Opportunities trust**, and Amadeus, a travel services company that specialises in cruise trips, car rentals and airline seats, is a top ten holding in both the fund and the trust**.
“The cruise industry is structurally very good. There are a number of growth options there – whether it’s because the sector is benefiting from the rise of the Chinese middle class, or whether fundamental improvements are being made to individual business structures,” he said.
“There are multiple elements to starting up a business within the cruise industry and there are certainly high barriers to entry. You need strong branding that resonates globally. You need around $0.5 billion to build a single ship and, in order to run a cruise company, you need a fleet.
“They’re also very flexible as companies. If they source passengers from a country which goes into a recession, it’s not a problem. The cruise ship company can source more passengers from other countries or regions. This type of flexibility, combined with high barriers to entry, is very difficult to find.”
Alex Wright, who heads up the Fidelity Special Values investment trust, has a hefty 36.4% allocation to the financials sector. He is seeing attractive opportunities within banking and financial services companies in particular, and currently has Lloyds as one of his top 10 largest holdings***.
“Banks could continue to positively surprise investors in the coming months. They have been out of favour for some time, so valuations are still attractive,” he explained.
“The trauma and aftermath of the global financial crisis 10 years ago still dominates the collective imagination of the market. This seems to be preventing investors from recognising the profound changes that have occurred inside banks and in the external operating environment.
“Intense regulatory scrutiny means balance sheets are now generally much stronger than they have been for some time and the loans that are being written would seem to be much less risky than those made pre-2007. Regulators are also now becoming more willing for banks to make sizeable distributions to shareholders in the form of dividends and share buybacks****.”
*Source: JOHCM, Q1 2018 presentation
** Source: Jupiter fact sheets, March 2018
***Source: Fidelity Special Values factsheet. March 2018
****Source: Fidelity Market Perspectives and round table in May 2018