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FE Alpha Manager Luke Kerr’s top UK stock picks across the cap spectrum

18 January 2017

The manager of the Old Mutual UK Dynamic Equity fund discusses four stocks spanning across different sectors and UK indices that he expects to do well over the long term.

By Lauren Mason,

Senior reporter, FE Trustnet

Ashtead, Just Eat and Burford Capital are among some of the stocks Old Mutual manager Luke Kerr believe have significant levels of growth ahead of them over the longer term.

The FE Alpha Manager (pictured), who heads up the four crown-rated, £430.6m Old Mutual UK Dynamic Equity fund, predominantly invests in companies further down the market cap spectrum and is benchmarked against the FTSE 250 (ex IT) index.

However, Kerr also holds some of the newer constituents of the FTSE 100 index and is unafraid to hold a significant portion of the fund in small-cap and AIM stocks, all of which are chosen through a combined top-down and bottom-up stock selection process.

In the below article, Kerr discusses a number of stocks in his portfolio from across the cap spectrum that he expects to thrive as we head through 2017.

 

FTSE 100 - Ashtead

One of the largest and most well-known companies the manager has in his portfolio is Ashtead, an industrial equipment rental company based in central London.

Despite having been promoted to the FTSE 100 index last year, Kerr decided to keep the position and believes it is set to do well again this year.

Performance of Ashtead vs index over 1yr

 

Source: FE Analytics

“Over 90 per cent of its profits come from its US business; it has a very small operation in the UK as well though,” the manager explained.

“It has benefitted from the sterling move because its US profits now look bigger in pound notes, and it should also benefit from the extra infrastructure spend that Trump is proposing.”

“Again, if he drops corporate tax rates as well, it would get a big boost from that. There are three strands to this play.”

The stock, which was the 10th best-performer in the FTSE 100 last year, has a P/E ratio of 17.47x and yields 4.75 per cent.

 

FTSE 250 – Just Eat

Having floated onto the stock market in 2014, online food order delivery service Just Eat has achieved a strong return over the last two and-a-half years, having more than quadrupled the return of its FTSE 250 index.

Performance of Just Eat vs index since IPO

 

Source: FE Analytics

Despite this, Kerr believes the stock has much greater levels of growth to offer investors; it is currently the largest holding in the Marlborough UK Dynamic Equity fund.


“They’re not just based in the UK, they’re in 11 countries, but the UK is the vast majority of its profit at this stage as they’re relatively mature here, whereas in the other countries they are in various stages of maturity,” the manager explained.

“In Australia and New Zealand they’re profitable, in Denmark they’re profitable, there are three or four countries like Canada, France and Spain where they are on the cusp of profitability and then there are another five or so countries where they are still lossmaking.”

“In every country it’s a winner-takes-all market, I don’t think many people are going to have more than one app on their phone to order a takeaway.”

“So Just Eat’s policy is to only be in countries where they are number one and so, in the fullness of time, we expect they could be making similar margins to the UK in all those countries.”

Just Eat, which has a market cap of £3.6bn, has a P/E ratio of 93.37x.

 

FTSE Small Cap – Sanne

When selecting stocks for the portfolio, Kerr doesn’t differentiate between small-cap and AIM stocks as he says they are similar in terms of size and liquidity.

One of his holdings that is a constituent of the FTSE Small Cap index, though, is fund and corporate administration provider Sanne, which has a market cap of £849.8m.

“They provide an outsource service for funds and, generally, alternative funds. We’re talking about venture capital funds, property funds and hedge funds,” Kerr explained.

“They provide a range of services from helping them launch and raise money in terms of all the back-office functions, they will provide the legal support, the board of independent directors, they will do the accounting if that’s what the client wants. It’s a really nice little niche.”

“They have been growing organically quite rapidly but they’re also quite acquisitive, they have been growing their top line about 15 per cent per annum organically and they’ve been boosting that with acquisitions. It’s a nice differentiated little play that is pretty non-cyclical and, again, reasonably diversified geographically.”

Having floated in April 2015, the stock has returned 179.05 per cent compared to its index’s return of 20.83 per cent.

Performance of Sanne Group vs index since IPO

 

Source: FE Analytics

Sanne Group has a P/E of 47.74x and a dividend yield of 3.2 per cent.


FTSE AIM All-Share – Burford Capital

Despite being a constituent of the FTSE AIM All-Share index, litigation funding firm Burford Capital has a market cap £1.3bn in size and is one of the largest AIM stocks.

“Its market is almost entirely in the US, largely because the US litigation market is by far the biggest in the world,” Kerr said.

“They have a team of in-house lawyers. If you are BP or Shell, for instance, you’re constantly having legal action taken against you – any big company will. They don’t want to cut their capital defending themselves, so they will go to someone like Burford, who will take the first ‘x’ per cent of any pay-out they will have, then the company will take what is left over.”

“They are very, very good at assessing the risks they are taking on and they have made a phenomenal return to-date on the investment they have made.”

Performance of Burford Capital vs index since IPO

 

Source: FE Analytics

The manager says the company is adopting a ‘portfolio’ approach to its practices, which minimises risk.

For instance, they will monitor how much each company spends on legal costs spread this between 10 and 15 cases.

Burford underwrites them and chooses clients on an individual basis, taking care not to finance any firms they are unsure of. 

“They will take on a number of cases,” Kerr explained. “If they lose the first one and they lose the second but they win the third one, all their investment on the first and second one, and the third, gets paid out from the proceeds before Shell or BP get any money themselves.”

“It’s quite low risk and they are the global leader – there is very little competition. They bought their second-biggest competitor last month so they are head and shoulders above anyone else.”

Burford Capital has a P/E ratio of 25.2x and yields 2.12 per cent.

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