His value orientated strategy has meant his £136m JOHCM UK Dynamic fund has been a top quartile performer in the highly competitive IMA UK All Companies sector – and has more than doubled the FTSE All Share – since its launch in June 2008.
Performance of fund vs sector and index since June 2008
Source: FE Analytics
Savvides attributes that performance to investing in companies that are going through their recovery phase and have hidden growth potential that is undervalued by the market.
“We think that after the biggest periods of disappointment comes the biggest periods of change in a company,” Savvides explained. “When pressures come to bear, we think companies are dynamic and forward looking. We like companies where the view on it has become stale and the market is disillusioned. That’s when we are fishing around for valuation mismatches.”
However, the manager is keen to point out that he isn’t just backing cheap companies but ones which give him a form of downside protection. Then, once a company’s potential has been recognised by the market, he will recycle capital into another hidden gem.
With that value approach in mind, Savvides highlights the stocks he has recently bought, trimmed his holding in and sold completely out of.
Buy – African Barrick Gold
Savvides says he has moved to an overweight position in the basic materials sector for the first time in his fund’s history because of compelling valuations and management led change in the industry.
He has bought Anglo-American, like his fellow FE Alpha Manager Alex Wright, but he has also been buying shares in African Barrick Gold, which is listed on the FTSE 250.
“We wouldn’t normally buy a gold miner because they can just be a binary call on the gold price,” Savvides said.
“However, we have bought African Barrick Gold which has consistently struggled to meet market expectations and the share price has declined as a result. However, the new management is taking a completely new direction.”
Savvides says the new management has been through a period of cost-cutting and re-modelling the business.
For instance, the manager says they are improving their current mines, such as their sites in Tanzania which Savvides describes as “world class”, and producing a higher return on capital.
Like most gold mining companies, African Barrick Gold has performed poorly over recent years.
Our data shows that if investors had bought shares in the company when it floated on March 2010, they would have lost more than 50 per cent of their initial investment as its share price lost money in 2011, 2012 and 2013.
The gold price has also performed poorly over that time.
Performance of stock vs indices since March 2010
Source: FE Analytics
African Barrick Gold has bounced this year, however, and has returned close to 40 per cent in 2014. Savvides expects that trend to continue.
“I’m not taking a particularly strong view on the gold price here, but I am backing the company and the management’s ability to generate more from their current operations,” Savvides said.
Our data shows that R&M UK Equity Unconstrained is the only IMA fund that counts it as a top 10 holding, however.
Trim – Lookers
Lookers, the FTSE Small Cap-listed car dealership business, is an example of stock that Savvides has been trimming his exposure to.
“It has around 4 per cent market share of the UK’s new car market,” Savvides explained.
“It has been quite successful and has been buying up some of their more challenged competitors’ dealerships and family owned operations who want out.”
“Added to that the huge demand for new cars because of new scrappage laws and very low rates of interest, it has been a very, very interesting situation.”
According to FE Analytics, shares in Lookers have returned close to 200 per cent over the last three years. The stock returned more than 50 per cent in 2012, more than 60 per cent in 2013 and is currently up more than 20 per cent so far in 2014.
However, due to those strong returns, Savvides thinks it is becoming fully valued. As a result, he has halved his position in Lookers over recent weeks.
“It has been a very successful holding. We had bought it at 50p and it has increased to 150p, however, we are wondering how much value it has left for us. It is still a very good company, but we have been selling out,” he said.
There are four funds that hold Lookers in their top 10 and they include CF Miton UK Value Opportunities and Unicorn UK Smaller Companies.
Sell – Legal & General
Savvides has sold all of his shares in Legal & General, the FTSE 100 insurer.
However, the manager says he exited the stock well before the recent budgetary changes to annuities and the pension system as a whole.
“We were quite lucky with L&G,” Savvides said. “We had bought the stock at 22.5p at its lows in 2009 and the reason to sell was more luck than judgement.”
“Its recovery has been fantastic as the chief exec, Nigel Wilson, has just focused on generating more cash.”
“It’s been a very good story, particularly in 2011, 2012 and 2013 when it delivered very strong performance. However, it had traded at a huge discount to book value and went onto a wide premium. Because of that, we sold out of it in January.”
As the manager points out, Legal & General had performed very well. Our data shows that it returned more than 230 per cent between 2010 and 2013. However the company, like other insurers such as Phoenix and Resolution, has had a woeful time of it this year.
Performance of stocks in 2014
Source: FE Analytics
According to FE Analytics, Legal & General has lost more than 10 per cent over the last month which means the stock is down more than 4 per cent year to date.
As FE Trustnet recently highlighted, those losses have affected a large number of UK equity funds as it had been a very popular dividend paying stock.
While a number of managers have been buying into the sector’s dip, Savvides would like to see lower valuations before he returns to Legal & General.
