Pharma company Sartorius, materials technology specialist Umicore and oil & gas firm Lundin are three stocks that Hermes Investment Management’s Tim Crockford believes could benefit from change.
Crockford said the majority of the fund he oversees since 2014 with James Rutherford, the five FE Crown-rated Hermes Europe ex UK Equity, was up in performance terms in 2017 with all the returns coming from stock selection and across most of the names in the portfolio.
“We outperformed the benchmark in 2017 and the overwhelming factor that has driven the returns has been stock selection,” he said.
“One commonality with every name that goes into the portfolio is that every single investment will be trying to get exposed to some elements of change.
“We are looking for companies that are undergoing change either by means of the themes they are exposed to, or something internal (management, structure, et cetera) whereby the financial effects of those changes haven’t been correctly priced into the future expectations for that company.”
Performance of fund in 2017
Source: FE Analytics
In 2017, the €1.3bn Hermes Europe ex UK Equity fund delivered a total return of 24.79 per cent compared with a 17.29 per cent gain for the average fund in the IA Europe excluding UK sector and a gain of 17.53 per cent for the FTSE World Europe excluding UK benchmark.
The manager said his investment approach doesn’t fit into the growth or value categories but aims to find mid-cap ideas that are exposed to elements of change and will grow into large caps.
As opposed to other funds that have some stocks where risk is concentrated towards, the manager said the position sizes across most of the fund are flat, with every name being a high-conviction one.
“The philosophy of the fund is such that when we find names that have this change in play, it’s high conviction approach, we don’t tie up all our risk in one or two stocks, because if you get one or two stocks wrong that does ruin your year,” the manager added.
Below, Crockford highlights three stocks that he believes could benefit from change.
Sartorius
The first stock highlighted by the manager is German pharmaceutical company Sartorius, which covers the production processes of the biopharmaceutical industry and the production and servicing of laboratory instruments and consumables. It currently makes 3.5 per cent of the fund.
“Sartorius is a core long-term position in the fund that has been a fantastic performer since the day we bought it in 2014 and has also been one of the best performer names in Europe this year,” said Crockford.
“It was about €1.5bn when we bought it, it has now grown to €8bn and I have an expectation that is going to grow significantly larger.”
Performance of Sartorius over 5yrs
Source: Google Finance
Among the reasons why him and his team are positive on the company, Crockford highlighted the position of Sartorius as one of the leaders in the so-called “single-use market”.
Crockford said Sartorius is one of the few companies that sells the equipment that is needed to manufacture biological drugs.
“They will have a piece of equipment which has part of the machinery that comes into contact with the cell culture,” he said
“It is a consumable part so you can use it and after a few weeks you throw it away, which is very important for this industry and these manufacturers because what it means to drug makers.
The Hermes manager added: “These drug makers, rather than have to stop production completely for two weeks and having to sterilise and clean their equipment and test it to make sure that is 100 per cent clean, can just continuously produce by removing this consumable element and putting a new one in.
“This increases the uptime and therefore, the financial return prospects for their customers.”
Umicore
Another company Crockford highlighted because of its good performance in 2017 is the Belgian-listed Umicore, which currently represents 3.41 per cent of the fund.
“Umicore has three divisions and does a number of things. One of their businesses is manufacturing and selling catalytic convertors for cars: they source the catalytic convertor that go in the exhaust system of the car to reduce its emissions,” he said.
“They also have a metals recycling business, a business whereby they will take large supplies of tailings from miners and use their patented processes to process metal out of these tailings, something mining companies aren’t able to do.”
However, Crockford said the most attractive thing about the Belgian materials technology company was its role as a leader in the area of battery materials for electric vehicles.
Performance of stock over 5yrs
Source: Google Finance
“This particular division of Umicore makes a particular material that goes into the cathode of the electric vehicle’s battery,” the Hermes Europe ex UK Equity manager said.
“Thus, their customers are both electric vehicles’ manufacturers and big battery manufacturers such as LG Chem etc.” he said.
Crockford noted the Umicore’s position as one of the few manufacturers that mass produce the material, a fact that has led the company to substantially increase their production over the last year.
Lundin Petroleum
Finally, Crockford highlighted Swedish-listed oil and gas producer Lundin Petroleum.
The team added Lundin in 2017, a decision based on stock performance but also influenced by their more positive view on the oil & gas space.
“The reason why we bought it is the change that is happening in the company, which is driven by their production profile; it’s not based on a pure bet on the oil price,” he said.
“Lundin is a company that has found a lot of oil, and that will grow significantly even if the oil price stays flat over the next few years.”
The Hermes manager also pointed out that, despite having a purely bottom-up approach, the shape of the fund has recently been evolving towards more cyclical areas of the market and some areas they had previously been underweight.
“The big position in industrials build up but very much driven by individual change ideas, in fact, the industrials overweight is largely companies that are exposed to robotics and automation, for example,” he explained.
The five FE Crown-rated Hermes Europe ex UK Equity fund is currently overweight industrials (23.46 per cent), healthcare (17.74 per cent), technology (8.81 per cent) and oil & gas (8.57 per cent). It has an OCF of 0.94 per cent.