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Five UK stocks to Brexit-proof your portfolio

07 June 2016

Ketan Patel, portfolio manager at EdenTree, tells FE Trustnet about five UK holdings he believes will be immune to the impacts of a potential Brexit.

By Lauren Mason,

Reporter, FE Trustnet

Following the latest YouGov and TNS poll results, which suggest that the Brexit campaign is now at an advantage, investors could be more puzzled than ever in terms of their UK exposure.

Given that the UK will be stepping into unchartered territory and that markets notoriously dislike uncertainty, a number of investment professionals have opted to sell or at least reduce their UK exposure over recent months.

In an article published in March, SWMC’s Brian Cullen told FE Trustnet that an exit from the UK could indeed have a detrimental impact on the domestic market.

“It is a big risk. The one thing I wouldn’t agree with is the people who have said, ‘oh well, whichever way the vote goes it doesn’t really matter’,” he said.

Ketal Patel, who is a portfolio manager at EdenTree, says that UK investors can still increase their portfolio’s resistance against potential Brexit headwinds while maintaining their holdings within the market.

He says the key to this is to choose stocks that won’t be impacted by either an ‘in’ or an ‘out’ vote and many of the UK companies he has chosen as potentially ‘Brexit-proof’ holdings are stocks further down the cap spectrum.

“These are UK companies that have sustainable business models and share a number of commonalities,” Patel explained.

“Firstly, they have pricing power with the ability to pass on price increases to customers. They also have dominant market share, and high levels of recurring revenues that create earnings visibility. Finally, they all have significant barriers to entry.”

In the below article, the portfolio manager talks through five UK stocks that are held in Sue Round’s EdenTree Amity UK fund and why he believes they are good options for those worried about market noise caused by the EU referendum.

 

Mears

First up is Mears, which is a market-leading housing and social care provider that was founded in Gloucestershire in 1988.

The firm, which manages 700,000 social homes across the UK, floated onto the AIM market in 1996 and since then, it has provided a total return of 4231.69 per cent, outperforming its index by 4243.22 percentage points.

Year-to-date though, it has made a loss of 18.27 per cent while the index has provided a return of 1.23 per cent.

Performance of stock vs index in 2016

 

Source: FE Analytics

“[Mears] has built up a strong forward order book, growing margins and a track record of delivering long-term returns to shareholders,” Patel said.

“Management has tackled the issue of wage inflation – the living wage, by engaging with clients at an early stage and only taking on profitable business.”

“This augurs well for the business, given the significant long-term business opportunity that an aging population brings. The company’s excellent earnings visibility – all UK – is supported by a robust balance sheet.”

Just four days ago, the firm won two out of three awards handed out at the Barnet Service Provider awards, which were for ‘One Team, One Outcome’ and ‘Responding to Individuals’.

The stock has a P/E ratio of 19.28 per cent and yields 7.9 per cent.


Porvair

The second stock on the list is Porvair, which Patel says has become a leading infiltration company that operates in strong end markets, including water treatment, aerospace, food & beverage and healthcare.

The firm operates in the US, Germany and China as well as in the UK, currently employing 700 people.

It consist of two divisions – metals filtration, which involves manufacturing ceramic filters for molten metals, and microfiltration, which is the creation of specialist filtration equipment used in the water, bioscience and energy industries.

“The high levels of recurring revenues are built on designing and manufacturing bespoke products which are essential to the safe and reliable operations of systems,” Patel explained.

“High barriers to entry have led to increased market share and greater sales to international customers. The commitment to R&D programme to identify new materials and products is a key differentiator in a highly complex and technical industry.”

The company also operates a stringent corporate governance policy which is managed and controlled by three committees within the firm.

Porvair, which is a constituent of the FTSE Small Cap index, has returned 57.29 per cent since it floated in 1995, compared to its index’s return of 321.89 per cent.

It has significantly outperformed over one, three, five and 10 years however, comfortably doubling the returns of the FTSE Small Cap index over the last decade.

The stock has P/E ratio of 21.54 per cent and yields 2.2 per cent.

 

Victrex

Next up is Victrex, which produces high-performance polymer solutions and is a constituent of the FTSE 250 index.

It is based in Lancashire and is the world’s leading producer of PEEK (polyether ether ketone) for aerospace, industrial, medical, automotive and electronics industries.

Since the stock floated onto the market in 1996, it has outperformed its index by 169.59 basis points with a total return of 824.31 per cent.

It has underperformed over the last three and six months as well as over the last one, three and five years though, providing less than one-third of the total return of its index since June 2011.

Performance of stock vs index over 5yrs

 

Source: FE Analytics

Patel says that the qualities of PEEK, which include resistance to harsh chemicals, high strength-to-weight ratios and high melting points, mean the product is often used as a substitute to metals and other plastics.

“With over 95 per cent of sales to international markets, a strong balance sheet - with net cash - and growing margins leaves the company well positioned,” he explained.


“The company has delivered both strong capital and dividend growth for shareholders.”

Victrex has a P/E ratio of 15.95 per cent and yields 11.73 per cent.

 

Trifast

The portfolio manager’s fourth pick is Trifast, a Sussex-based firm that manufactures and distributes industrial fastening to assembly industries.

“The company has a high quality customer base in the automotive, electronics and domestic appliances sectors,” Patel explained.

“It is one of the very few operators with the ability to deliver a full solution for clients on a global basis. Management have built up a strong balance sheet which has delivered strong returns for shareholders over a long period.”

The firm floated onto the FTSE Small Cap index in 1995. While it has significantly underperformed its index over this time frame after enduring a torrid time in 2001 (the stock made a loss of 41.01 per cent over this year alone while the FTSE Small Cap fell by 16.89 per cent), it has outperformed over one, three, five and 10 years as well as over the last one, three and six months.

Over the last three years, in fact, it has returned 143.52 per cent while its index has returned 28.45 per cent.

Trifast has a P/E ratio of 15.91 per cent and yields 0.8 per cent.

 

Horizon Discovery

The final stock on the list is Horizon Discovery, which Patel says is a leading player in the Life Sciences sector.

The biotech firm is based in Cambridge and creates genomics-focused products that support personalised medication, such as genetically-defined isogenic cell lines (which use genetic mutation to remove disease).

“Management has been able to build a high quality business in an attractive niche, with the scale to take advantage of fast growing structurally attractive end-markets,” the portfolio manager said.

“The company enjoys strong barriers to entry and very high margins, which augur well for shareholders.”

The firm, which is a constituent of the FTSE AIM index, floated in March 2014 and since then, it has lost 23.31 per cent compared to its index’s loss of 9.8 per cent.

Performance of stock vs index since IPO

 

Source: FE Analytics

However, it has outperformed its index by more than 15 times over the last six months with a return of 15.44 per cent.

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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.