14th August 2013
The set of investments required to benefit from the UK recovery are very different from the underlying UK stock market argues George Godber, manager of the CF Miton UK Value Opportunities Fund.
The stock picking manager says he is finding value in the UK housing market and pharmaceuticals sectors and in M&A activity.
He has set out his views in the following note.
The fund has a sizeable investment in UK house building shares with just over 6% of assets invested. The sector offers strong asset backed balance sheets and extremely good cash generation. While the shares have performed strongly over the last 12 months, improvements in return on capital have more than offset this so many shares remain attractively valued. The competitive environment remains reasonable with continued funding barriers to smaller, private players while management teams of larger companies remain cognisant of over expansion. The sector is currently making strong margins on reasonably priced land and is showing good potential for continued increases in profit expectations. We believe the sector will continue to receive significant levels of government support given the positive multiplier effect on the UK economy and the projected supply demand imbalances for housing. Most companies have already achieved targets for this year as a whole; this visibility in an uncertain world offers us a great degree of comfort.
At the launch of the fund, we had no exposure to drug companies; this has now changed with two new investments in the area. The sector is extremely cash generative and well capitalised as a whole; however, we have long had concerns regarding the threat of generic competition and that, in many cases, their end customer (governments around the world) are struggling financially. The problems the industry have faced over the last 10 years has led to such a fall in new drugs coming to market that the USA is trying to address this by exploring a significant change in legislation. Drugs targeting difficult therapeutic areas, or areas that are under covered by current drugs, will see a significant reduction in cost and time to come to market. This change in regulation could be a fantastic opportunity for firms exposed to the right areas.
Deals – M&A activity
Although large scale UK M&A has been scarce this year, there have been a number of well priced, moderately sized acquisitions and disposals. Despite being small, the deals often have a transformational impact on the companies involved. Typically analyst coverage is focused on any earnings impact and analysis on the balance sheet or cash flow is either considerably delayed or non-existent. This provides us with some of our most exciting opportunities in the fund.