Attractive investment opportunities can still be found in the uncrowded, under-owned UK market, according to JO Hambro Capital Management’s Alex Savvides, who feels valuations remain compelling.
FE Alpha Manager Savvides, who runs the four crown-rated JOHCM UK Dynamic fund, said market uncertainty had increased but this had been a consistent theme for the fund since launch.
Savvides said there were other reasons to be “mildly confident” about investment opportunities, highlighting the low level of stock and factor correlations.
He said: “It’s important to note that they have been coming down for a period of time. They remain fairly low and that does mean they are acting differentially, which is good obviously to fund management businesses like ours and funds like ours.
“We think this is a healthy backdrop in which to think about allocating capital.”
The manager also highlighted how uncrowded the UK market had become as international investors have been put-off by the Brexit challenges.
Performance of fund during H1
Source: FE Analytics
He said: “UK has become even more uncrowded as place to invest. A situation of uncrowded, under-owned markets offer opportunities.”
Indeed, the manager said he had been particularly busy over the past two quarters with some “decisive position-building”.
Savvides said the fund had performed strongly during the second quarter of the year rising by 3.09 per cent, compared with a 2.12 per cent gain for the FTSE All Share index.
“It’s been a good quarter for the fund, that’s continued our relative outperformance since from beginning of the year,” he said. “It was a pretty unpredictable Q2, so I think we’re quite pleased with how the fund performed: fairly resiliently.”
Indeed, the JOHCM UK Dynamic fund has enjoyed a strong start to the year returning 8.86 per cent during the first half of 2017, compared with a 7.29 per cent gain for the average IA UK All Companies fund and a 5.5 per cent rise for the benchmark FTSE All Share index.
Both allocation and selection had been positive for the fund during the second quarter of the year, said Savvides.
The rise in gilt yields during the quarter – fuelled by expectations of inflation and tapering of quantitative easing programmes – had a positive effect for the fund, said the manager, as its underweight position in consumer goods did not drag on performance. Its maximum underweight position in the utilities had a positive effect for similar reasons, the manager noted. Conversely, the funds overweight position in industrials was positive for the fund.
On an individual stock basis one of the biggest contributors to performance during the second quarter was private equity investor 3i Group, while it also saw a strong performance from electronic components distributor Electrocomponents.
He said: “Electrocomponents had another excellent quarter. It’s ahead of our expectations, thus far. We invested in this in 2015. It has had two or three trading statements ahead of expectations on every metric, so far this year.
“Management are performing very well across the world. We continue to have very high conviction active overweight in that company.”
Performance of Electrocomponents over 2yrs
Source: FE Analytics
Another top performer for the fund during the second quarter was SIG, an international supplier of insulation, roofing, commercial interiors and specialist construction products.
“Having previously owned and sold it in 2013, we got to know management at that point in time and took a decision over what their strategy was going to be for next few years. We think it’s fair to say we thought it could’ve been a bit tighter on various things, not least capital allocation,” he said. “We watched on the side-lines for a long period of time, our interest was reignited [by its trading statement].”
In the January statement SIG chief executive Mel Ewell said it would prioritise leverage reduction by focusing on cash generation, moderating capital expenditure and suspending its infill acquisition programme. The statement prompted Savvides to reinvest in the company straight away, having previously been concerned about the capital allocation.
The manager said the company had the potential to double in price if management reacted the right way. Indeed, during the first half of the year the company’s share price has risen by 52.96 per cent in the six months to 21 July.
Elsewhere, the manager has been building positions in its customer services exposure, reallocating from its exposure to broadcaster and telecommunications firm Sky.
Saavides said that its consume services positions – which represents 15.94 per cent of the portfolio – said they were very balanced, well diversified and not all business-to-consumer.
It has increased exposure to Marks & Spencer and Restaurant Group and media assets such as Daily Mail & General Trust, ITE and Ascential.
One of the biggest detractors of performance during the second quarter was Imagination Technologies, which Savvides said had seen a contract with Apple terminated. Apple had used the firm’s intellectual property in products and was the UK firm’s largest customer.
Savvides said it had sold out of the stock materially on the way down, the stock having fallen by 61.6 per cent in the immediately after the announcement, although it had been a “shock” for the manager describing it as a “fair headwind” in the portfolio.
Its AngloAmerican exposure was down in line with the commodities sector, said the manager, while bank holding Barclays was impacted by tougher environment for investment banking revenues during the first quarter.
Performance of fund over 3yrs
Source: FE Analytics
Over three years, the fund has delivered a 32.23 per cent return compared with a 23.87 per cent increase for the index and a gain of 25.97 per cent for the average sector fund.
Featured on the FE Invest Approved list, analysts highlighted the manager’s small and medium-sized companies and its ability to outperform in falling markets.
The fund has an ongoing charges figure (OCF) of 0.86 per cent. It also carries a performance fee of 15 percent on the excess if the net asset value outperforms the benchmark on an annual basis. Last year the performance fee was 0.56 per cent.