Polar Capital’s star fund manager signings George Godber and Georgina Hamilton are seizing on ‘cheap’ UK stocks focused on the domestic economy, as they put money to work following the launch of their Polar Capital UK Value Opportunities fund.
Godber and Hamilton joined from Miton, where they had run the top-performing Miton UK Value Opportunities fund, launching their new fund in January.
They are hunting for cheap stocks with ‘sustainability of earnings’ and think UK domestic companies fill the criteria, after they were hit hard by last year’s Brexit vote.
Hamilton (pictured above) said they liked ‘bargain assets where a business is trading below asset base and we can find £1 for sale for 50p’.
‘We like a cheap value creator where the market is underestimating the return the business is capable of,’ she said. ‘But cheap is not enough, we also need sustainability of earnings.’
Godber used retail giant Next (NXT) as an example of a cheap business they do not own.
‘Next is a good business but sales are down 8% and we are trying to find the inflection point…it’s cheap but it’s not in the fund there is no sustainable returns outlook,’ he said.
The fund has returned 10.1% since launch, ahead of the FTSE All-Share’s 3.5%, but Godber said it was early days and admitted ‘the UK is a tough place’, as shown by investor attitudes. Investors piled back into UK funds in March, with net inflows hitting £924 million, but only after a huge £4.9 billion was pulled from those funds last year.
‘UK domestics is a good hunting ground,’ said Hamilton. ‘UK domestics are cheap but they are also the ones with a more uncertain outlook. What we have been trying to find are those with the most visible outlook in terms of returns.’
Hamilton pointed to infrastructure, which ‘has got more certain post EU referendum’. Although chancellor Philip Hammond has not promised to spend any more money, there was still plenty of government spending earmarked for the sector.
To take advantage of this spending the fund is invested in stocks such as Hill & Smith (HILS), which manufactures crash barriers, and Renew Holdings (RNWH) which maintains train lines and operates in ‘critical infrastructure’.
The managers are also keen on house builders, with Bellway (BWY) the largest holding at 2.1%.
‘Bellway is a brilliantly run company that finds itself on eight times earnings,’ said Godber (pictured above). ‘It is not an expensive share when we have the visibility of the government’s Help to Buy scheme.’
Companies with ‘pricing power’ in the face of rising inflation have also made it into the fund, with Hamilton flagging sportswear retailer JD Sports (JD).
‘If we do have inflation in the UK, the companies we think will have decent sustainable returns have pricing power, like JD Sports,’ she said. ‘It traded incredibly well through the last recession and last pay squeeze.
‘There are lots of opportunities out there at the moment. There are so many domestic shares that are cheap.’
She argued that while the Brexit vote had dealt a blow to some stocks, its impact in shaking up the stock market had thrown up good opportunities for stock pickers.
‘Before the EU referendum all banks were moving together and all leisure stocks moved together. It is a very different environment since the referendum and we have seen a breakdown in correlation, which is now at a 10-year low, so it’s a good time to be a stock-picker,’ she said.
The breakdown in correlation and a shift in the market has brought financials onto Godber and Hamilton’s radar. While their previous fund had almost zero financial stocks, the Polar Capital fund has stakes in insurers Royal Sun Alliance (RSA) and Prudential (PRU). Financials make up 18% of the fund.
Hamilton said the turnaround at RSA, masterminded by former Royal Bank of Scotland chief Stephen Hester, was a ‘really good restructuring story’.
Godber said the challenger banks were ‘curious’ as they had ‘clean balance sheets…are well capitalised and trade extremely well’.
‘The market perception is that they will not trade above nine times earnings,’ he said. ‘That is not what we are seeing.’
The managers are not predicting any changes to the portfolio in the wake of the snap election on 8 June as they predict little will change.
‘It should not affect the sustainability of returns because we are set up for the currently environment and we anticipate that will continue,’ said Hamilton.
‘We like volatility and uncertainty, it should be a good market for us.’