Financials, housebuilders and overseas industrials are new areas of the market that Georgina Hamilton is finding exciting opportunities in for her recently-launched Polar Capital UK Value Opportunities fund.
The star manager, who built up a stellar track record alongside George Godber while running Matterley Undervalued Assets and Miton UK Value Opportunities, announced that she would be moving firms last May.
Performance of fund vs sector under Hamilton and Godber
Source: FE Analytics
Polar Capital UK Value Opportunities, which was launched at the end of January this year and has now reached £150m in size, will be co-run by Hamilton (pictured) and Godber, who is set to join the firm after his gardening leave ends in April.
The two are set to retain the same investment process they have used throughout the entirety of their investment careers, which involves a focus on cheap valuations, sustainable returns and stocks with strong funding positions. Essentially, the managers’ mantra is finding companies that are in control of their own destiny and aren’t reliant on cyclical upswings to improve their performance.
This bottom-up stock selection process means they are entirely benchmark-agnostic, with previously-managed investment vehicles retaining active share figures in excess of 90 per cent.
While Polar Capital UK Value Opportunities – which is now more than 90 per cent invested – has been built using the same methodology (although Hamilton re-built the model database process from scratch), around one-third of its portfolio differs from how Miton UK Value Opportunities was positioned.
“That’s not by design, that is purely part of the process; things have moved on and prices have changed,” Hamilton explained.
“One of the themes I’m exposed to at the moment which I’m finding to be different from before is I have greater exposure to overseas industrials.
“In general, overseas shares are a little more expensive because they have performed better since Brexit.
“The fund has a lot of domestic exposure. However, within the overseas space, the most interesting sector to me is industrials. An example of a stock that wasn’t previously in the fund in this market area is RPC, which is a European packaging company.”
The manager says RPC is benefitting from a general move from glass to plastics so, on its own organic basis, is growing strongly, remains well-funded and is trading at an attractive valuation.
Another example is Vesuvius, an engineered ceramics company based in London which creates the consumables used to make steel and foundry technologies.
“This fund is all about buying cheap, boring and steady companies. This type of company may not sound too exciting, but it is a really good example of something that is right up our street and is a steady, cash generative business,” Hamilton said.
“It is unloved, but actually it implemented really good restructuring last year, it improved its margins and, on a self-help programme, has done a very good job in 2017. I think that will really flow through into 2017 and beyond.”
Performance of stocks over 5yrs
Source: FE Analytics
Another area of the market the manager is showing greater interest in than before is financials; she considers the likes of challenger bank Aldermore and non-life insurer RSA to be particularly attractive businesses at the moment.
She says the former’s share price has been blighted by investors shunning challenger banks due to post-Brexit uncertainty, despite the fact the business itself is well-funded and its loan growth has been strong.
She adds that the latter is currently undergoing restructuring from CEO Stephen Hester, which has involved reallocating capital to more lucrative areas of the business.
“One thing that’s similar is that the previous fund had a large domestic earnings exposure, and that remains the case in the new fund,” Hamilton pointed out.
“The UK domestic earnings space has had a really tough time since Brexit. There has been an underperformance of around 15 per cent of domestic earners versus overseas performers.
“Therefore you would expect a value fund to have a decent exposure there. However, while valuation is the first criteria, sustainability of returns is the second criteria and it’s harder to get that in the UK as you can imagine, given the Brexit outlook is a bit more clouded.
“So what I’m fighting really hard to do is find domestically-exposed shares which have a very, very visible earnings stream.”
As such, Hamilton also likes the infrastructure space, which she believes will be a significant beneficiary of Brexit. She says stocks such as Hill & Smith – a supplier of construction industry products – has now hit a sweet spot due to an increasing UK and US infrastructure spend.
“The housebuilders are good example too because they have good order books, good supply and demand dynamics, supportive policy and they’re well-capitalised,” the manager continued. “Interestingly there seems to be the start of some M&A activity in the space. Of course I don’t own stocks because M&A is in the space, but it’s interesting that is beginning to happen.
“Within the domestic earners and UK names, I have a really strong focus on trying to find the most visible returns possible. That’s why I’m led to some infrastructure names and some housebuilding names.”
While Polar Capital UK Value Opportunities does, as the name suggests, adopt a value style, Hamilton stresses that it is not the case of catching the falling knife when it comes to stock selection.
She says many domestic UK stocks are currently trading at cheap valuations, but warns there are plenty of value traps that don’t demonstrate a sustainable return profile.
“An example of something that doesn’t have this is general retail,” Hamilton said. “It’s been talked about a lot in the press. The second half of 2017 is likely to see a consumer take-home pay squeeze, and a number of the general retailers perhaps don’t have too much pricing power either. I think they have quite a tough outlook.
“They’re cheap so I don’t think they’re a disaster, I’m just trying to slant the fund towards things that have as much visibility and funding as possible rather than just the cheapest UK domestics.”
In terms of finding new opportunities for the fund, the manager is optimistic given that stock correlation in the UK market is at a five-year low. She says this makes for a favourable environment when it comes to alpha generation.
“I would expect the stock number that gets published by the end of the month to be higher than the 59 that was published at the end of February, and that’s as things get converted from the watch list,” she added. “There are definitely, definitely good opportunities out there.”
Polar Capital UK Value Opportunities has a clean ongoing charges figure of 0.88 per cent.