11th July 2013
The Mindful Money fund manager interview
David Stormont, is co-manager of the £236.2m Hermes UK Small & Mid Cap Companies fund. The portfolio is reasonably concentrated, with currently some 61 holdings and given its focused strategy, Stormont says it is imperative “to make every position count”. Stormont outlines his current view of the UK and explains the motivation behind some of his key stock picks to Philip Scott.
What do you think of the UK economic backdrop right now?
From our perspective we do not tend to make big calls on the general economic state of the UK. In the running of this fund we are very much bottom-up stock pickers. But having said that the economy is improving, recent data has shown more encouraging figures for UK manufacturing, construction and service sectors, where they all have picked up. In addition, the British Retail Consortium has posted positive data, with sales for June up 1.4 per cent on a like-for-like basis, following a rise of 1.8 per cent rise in May. The housing market is also showing good progress which has been aided by the government’s Help-to-Buy and Funding for Lending schemes, which are having a very real impact. The Royal Institution of Chartered Surveyors’ house price balance rose to +21 in June, up from +5 in May, (the best reading since January 2010 and the largest improvement in a single month since 2009). There has been a moderation in inflation too, since this time last year at least, and this has had an impact on people’s real take-home pay.
What about the stock market?
The stock market will, I feel, continue to endure volatility as investors attempt to second guess what central banks do. But on that point, I believe central banks will continue to provide liquidity for the time being and interest rates are expected to remain low for some time yet.
Ashtead is one of your top holdings in the fund, what is the attraction?
Ashtead Group (12 month share price: +157 per cent) is one of the largest equipment rental groups in the world. While it is UK listed some 90 per cent of its business and profit comes from the US. The group has had a surge in profitability on the back of a few factors. There has for one, been a switch from people owning to hiring equipment as a result of the credit crisis, as customers did not have access to credit, so renting became more financially viable. It has also been winning market share from its competitors and the overall recovery in the US is driving momentum, a trend which has more to play out. It has been a good holding for us, with our investment having quadrupled in the past 18 months to two-years. And the group still has a strong outlook.
Are there any new additions to the fund you would highlight?
Breedon Aggregates (12 month share price: +20 per cent)is a recent addition to the portfolio, as we only invested about three months ago.Breedon is the largest independent aggregates business in the UK. It employs around 1,000 people in England and Scotland and supplies an extensive range of products and services to the construction and building sectors. We like the aggregates business, and Breedon is a low-value, high bulk product, which also has considerable pricing power and a very experienced management team. These factors give it a robust competitive advantage. They have and are consolidating a lot of the smaller quarry operators in the UK.
The stock price of Debenhams (12 month share price: +13 per cent) fell in March after winter snowfall suppressed analysts’ forecasts of profits from the department store group. We perceived this as a good buying opportunity: new store openings,refurbishments of existing properties and better product ranges should improve the earnings at the business
Can you tell me about your investment in Latchways?
Support services group Latchways, (12 month share price: +16 per cent) is what I would call a classic smaller company in that it is highly focused niche play. The firm provides safety equipment to protect those working at height, such as those working on tall buildings and telecommunications towers. Originally the firm was quite focused on the construction industry but the management has broadened the business out, for example it now also supplies the military and international clients, it is very much now a global business.
What sectors have you tended to avoid?
Overall we are not a big fan of the pub sector. The industry suffers from over capacity and while a lot of pubs have closed there are still probably too many out there. However we have found an opportunity in Spirit Pub Company (12 month share price: +40 per cent). It is a spin-off from Punch Taverns, which it demerged from some two years ago. It has a number of brands under its name including Taylor Walker and Good Night Inns.