View more on these topics

Hugh Sergeant: Value investing holds greatest potential for years

Investors have spent much of the last two years seeking apparent certainty by buying growth stocks that have already delivered, and ignoring prices for those that are deemed less certain.

Nowhere has this been – at least until very recently – more apparent than in the share prices of growth stocks such as the FAANGs –Facebook, Amazon, Apple, Netflix and Alphabet (Google). These stocks have rocketed over the past two years as investors have chased growth at any price.

The volatility of recent weeks notwithstanding, the FAANGs remain the standout performers in the US, but with such a narrow focus for investors, cheaper companies with good long-term growth prospects are being overlooked.

As such, this feels like the most productive hunting ground to find cheap firms since the European sovereign debt crisis, as while Mr Market is focused on paying higher and higher prices for the already fully delivering expensive growth stocks, there are opportunities in abundance to pay lower prices for everything else that has been left behind.

What does Italy’s election mean for the rest of the eurozone?

Signs that things are changing are becoming more apparent, albeit slowly. Safety first stocks such as utilities companies are starting to come under pressure as interest rates – and bond yields – continue to climb.

Economies around the world are growing at a high rate, and many of our value stocks are either growing robustly or have significant latent growth potential, but for some reason, they just get cheaper.

Using our philosophy known as PVT – potential, valuation and timing – we are attempting to exploit this by buying firms with the potential to grow their profits at both the right time in the cycle and at a good price.

A recent example of this is the increase of our Global Recovery fund’s stake in UK firm Chemring, which I would describe as a “classic recovery firm” with the potential for higher return on capital in the medium term.

We also bought into insurer Prudential, Brazilian transport firm EcoRodovias and the largest global geoscience company, CGG. Outsourcers such as Capita also represent a good opportunity for growth, despite investors shying away from them in the wake of Carillion’s collapse.

Advice firms step up post-Brexit Europe plans

Outsourcing companies are indeed what we would term classic recovery stocks in the current environment. Capita, for example, has many of the hallmarks that we look for in a recovery thesis: forecast operating margins of 8 to 9 per cent are well below the long-term average of 13 per cent and the catalyst of a new management team, with a fresh set of eyes, are addressing this with an initial cost reduction target of £175m by 2020 that would bring it more in line with industry cost ratios.

Focusing on such companies is an approach that will struggle when hot money flows into popular investments with little or no consideration for the price paid.

Indeed, amid a move to focus on “disruptors” across most industries globally, there have been an increasing amount of “value traps” to catch out unwary investors.

But that said, there is still no excuse for paying ever higher valuations for technology growth stocks, nor a reason why a mining company like Anglo American trades on such a low cash flow multiple. It means there really are an abundance of options out there for recovery investors.

Hugh Sergeant is chief investment officer of equities at River and Mercantile Asset Management

Recommended

4

Budget 2018: Hammond ups Brexit budget by £500m

Chancellor Philip Hammond has increased Brexit preparation funding by another £500m in the 2018 Budget today. After allocating an initial £2.2bn to a new Brexit preparations department, Hammond noted said in last year’s Budget that a further £1.5bn for the purposes in last year’s budget. Today he announced that figure will rise to £2.0bn. Hanmond says […]

2

Pensions tax relief fight could pit government against unions

A reduction in pension tax relief could bring thousands more public sector workers into the taxman’s net, potentially setting up a showdown with unions, AJ Bell has warned. With spending pledges for the NHS in mind, commentators have said in recent weeks that one of the most likely courses of action will be for the […]

5

Advice firms step up post-Brexit Europe plans

British politicians may be struggling to finalise a deal for leaving the EU, but the country’s financial advice industry is getting on with making its plans regardless. While arguments and protests are still raging over Brexit, UK-based wealth managers, financial advisers, insurance brokers and others in the financial advice industry appear to have accepted the […]

Highlight the tangible benefits of protection through value-added support services

Many clients aren’t aware that their protection policy can give them access to practical and emotional support for coping with bereavement or serious illness. Such additional services can really add value, and help your clients see the tangible benefits of protection. Scottish Widows Care comes with every protection policy at no extra cost and is […]

Newsletter

News and expert analysis straight to your inbox

Sign up

Comments

    Leave a comment

    Close

    Why register with Money Marketing ?

    Providing trusted insight for professional advisers.  Since 1985 Money Marketing has helped promote and analyse the financial adviser community in the UK and continues to be the trusted industry brand for independent insight and advice.

    News & analysis delivered directly to your inbox
    Register today to receive our range of news alerts including daily and weekly briefings

    Money Marketing Events
    Be the first to hear about our industry leading conferences, awards, roundtables and more.

    Research and insight
    Take part in and see the results of Money Marketing's flagship investigations into industry trends.

    Have your say
    Only registered users can post comments. As the voice of the adviser community, our content generates robust debate. Sign up today and make your voice heard.

    Register now

    Having problems?

    Contact us on +44 (0)20 7292 3712

    Lines are open Monday to Friday 9:00am -5.00pm

    Email: customerservices@moneymarketing.com