The Daily Telegraph - Saturday - Money
‘I’m backing banks as rates start to rise’
As the era of ever decreasing interest rates looks set to end, quality “bond proxy” stocks are falling out of favour. When bond yields and inflation were falling, the stable cash flow and lack of economic sensitivity offered by stocks such as Unilever and Diageo was highly desirable.
Now, “value” investing is expected to see a comeback, as cheap, unloved, and economically sensitive stocks receive a boost.
One fund that follows a value approach is JO Hambro UK Dynamic, which was singled out by FE, the data company, as positioned to benefit from the return of the trend.
Telegraph Money spoke to manager Alex Savvides about why price isn’t everything, buying bank shares and his worst investment mistake. which hasn’t had the desired effects.
It’s not just enough to look at cheap stocks, there has to be some sort of catalyst for change.
We look for the point where a company recognises the need to do something differently and pursue a shareholder-friendly strategy.
Banks and oil majors form a significant part of the fund. Where do you see potential?
Ideas usually cluster, as certain sectors underperform due to unfavourable conditions and management actions.
With oil and gas, it’s macroeconomic conditions pushing down the oil price, meaning companies have to take a different strategy.
BP is focusing on the highest margin barrels of oil and Shell is seeking to reduce average production costs. Both look cheap versus history and the market and dividend yields are attractive too.
In the case of banks, valuations are low, poor macroeconomic conditions originated in the financial crisis and poor regulatory conditions followed. With low interest rates too, banks have been uninvestable for many.
Now there has been a shift to generate cash, with cost cutting, and the regulatory shift is nearing its end.
Barclays is our largest “overweight” bank position. It is making real progress, including a major improvement in its investment bank’s performance, but the shares remain lowly valued.
Are we at the tipping point for value stocks?
In the declining rate environment, lots of regular cashproducing stocks, such as utilities, tobacco, the drinks industry and food producers, see their share prices rise relative to profits. The higher bond prices go, the lower the yield, and these stocks are dragged up too.
But there is an argument that we are in a new period for rates.
If rates move up, bond prices will fall and yields will rise, and there will be continued underperformance from quality cash-producing stocks. Value stocks are the alternative.
Alex Savvides of the JO Hambro UK Dynamic fund tells James Connington why ‘value’ stocks are back
Have you reacted to Trump and the EU referendum?
We don’t aim to generate returns from external political and macroeconomic conditions, just to ensure they don’t negatively affect returns.
We expect volatility and deal with it; focusing on valuation and strategic change allows patience.
Our main discussions have been about companies generating all of their profits in the UK. Pre-Brexit only 20pc was exposed to these companies, and I haven’t changed that.
We added to UK stocks we viewed as unfairly affected too, such as Lloyds.
What was your biggest investing mistake and your biggest success?
The worst investment we ever made was in Johnston Press, the regional publisher. It had a high market share but regional publishing lives and dies by advertising, and over the past 10 to 15 years there has been a negative structural shift. We sold at 50p, luckily; the shares are now at 13p.
The biggest success was backing 3i, the private equity company, in 2009 and 2010 at around a 30pc discount. The shares have moved from £1.70 to
£6.60 since we have owned them.
Do you have your own money in the fund?
Yes, a significant portion.
What would you have done if you hadn’t become a fund manager?
I might have been an architect.
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