Aruna Karunathilake, Tom Ewing and FE Alpha Manager Alex Wright say that macro conditions point to companies such as Johnson Matthey, GKN and Nanoco doing extremely well over the coming years.
However, they add that the quality of these companies means they should still be capable of growth if the recovery begins to falter. Here, each manager reveals their reasons for investing in one of these stocks.
Johnson Matthey
Aruna Karunathilake, manager of the Fidelity UK Select fund, says that British chemicals and precious metals company Johnson Matthey will benefit from the need to make cars more environmentally friendly over the coming years.
"Johnson Matthey is a FTSE 100 advanced materials business with a strong competitive position in auto catalysts," he said.
"Its high-tech catalysts are used for emission control in car engines. With regulations on car emissions becoming ever-tighter, and constraints in the supply of raw materials needed to manufacture them, the company could grow its sales by as much as 10 per cent across the cycle."
Investors in Johnson Matthey would have seen good returns over the medium- and short-term. However, it is the stock’s long-term performance that is the most eye-catching.
According to FE Analytics, Johnson Matthey has returned 264.3 per cent over the past 10 years, compared with 115.46 per cent from the FTSE 100.
Performance of stock vs index over 10yrs
Source: FE Analytics
Our data shows seven funds in the IMA universe count Johnson Matthey as a top-10 holding – one of which is Charlie Thomas’s Jupiter Ecology fund.
GKN
FE Alpha Manager Alex Wright (pictured), who runs the Fidelity Special Values trust, is a fan of the FTSE 100-listed engineering firm GKN thanks to what he describes as "catalysts for change" within the company.
"GKN is a UK engineer making high-tech parts for the automotive and aerospace industries. While the autoparts segment has been under pressure during the recession, GKN is primarily exposed to luxury cars, which have been more resilient."
Wright added: "The aerospace business has become a larger part of sales following the acquisition of Volvo's aerospace division. This diversifies GKN into a fast-growing area, earns higher margins and reduces the cyclicality of the business."
Like Johnson Matthey, investors in GKN have been well rewarded. It has returned more than 100 per cent over three, five and 10 years. Over one year, the stock is up 69.43 per cent compared with 16.22 per cent from the FTSE 100.
Performance of stock vs index over 1yr
Source: FE Analytics
Twenty-one funds in the IMA universe count GKN as a top-10 holding, including Nigel Thomas’s AXA Framlington UK Select Opportunities, Julie Dean’s Cazenove UK Opportunities and James Henderson’s Henderson UK Equity Income fund.
Nanoco
Tom Ewing, who runs the Fidelity UK Growth fund, likes the niche high-tech chemicals company Nanoco, which sits in the FTSE AIM (Alternative Investment Market).
Our data shows that investors in the stock would have seen returns of more than 500 per cent over the last five years. However, Ewing says there are still plenty of reasons to be holding it.
"Nanoco is on the verge of becoming recognised as the global leader in the development of quantum dots, a cutting-edge technology that radically improves the colour performance and energy efficiency of LCD displays, high-end lighting and solar panels," he said.
"It is the only company in the world that has managed to manufacture quantum dots without the use of cadmium, a toxic chemical effectively banned from most consumer products, which gives it a dominant position in a potentially huge global market for quantum dot technology."
"Spun out of the University of Manchester in 2001 and listing in 2009, the company has spent the last 10 years gradually moving towards commercial production and recently signed a deal with industrial giant Dow Chemical," Ewing added.
FE Analytics data shows that not a single fund in the IMA universe holds Nanoco in its top-10. However, it is the fourth-largest holding in Gerald Smith’s Monks Investment Trust – making up 2 per cent of the £1bn portfolio.