Investors would be unwise to treat the companies that have benefited the most from the economic lockdown like a “lockdown puppy” and dumping them as soon as life returns to normal.
This is according to Kartik Kumar, co-manager of the Artemis Alpha Trust. Kumar bought a puppy to keep him and his fiancé company during the first lockdown and although he said he has no plans to get rid of it when he returns to the office, there are concerns this is what many new dog-owners will do once they are no longer spending as much time at home.
More relevant to Kumar’s career as a fund manager is that a return to normal may also lead to his peers ditching the stocks and sectors that have surged during the lockdown as they chase the quick gains available from a value rebound.
However, the manager believes this would be a mistake for anyone with a long-term horizon.
“We have an all-weather portfolio with a bias towards believing there was a mispricing in areas that would prosper from a vaccine,” he said.
“But in the same way I wouldn’t buy a puppy just for lockdown – I have [bought one], but I’m not going to get rid of it when there’s a vaccine – I’m not going to get rid of our food delivery stocks. It’s just not why they are there.”
Rather than selling out of holdings such as Delivery Hero and Just Eat, Kumar said that now may be a good time to think about increasing the size of his positions.
There is a school of thought that says while these stocks have surged over the past eight months, there is little to support earnings in the short term and now may be a good time to take profits. However, Kumar said it is not too difficult to envisage a scenario where such a strategy proves to be counterproductive.
“In my view, this is a bit like how you would have been incorrect on a fundamental basis to have sold Amazon for technical reasons at any time in the last decade,” he added.
“I’m now looking more towards growth stocks, thinking I may have an opportunity there if that pendulum swings the other way. But I really think you’ve got to assess them on their merits.”
He contrasted his outlook on Delivery Hero and Just Eat with another one of his holdings, property company Capco. The share price went from £2 at the start of the year to £1 at the bottom of the trough, which the manager said indicated a value of about £1,000 a square foot for its mixed-use commercial property in areas such as Covent Garden.
Performance of stock in 2020
Source: FE Analytics
“Now anyone with knowledge of prime London property knows £1,000 a square foot is a reasonably low price,” Kumar continued. “That’s jumped 45 per cent in a week, which is a big move, but if I look at Capco, I can’t really argue that the long-term upside is as compelling as a business that generates a high return on capital and can grow.
“If I were to look at that, the jump it’s made reduces the upside to a greater degree than it would have done in other sectors. But we are buying property so I look at it as people will go back to Covent Garden again one day. Therefore, I actually thought the downside was above the current share price.”
Despite Kumar’s enthusiasm for certain growth stocks, he owes his strong recent performance to his exposure to their value counterparts. Artemis Alpha Trust is up 33.21 per cent since the start of November, with positive news on a potential vaccine leading to a surge in the airlines, banks and housebuilders he owns.
Performance of trust vs sector and index in Nov 2020
Source: FE Analytics
The reason Kumar bought many of these stocks was that although their short-term prospects looked “ugly”, their long-term fundamentals were solid. But while these sectors are still well below their starting prices in 2020, the manager warned against using these figures as some sort of yardstick for their recovery.
“Let’s take Lloyds,” he said. “Let’s say I believe it’s worth 1.5x book value in a modest scenario based on the expected return on capital. But it fell to 0.5x book [this year].
“In my view, I’m confident that my judgement about that 1.5x book value is correct. I really felt quite stupid losing 40 per cent on the way down, but I don’t think of any price that happened historically.
“In the same way, my sister is looking to buy a house in London, and she’s using the prior peak as an expectation for a future peak. I believe that’s a mental bias. There is no reason why London house prices in the future should be where they were last year – they are judged on their fundamental merits.”
He added: “In my opinion, if I were to draw a generalisation on the segments that we are invested in, I believe there is significant upside to come. But clearly, the upside is lower now than it was two weeks ago.”
Data from FE Analytics shows the Artemis Alpha Trust has made 13.14 per cent since Kumar joined in May 2018, compared with gains of 1.06 per cent from the IT UK All Companies sector and losses of 4.46 per cent from the FTSE All Share index.
Performance of trust vs sector and index under manager
Source: FE Analytics
The trust is on a discount of 16.49 per cent to net asset value (NAV) compared with 17.13 and 17.46 per cent from its one- and three-year averages. It has ongoing charges of 0.94 per cent and is 9 per cent geared.