Developed market companies benefiting from the oil price plunge and those sold due worries over exposure to emerging markets are some of the best bargains to appear since the Black Monday sell-off last month, according to Steve Davies, manager of the Jupiter UK Growth fund.
On 24 August equity markets around the world plunged at their most dramatic pace for any one-day trading session since 2011. In the five weeks or so since the Black Monday falls, global stock markets have made some recovery but are still very far from their highs earlier in 2105.
Davies says this was quite welcome as it gave him an opportunity to reduce his cash pile.
He said: “Periods of turmoil are always the ones that throw up the most exciting investment opportunities. It always feels deeply uncomfortable when you are doing it but I have been doing this long enough to see through that.”
Performance of indices since Black Monday
Source: FE Analytics
Davies (pictured), who has managed the £1.3bn fund since January 2013 but had worked alongside former manager Ian McVeigh since 2007, has a value /contrarian approach to investing.
Earlier in the year he started to feel more cautious and ramped up cash in his fund. This was prescient as by the time he has raised cash to its highest level for at least three years – 10 per cent – the equity market began to sell off until its huge fall on Black Monday.
“Early in the year I was thinking to sit on some cash because you'll probably get better opportunities later on. This is definitely a time to have one's eyes open and be looking at lots of these new opportunities. The thing that comes with experience is when to pull the trigger,” he said.
He says that over the past month or so the cash weighting in the Jupiter UK Growth fund has come down from about 10 per cent to 5 per cent now.
“I [now] have got about £80m of firepower which is a nice position to have in these types of markets conditions,” he added.
The manager looked to take advantage of two distinct themes during this period: ‘a lower for longer’ oil price and rising consumption in emerging markets.
He says two firms to benefit from a low oil price are airline group IAG and travel agent Thomas Cook.
“Low oil for longer keeps me away from investing in oil stocks but it also makes things like IAG and Thomas Cook look incredibly cheap,” he said. “If we are down at this kind of level for any decent period of time then those types of stocks look really, really cheap.”
The oil price has been weak since the middle of 2014 and over the past year this has somewhat uplifted to two firms’ share price. Both suffered in the sell-off but have subsequently made steady gains since Black Monday.
Performance of stocks and index over 1yr
Source: FE Analytics
IAG, which is the owner of British Airways, is the sixth largest position in the fund making up 4 per cent of the portfolio while Thomas Cook is slightly smaller but still in the top 10.
Another more recent addition to Davies’ largest holdings in the concentrated portfolio of 43 stocks is the Europe-listed auto maker BMW. Davies bought the stock with profits from British American Tobacco to provide some emerging market exposure in the fund.
He says BAT, a popular income stock, looks set for less growth in emerging markets while BMW has been oversold. However, this was before the Volkswagen emissions scandal that it has allegedly falsified data on its core diesel car business.
Although no allegations have been made about BMW, it has lost 10 per cent in a week of trading since the story broke after the whole sector saw a fall in investor sentiment.
“I've been selling BAT and starting to re-invest in BMW although the events last week require a pause for thought and we will see how that pans out. It is the case of selling something that has done really, really well and buying something that has been really, really clobbered,” Davies said.
“BAT is definitely a slower growth business than it used to be and the currency headwinds that it is going to be running into are only going to get worse.”
Since Davies took over Jupiter UK Growth in January 2013 it has returned 48.39 per cent, beating the sector by more than 20 percentage points and FTSE All Share index by more than 30 percentage points.
Performance of funds, sector and index since January 2013
Source: FE Analytics
Jupiter UK Growth has a clean ongoing charges figures (OCFs) of 1.04 per cent.