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Three stocks Mark Martin is backing for a flat market

25 July 2014

The FE Alpha Manager tells FE Trustnet which FTSE 250 and Small Cap companies he thinks can outperform despite the difficult market conditions.

By Alex Paget,

Senior Reporter, FE Trustnet

Investors should now be focusing on companies that can deliver returns at any point in the business cycle, according to FE Alpha Manager Mark Martin, who has been upping his exposure to structural growth sectors like healthcare and biotech in his five crown-rated Neptune UK Mid Cap fund.

Martin has bucked the trend of most active managers in the IMA UK All Companies sector this year, especially those with a clear mid-cap bias.

As FE Trustnet revealed earlier this week, Neptune UK Mid Cap fund has managed to considerably outperform during the stop-start market conditions of the last 14 months. It has returned 5.66 per cent compared with a loss of 0.17 per cent from the FTSE 250.

Performance of fund vs sector and index in 2014

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Source: FE Analytics

Martin aims to deliver cross-cycle returns and to do that he splits his portfolio into three “silos”: economic recovery, corporate turnarounds and structural growth. He attributes his recent outperformance to his structural growth stocks.

ALT_TAG “We are currently slightly overweight our structural growth bucket,” Martin (pictured) said.

“These are sectors like healthcare that tend to perform poorly when the market is ripping higher; like in 2009 and 2010. But now the market is flatter, they have, and should continue to, perform well.”

With that in mind, he highlights three stocks within his five crown-rated fund which he thinks will steer him through this flat market.


Vectura

Martin’s benchmark is the FTSE 250, though he can invest in the 50 largest companies within the FTSE Small Cap index. Vectura, the £552m pharmaceutical and drug development company, is an example of those.

“Vectura are a profit making biotech company with a wide portfolio of different drugs,” Martin explained.

“One of the things I find interesting is investor psychology and a lot of institutional investors will avoid biotech companies after the tech bubble because a lot of them had their fingers burst. A number of these companies were one-drug wonders and that has put off a lot of investors.”

“However, the business models of these companies have now changed to become more accommodative and they now have a wide range of drugs. Vectura is an example of that.”

Vectura specialises in the development of pharmaceutical therapies for the treatment of airways-related diseases.

They have entered development collaborations with a number of pharmaceutical giants like GlaxoSmithKline and Novartis.

According to FE Analytics, Vectura has returned close to 70 per cent over the last 12 months.

Performance of stock versus index in 2014

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Source: FE Analytics

However, as the graph above shows, it sold off quite considerably earlier this year and is currently only up 2.94 per cent year to date.

Our data shows that there are eight IMA funds that count Vectura as a top-10 holding and they include FF&P Small Cap UK Equity, JPM UK Smaller Companies and L&G UK Special Situations.


Consort Medical

Martin’s second pick is Consort Medical, which is also listed on the FTSE Small Cap index with a market cap of £283m.

“It is a medical device company and it manufacturers pumps of asthma inhalers. The pump is regulated by the FDA, which provides barriers of entry,” he said.

“This pump is used by people with severe asthma and emphysema. One of things which sadly can be said with a high degree of certainty is that with the increased urbanisation and pick up in smoking in emerging markets like China, the addressable market for Consort will increase.”

Martin is also bullish on the stock because it has recently entered a partnership with British American Tobacco to develop pumps for e-cigarettes – a market that has grown significantly over recent years.

The manager says e-cigarettes are soon likely to be regulated by the FDA, and as Consort already has deals in place for its inhaler pumps, it should be one of the leading players in that market.

Like Vectura, shares in Consort Medical have been volatile this year and are so far down 0.47 per cent in 2014.

Schroder UK Smaller Companies and Schroder Institutional UK Smaller Companies – which are both run by the FE Alpha Manager duo of Andy Brough and Rosemary Banyard – are the only two IMA fund that hold Consort in their top-10.


BTG

Martin’s final recommendation is the FTSE 250-listed BTG, which has a market cap of £2.2bn. The manager describes it a specialist pharmaceutical company which has grown substantially by various acquisitions.

“They have developed a drug called Zytiga. It is used to treat prostate cancer which sadly, is becoming more and more prevalent,” he explained. “Through a partnership with Johnson & Johnson, Zytiga’s launch was the most successful oral oncology drug in history due to its popularity.”

“I think it says something when a relatively small UK company manages to develop a drug that no one else in the world has been able to discover.”

According to FE Analytics, shares in BTG are up 8 per cent this year, but like Vectura and Consort, its shareholders have had a turbulent few months.

Performance of stock in 2014


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Source: FE Analytics

Martin is also a fan of BTG because it has a product called Varithena, which is used to treat varicose veins. It was approved by the FDA at the back end of last year.

He says the market is potentially huge as current treatments for varicose veins are painful and costly. Varithena is designed to be relatively painless and can be used as an out-patient procedure – making it cheaper to use.

Ten funds in the IMA universe count BTG as a top 10 holding. The list include the £1.4bn Old Mutual UK Mid Cap fund and FE Alpha Manager Julie Dean’s Schroder UK Opportunities fund.

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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.