While it is unrealistic, or perhaps impossible, to expect every holding in a fund’s portfolio to contribute positively to performance, a single stock can be enough to tip the balance of a fund below its benchmark or it could mean the difference to significant outperformance.
FE Alpha Manager Jeremy Hall, who manages the Cartesian range which includes the Cartesian UK Absolute Alpha, Cartesian UK Opportunities and Cartesian UK Enhanced Alpha funds, said he was backing UK construction.
He said consistent earnings growth would occur as the UK’s recovery continued and, as the sector was being overlooked by the market, it was trading on relatively cheap valuations. He backed Costain and Balfour Beatty.
“Balfour Beatty is at 11 times earnings with the prospect to double earnings over the next two years, because of an underlying improvement in the construction market and the balance sheet and cash flow is looking good. During the downturn margins at Balfour Beatty collapsed and the balance sheet was carrying too much debt, and they also have a pension deficit of £300m. They now have a steady stream of contracts coming through,” he said in March 2014
However, both stocks have had a tricky time since Hall added the two to his portfolios. Balfour Beatty has plummeted 20 per cent while Costain has edged up to 1.1 per cent, although it only made it into positive territory in the last few months.
Performance of stocks and index since March 2014
Source: FE Analytics
Neither stocks make it into any of Hall’s funds’ top 10s at present.
Costain recently completed a huge waste facility project for Greater Manchester under a private finance initiative [PFI] contract awarded in 2007 and will shortly start building a £110m road improvement project in Lincolnshire.
Colin McLean, co-manager of the £110m SVM UK Growth fund alongside FE Alpha Manager Margaret Lawson, took a conviction bet on wealth manager St James’s Place, believing it to a great contrarian play.
McLean said at the time: “It does indeed looks expensive using embedded value metrics. However, it will be increasingly recognised as a unique asset gatherer with a proven sales force. The market is underestimating the consistency of growth.”
A beneficiary of the regulatory changes under the Retail Distribution Review (RDR), St James’s Place
had a strong few years from 2012 but spent most of last year with its share price falling. It has bounced back over the past few months with McLean and Lawson sticking to their holding, which is now the fund’s fifth largest holding.
Performance of stock and index since March 2014
Source: FE Analytics
FE Alpha Manager Leigh Himsworth, who heads up the £63m Fidelity UK Opportunities fund, said last year that his favourite contrarian play was online gambling group 888.
Himsworth along with his fund departed City Financial in July to join Fidelity. The fund has had a difficult past year and is currently down more than 3 per cent.
While 888 is marginally up since the Himsworth told FE Trustnet he was buying the stock. It spent a lot of last year falling, although it too has been making gains.
Performance of stock and index since March 2014
Source: FE Analytics
The stock had previously soared several hundred per cent and Himsworth believed its European business made it a sound investment but the possibility of an opening to the US market suggest it could be set soar again.
The company’s US business has been growing with profits up last year, but the new point of consumption tax introduced in December could also spell a headwind to its profits in the UK.
George Godber, manager of the £153m CF Miton UK Opportunities fund, had a very pleasing uplift of 17.77 per cent in his favourite contrarian pick last ISA season.
The manager said he was backing African Barrick Gold, which has since changed its name to Acacia Mining, because it had been undervalued since its former parent company Barrick Gold sold it off.
“This is a very exciting investment, it’s a clear example of £1 of assets trading for 50p in the stock market,” he said back in March.
Shares in the company started to fall in 2012 after rising rapidly during gold’s bull market run from 2006 but then lost more than half of its value. It has been trending strongly upward for 18 months.
Performance of stock and index since March 2010
Source: FE Analytics
Acacia Mining chief executive Brad Gordon recently said in a trading update that the firm was eyeing up gold mines and exploration projects in Senegal, Mali and Ghana to expand into west Africa from its current east African mines.
