Although his Standard Life UK Equity Unconstrained fund tends to fall hard during market sell-offs, illustrated by losses of more than 40 per cent in 2008 and 20 per cent in 2011, his ability to snap up cheap stocks at the right time has seen him top the tables in the IMA UK All Companies sector over a five-year cumulative period, with returns of more than 150 per cent.
Performance of fund vs sector over 5yrs
Source: FE Analytics
Legget says his process involves concentrating on opportunities where he thinks a company’s cash-flow is underestimated or undervalued by the market. He says that over the last five years, he has been able to find companies that were "materially mispriced", particularly in the aftermath of the Lehmans crash in 2008 and the eurozone crisis sell-off in the summer of 2011.
The manager is confident his style can continue to thrive, and even accelerate, given that investors are beginning to focus on company fundamentals instead of worrying about being on the verge of imminent catastrophe.With this in mind, he tells FE Trustnet about three out-of-favour businesses with strong cash-flows, which he believes will see a spike in value in the coming months.
Rio Tinto
Miners have been one of the worst areas to invest in recently, but Legget says he has bought a position in FTSE 100 giant Rio Tinto because negative sentiment towards the stock has now gone too far.
"We don’t often make changes to the fund, but with miners we have moved from an underweight position to a neutral one by buying a position in Rio Tinto. It is a low-cost producer and has increased its cost-cutting," he said.
"Yes, it is a cyclical as commodities stocks have been de-rated by the market. However, they have a sensible management team and I think we will see a re-rating as the supply of new mines tails off, which will mean the supply of commodities is going down," he added.
Performance of stock year-to-date
Source: FE Analytics
So far this year, investors in Rio Tinto would have lost 13.89 per cent. Although Legget says he has seen the share price drop since he started buying the stock, he says investors should remain unfazed.
"There is always the temptation to sell if you see the stock underperforming, but you need to ask yourself why it has gone down," he said.
"If you still think that the company’s cash-flow is undervalued by the market then you shouldn’t give up on it. For instance, I began buying Rio at £30 three months ago and three weeks ago I was buying it at £26."
"But my underlying thoughts on the stock are still there, so if anything, the upside should be greater," he added.
Our data shows that 143 funds count Rio Tinto as a top-10 holding, one of which is FE Alpha Manager Richard Plackett’s BlackRock UK Special Situations fund.
Standard Chartered
Legget also holds the banking stock Standard Chartered, because he expects its share price to surge when the market inevitably falls back in love with emerging markets – notably the Asia Pacific region.
"I’d say that one of the areas which is increasingly falling out of favour is anything with emerging markets exposure," he said.
"Standard Chartered has had good earnings growth over time, but the market is negative on it because of its heavy exposure to the emerging markets. However, we still see a phenomenal franchise there."
"Everyone used to love it as it has strong earnings and is yielding above the market. Over time, I am confident people will become more confident with emerging markets and the stock should therefore see a big re-rating," he added.
Standard Chartered is the 15th-largest company in the FTSE 100, with a market cap of more than £36bn. Although it is listed in the UK, the majority of its operations are focused in Asia.
The stock is down 2.21 per cent this year, however it has rewarded its shareholders over the long-term. It has returned more than 250 per cent over 15 years, for instance.
Performance of stock over 15yrs
Source: FE Analytics
The stock is also yielding close to 4 per cent. Our data shows that Standard Chartered is less popular than Rio Tinto with fund managers, although it still crops up in 65 IMA funds' top-10 holdings.
Smith (DS)
Unlike the other stocks Legget has mentioned, the FTSE 250 listed Smith (DS) has performed well recently.
The plastics and packaging company is Legget’s largest individual holding – making up 4.5 per cent of his £636m Standard Life UK Equity Unconstrained fund.
The stock itself has returned an impressive 75.8 per cent over one year while the FTSE 250 index has returned 40.14 per cent.
Performance of stock vs index over 1yr
Source: FE Analytics
However, Legget says the stock could see a further re-rating as investors start to become more positive towards Europe – an area that Smith (DS) has a high exposure to.
"People are becoming, rightly or wrongly, less negative on Europe. Economic data is looking slightly better, but Smith DS has been able to deliver against a pretty tough backdrop recently. I think it could be a good place to be over the next 12 to 24 months," Legget said.
There are 21 open- and closed-ended funds that count Smith DS as a top-10 holding. These include James Henderson’s Henderson UK Equity Income fund, Giles Hargreave’s Marlborough Special Situations fund and Daniel Nickols’ Old Mutual UK Smaller Companies fund. All three are FE Alpha Managers.
