Legget, whose fund is the best performer in the IMA UK All Companies sector over five years, has benefited since the period after the financial crash by buying into vastly out of favour areas of the market early on, such as more economically sensitive, and often domestically focused, stocks.
Performance of fund vs sector over 5yrs
Source: FE Analytics
However, as he told FE Trustnet yesterday, Legget thinks that those sorts of companies are now looking fully valued.
Instead, the manager is upping his exposure towards stocks that have a high emerging markets exposure, which were some of last year’s worst performers as investors became negative on the outlook for the developing world.
“As we look forward, the most exciting areas of the market on a two- to three-year view are the companies that have decent emerging markets exposure,” he said. “Sentiment seems to be close to rock-bottom now but at the same time, things like growth rates and all the other reasons to talk about emerging markets a few years ago are still very much intact,” Legget said.
He says that, unlike in the past, this has meant he has been upping his exposure to the mega-cap end of the FTSE as stocks in this area will be the ones that benefit from an emerging markets revival.
“Over the last six months, some relatively good value opportunities have opened up in the largest parts of the FTSE 100,” he said.
“The bottom 80 stocks of the FTSE 100 have actually performed the same as mid caps and have done very well. They are now on big valuations while some of the large financials and commodity stocks have heavily distorted the performance of the FTSE 100.”
With that in mind, Legget highlights his three most recent investments.
BHP Billiton
Legget says that one of the best ways to play a recovery in emerging markets is via miners, as the two areas of the market are very closely linked.
He picks out BHP Billiton – which is the 15th-largest member of the FTSE with a market cap of £37bn – as a stock that should perform well over the coming two to three years.
“It has a long-term competitive advantage in its sector. BHP Billiton is a low-cost producer and is also well-invested, so it is one of the only miners that can make money across the commodities cycle,” Legget said.
BHP Billiton is commonly regarded as one of the safer commodities plays as its business model is more diversified than its peers and not overly reliant on its iron ore assets.
However, like other miners such as Rio Tinto and Glencore, BHP Billiton has fallen out of favour with investors as the Chinese economy has stuttered and demand for commodities has slowed.
Performance of stocks over 1yr
Source: FE Analytics
Legget says that after BHP Billiton’s run of poor share price performance, now is a good time to buy.
BHP is a very popular stock in the IMA universe, with more than 100 funds counting it as a top-10 holding.
However, that figure is distorted by the fact that the majority of its holders are emerging markets, Asia Pacific, natural resources and FTSE All Share tracker funds.
It is under-owned in the UK sectors. Two portfolios that do have exposure are Liontrust Macro Equity Income and Liontrust Macro UK Growth, both of which are headed up by the FE Alpha Manager duo of Jan Luthman and Stephen Bailey.
HSBC
“Another one we have been adding to is HSBC,” Legget said. “HSBC has very cheap funding costs and a great franchise in Hong Kong. It is also normally fairly conservatively managed so we see now as a good opportunity to buy a good and growing yield,” Legget added.
HSBC (or the Hong Kong and Shanghai Banking Corporation) is listed on both UK and Hong Kong stock markets and has thousands of offices in the developed and developing world.
With a market cap of more than £120bn, HSBC is the FTSE’s second largest constituent (behind Royal Dutch Shell).
As Legget points out, the bank largely disappointed last year, especially compared with more domestically focused banks such as Lloyds.
Performance of stocks in 2013
Source: FE Analytics
HSBC is an immensely popular stock with fund managers.
Close to 350 funds hold it in their top-10 while countless more will have some sort of exposure to it. Unlike BHP, however, it is popular with all manner of funds. Two of its most renowned fans are FE Alpha Managers Nigel Thomas and Francis Brooke, who have decent positions in HSBC via their AXA Framlington UK Select Opportunities and Trojan Income funds.
Burberry
Legget is also backing luxury retailer Burberry to bounce back as the company’s products are becoming increasingly popular with the emerging markets consumer.
“Outside of mining companies and HSBC, we have also been adding to our holding in Burberry. With Burberry we are buying a franchise that is very popular in the emerging markets. It also has a fairly scarce asset and is trading on a discount to most of the UK retail market,” Legget said.
Unlike BHP and HSBC, Burberry sits in the second half of the FTSE 100, with a market cap of £6.5bn.
Like BHP and HSBC, however, it underperformed the wider market last year.
Performance of stock vs index over 1yr
Source: FE Analytics
Shares in Burberry have been on the up more recently, though, after the company posted a 6 per cent increase in its Christmas sales. Nevertheless, it is a very under-owned stock with fund managers.
Our data shows that Dominion Global Trends Consumer and Franklin Global Growth are the only two funds in the IMA universe that count Burberry as a top-10 holding.
