Kerr’s fund is a best ideas portfolio, with the manager drawing on the expertise from other managers within Old Mutual’s UK equity team such as Richard Buxton, Daniel Nickols and Stephen Message.
Old Mutual UK Dynamic Equity was launched in June 2009 and, according to FE Analytics, it has been a top quartile performer in the IMA UK All Companies sector over that time with returns of 183.25 per cent. This figure beats the fund’s FTSE 250 ex IT benchmark by more than 25 percentage points.
Performance of fund vs sector and index since June 2009
Source: FE Analytics
While the principle driver of those returns has been from the manager’s long book, Kerr says he can use shorts in his portfolio to hedge risk and add value.
With that in mind, Kerr highlights three stocks which he is betting against within his portfolio.
Serco
One of the manager’s most recent shorts has been FTSE 250 outsourcing company Serco, which was dogged by negative news last year surrounding its UK public sector contracts.
The stock has already lost investors more than 30 per cent over the last 12 months as a result of this, as well as a 62 per cent fall in profits. However, Kerr thinks the company is set for further pain.
“There have been a number of concerns surrounding misdemeanours on government contracts and the chief exec fell on his sword,” he explained. “A new chief executive has come in [Rupert Soames], who is loved by the city, and the shares bounced back.”
“However, there are still earnings concerns for us. I think the new chief executive is going to have to rebase the numbers and I think the value of their contracts is much lower than the market thinks.”
Kerr highlights Serco’s immigration removal centres in Australia as one area of concern. He says that since the Australian government has introduced much stricter immigration measures, Serco’s position in the market could be at risk.
While Kerr rates Soames, who had previously been in charge at Aggreko, he thinks he has his work cut out.
Kerr added: “Sure, I think he will be able to turn it around, but I think there is still more pain to come before that happens.”
FE data shows that there are two funds that count Serco as a top 10 holding. They are FF Global Industrials and Thesis Destiny.
AO.com
“One of the more controversial shorts has been AO.com, which recently floated and went astronomically well,” Kerr said.
The online white goods company, which sells fridges, freezers, washing machines and other household appliances, floated last month and initially performed very well with shares jumping close to 40 per cent on its first day.
However, as the graph below shows, it has since underperformed.
Performance of stock since Feb 2014
Source: FE Analytics
While Kerr thinks the stock will perform well for investors over the long run, he thinks it will continue to give back its initial gains.
He commented: “We met with them last summer and the market cap was touted at £500m. We said we loved it and would get back to them. Suddenly the market cap is valued at £1.2bn.”
“We looked at forecasts and thought that was too high, but we have got it wrong so far as the shares have gone up.”
“However, I have the short in place because I am betting that the valuation is going to unwind from here. It won’t be a short for long as the company is growing at a rapid rate, but for at the moment I think that valuation is under pressure.”
Our data shows that no funds in the IMA universe count AO.com as a top 10 holding.
Borders & Southern
The FE Alpha Manager has had a short in place on FTSE AIM listed oil explorer Borders & Southern for the last year or so.
“We have a small short on Borders & Southern, which has acreage off the Falkland Islands,” he said.
“It had, 18 months ago, discovered gas condensate which was borderline economical. However, they need to find an awful lot more to be economically viable as the current level is nowhere near enough.”
Shares in Borders & Southern had spiked when the group initially made their discovery; however it has since fallen and investors who bought the stock two years ago would now be sitting on a loss of 82.66 per cent.
Performance of stock vs index over 2yrs
Source: FE Analytics
Kerr says that the company is currently in a lose-lose situation as it is burning cash from their current assets but cannot find a partner to help fund further progress. As a result, he thinks further falls are on the horizon.
“The company has spent the last year looking for a partner in the exploration, because they don’t have the cash to fund it at the moment,” he said. “Every month that passes they are losing money and I would anticipate they will ultimately have to raise capital – but at a discount to its current share price.”
Like AO.com, no funds in the IMA universe hold Borders & Southern in their top 10.
