However, this doesn’t mean they don’t come across some stocks they would love to hold if they had the chance.
We asked a selection of fund of funds managers to tell us the UK stocks they would love to hold in their portfolios but aren’t allowed to.
All the managers pointed out that direct UK equities are not their area of expertise, and their choices are by no means recommendations. Nevertheless, these are the stocks that have caught their eye.
Royal Dutch Shell
Ian Rees is a fund of a funds manager, with the five crown-rated Premier Multi Asset Distribution portfolio among his best performers.
He says that if he were to invest in direct equities, the income potential of Royal Dutch Shell would put it high up on his list.
“The most interesting stock call I have heard recently was on Royal Dutch Shell,” he said. “The perception of the stock as a dull large cap has been cemented this year with underperformance against the FTSE All Share index.”
“Despite having an attractive yield and a dividend that has never been cut since World War One, the stock has been languishing.”
Performance of stock vs index over 1yr
Source: FE Analytics
Rees likes Shell, as not only has it been able to raise its dividend, but at the same time is investing for growth.
“Shell is undertaking the sin of maintaining its capital expenditure and investing back into its business, contrary to the market's desire for short-term shareholder returns,” Rees said.
“For the contrarian, Shell’s action suggests a longevity in its outlook towards investing capital for the growth of the business in future years rather than bowing to the current desire for companies to return ever increasing amounts of cash back to investors in the form of greater dividends or enhanced stock buybacks,” he added.
Given its market cap of £80bn, it is not surprising that Royal Dutch Shell is a popular stock. Overall, 321 funds in the IMA universe count it as a top-10 holding.
One of the stock’s most notable fans is Richard Buxton, who recently told FE Trustnet that it is very undervalued.
QinetiQ
FE Alpha Manager Toby Ricketts, who heads up various funds of funds including Margetts Venture Strategy, says that if he had the chance he would love to have tech company Qinetiq in his portfolios.
The company provides technology for the military and is listed on the FTSE 250.
Ricketts says that the company had struggled to cope when military budgets came under pressure in 2010 and was shunned by the market. However, a new management team came in that year and has turned it around.
“Slowly, since 2010, profitability and free cash-flow have improved,” he said.
“Investors have remained sceptical, anchored by those bad years and an easy to see negative industry narrative. Defence companies have generally struggled to grow, and have frequently disappointed in the last few years.”
“But Qinetiq is on a different path. It is in areas that face less budget pressure anyway, and it has plenty of room to improve what it does. This means it can drive cash-flow growth, without needing more sales. Analysts remain biased too.”
“I think they have underestimated both the change inside the business and how differently Qinetiq can behave compared with other more conventional military businesses,” he added.
QiniteQ has still performed well over the past three years. Its share price is up by more than 70 per cent, despite the fact it lost close to 20 per cent in 2010.
Performance of stock over 3yrs
Source: FE Analytics
“As the last few years have unfolded, Qinetiq has generally surprised and the stock price has gone up,” Ricketts said.
“Despite this, the powerful taint of failure anchors investors. The valuation and the anxiety have changed little since 2010,” he added.
Three funds count QineteQ as a top-10 holding. They are Aberforth UK Smaller Companies, FE Alpha Manager Alex Grispos’ CF Equity Ruffer & General and FE Alpha Manager Alex Savvides’ JOHCM UK Dynamic.
FE Trustnet recently pointed out that the stock is a favourite among value and special situations managers.
Nanoco Group
Peter Walls, who manages the five crown-rated Unicorn Mastertrust, is restricted to buying closed-ended funds in his portfolio.
However, although he says he is no expert in assessing individual stocks, through reading an investment trust manager’s notes he stumbled across nanotechnology company Nanoco.
“This is by no means a recommendation as I don’t know about its valuation, but it just fascinated me. They make quantum dots and these dots are something like a 100,000th the size of the width of a human hair – it’s fascinating stuff.”
“These are used for next generation TVs and other digital displays,” he added.
Nanoco, which has a market cap of £280m, is a spin-off of a research team at Manchester University and was made public in August 2004.
The stock, like most others listed on the FTSE AIM, has been highly volatile over the last few years. However, the share price is up close to 60 per cent over the past 12 months.
According to FE Analytics, there are three portfolios that count Nanoco as a top-10 holding: Monks Investment Trust, Mid Wynd International Trust and Ignis Smaller Companies fund.
