Mitchell (pictured), who runs the Royal London UK Opportunities and Mid Cap Growth funds, recently told FE Trustnet that he felt the FTSE is set to break through its historic level of 6,950 by the end of the year.
The manager already has exposure to cyclical names, with UK house builders Persimmon and Barratt Developments both sitting in the top-10 of his £148m Mid Cap Growth portfolio. Mitchell prides himself has being a stockpicker, but says that his reading of the macro outlook has been one of the biggest drivers of performance in recent years.
“For me, I have always started with a top down approach but obviously there is a lot of bottom up work that goes into it,” he said.
“If you do sense that the global economy is recovering then that will guide you to certain sectors. That straight away will mean a portfolio should have an advantage and I just feel it is relatively simple process as it leads to the right areas of the market.”
“It is an interesting debate about the two processes and there are managers who swear blind that they don’t look at the wider economy and purely focus on stock picking. I think you have to look at the macro in some capacity.”
“You see that a company looks cheap relative on a historic valuation, but you aren’t going to buy it unless you see the outlook it operates in is improving,” he added.
Here, Mitchell highlights the three stocks he’s particularly bullish about:
Countrywide
The manager says one of the names that is very likely to benefit from an improving UK market is recently listed company Countrywide – the UK’s largest estate agency firm.
“Countrywide is a stock I bought at float,” he explained.
“Countrywide is an estate agency chain. The rationale behind buying it was that the market will soon understand the operational gearing within Countrywide. It isn’t currently in the FTSE 250 index, but it will be in June.”
“If we see any improvement in the economy they have got the infrastructure to really benefit from an uptick in the UK housing market.”
“I think it is a pure profit business,” he added.
Mitchell bought Countrywide on 20 March this year. According to FE Analytics, since the stock was listed it has returned 2.2 per cent.
Performance of stock since March 2013
Source: FE Analytics
Despite its strong start, our data shows that no funds in the IMA universe count Countrywide as a top 10 holding.
It has a market cap of £1bn.
Michael Page
Mitchell says he bought FTSE 250 listed recruitment agency Michael Page towards the end of March, as he feels this kind of business is bound to strengthen as the UK recovery gathers momentum.
“It is a company that I have bought because, like Countrywide, I feel it can perform well in what I envisage will happen in the UK,” he said.
“I bought it in late 2008, but then sold it again in 2009. However, I am happy to hold it again as the economy is picking up again. I have bought it earlier than most, but I think it is best to do that and let it run.”
“As confidence improves businesses will begin to take on more staff – firstly temporary and then permanently. It is a play on improving UK employment figures over the coming years,” he added.
The Surrey-based company was has a market cap of £1.2bn and was floated back in March 2001. Over 10 years investors in the company would have seen returns of 423.85 per cent, though performance has tailed off in recent years.
Year to date, the stock has lost 0.56 per cent.
Performance of stock year to date
Source: FE Analytics
Like Countrywide, no fund in the IMA universe holds Michael Page in their top 10.
888
Mitchell’s final stock pick is a play on the US recovery. A number of US states have legalised online gambling, which the manager believes will see 888 flourish.
“Another stock I have bought recently is 888, though I admit it is slightly left-field,” he said.
“This isn’t really to do with the UK recovery, but it is a stock that will benefit from a growing US internet gaming market. Nevada, New Jersey and Delaware have all approved online gambling and hopefully California will also follow suit.”
“I don’t think there will ever be a federal law change, but I think a number of states will also legalise online gambling, For instance, California needs the revenue and any change in law should boost 888’s share price.”
888 is another FTSE 250 listed company and has a market cap of £638m. The company was first listed on the London Stock Exchange in September 2005.
Its performance has been mixed since then, but in recent months the share price has surged. Our data shows 888 is up 167.04 per cent over the last 12 months.
Performance of stock over 1yr
Source: FE Analytics
Three funds count 888 as a top 10 holding, including Gervais Williams’ CF Miton UK Multi Cap Income portfolio.
Derek Mitchell has been running UK equity portfolios in the IMA universe since 1982. Before running funds at Royal London, he worked at F&C Asset Management.
Over 10 years, Mitchell has returned 115.51 per cent to investors, compared to 90.67 per cent from his peer group composite.