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Pick and mix

It is not difficult to be bearish on the economy. There seem to be more problems than I can remember at any time during my career in financial services. Fundamentally the problem is the financial crisis of 2008 is not really over. Although companies have generally sorted themselves out, the same cannot be said of governments or consumers, which remain indebted. It seems politicians are only interested in kicking the can further down the road to suit the electoral cycle but the can is getting heavier each time.

Debt becomes a problem when combined with anaemic growth and this is exactly what we have in the UK. The bear case is that this continues, perhaps with short periods of economic contraction; a poor backdrop for businesses. Yet, despite these issues, companies have had to get on with it, and although the West is hardly firing on all cylinders, the picture could not be more different in emerging markets. Here, a huge trend of urbanisation is taking place and many UK firms continue to reap the rewards.

Despite recent negative headlines, the dynamics have not changed. Many companies exposed to emerging markets, technology and other long-term growth stories have the ability to ride through this rough economic time. One fund manager taking advantage is Nigel Thomas who runs Axa Framlington’s UK opportunities fund and is one of the longest-serving fund managers in the UK. He has an enviable track record and when I met him recently he had lost none of his enthusiasm for investing.

When constructing his portfolio, Nigel Thomas always looks to the future. The fund contains a large number of companies outside the FTSE 100, as he believes the most exciting long-term opportunities will come from the next tier down. Interest-ingly, he is light on mining firms, partly because he feels there is a lack of corporate governance with many firms. The strength of mining stocks has not prevented the fund performing well, though, as he has benefited from other areas such as technology, energy and consumer stocks.

He particularly likes media and publishing firm Pearson, which is set to capitalise on the digitisation of books and consumption via devices such as Amazon’s Kindle. Other big holdings in the fund include Premier Oil, which is benefiting from rising demand for liquefied natural gas (LNG). This is partly a result of extra demand from Japan where imports of LNG are growing very rapidly as a result of the damage inflicted by the tsunami in March.

Thomas is constantly looking at what he calls “reasonable growth prospects” and what price he has to pay for them and despite the economic problems, he thinks there is still plenty of good value around.

Imagination Technologies, whose component designs are found in smart phones and other mobile devices, is a company he first saw in 1999 and one whose growth has seen it become a major holding in the fund. Thomas believes there is more to come, and expects it to be re-rated further. His rationale is we will see a similar situation to the 1950s – a low-growth, low-inflation environment where companies displaying growth characteristics will be highly prized and should trade on high multiples.

He does not necessarily always look to internationally-facing firms. Another of his favourites is Next, which is on an undemanding price/earnings ratio of nine. Growth is coming from online orders and the Next Directory rather than from the high street. He also believes M&S, a firm on a similar valuation, can do much to improve its offering and provide growth for shareholders.

In conclusion, a good, old-fashioned stockpicker like Nigel Thomas has exactly what it takes to outperform in difficult conditions. There are still plenty of problems in the UK economy and globally but his experience, enthusiasm and understanding of the macro-economic trends and issues affecting individual stocks should help investors profit. Although he is an old hand, it would appear he is not ready to retire any time soon.

Mark Dampier is head of research at Hargreaves Lansdown


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