Trustnet Magazine Issue 32 September 2017 | Page 30

STOCKPICKER WHAT I BOUGHT LAST CF MITON EUROPEAN OPPORTUNITIES 7IM’s Tony Lawrence says this fund’s tactic of investing away from stocks most vulnerable to the whims of passive flows offers a smoother ride and higher returns THROUGH THE BACKDOOR James Illsley of the JPM UK Equity Core fund says you don’t need to leave the comfort of the FTSE to give your portfolio a global reach U K EQUITIES STILL OFFER GOOD LONG-TERM VALUE. On a cyclically adjusted Shiller price/earnings ratio (which uses trailing 10-year average inflation-adjusted earnings), the market is trading at more than 15 per cent below its long- term average. As the global economy expands, UK COCA-COLA HELLENIC MAY NOT BE THE FIRST NAME that springs to mind for UK investors in search of a consumer staples stock, but it has delivered a 53 per cent return this year. The bottler for Coca-Cola operates in 28 countries from Armenia to Switzerland, underlining the global nature of the UK stockmarket. With a tailwind of economic growth across target markets, coupled with an unswerving focus on margin improvements, analysts have increased their 2018 earnings forecasts from €1.18 to €1.29. 28 equities, which derive more than 70 per cent of revenues from overseas, should continue to see earnings growth. In terms of valuations, we can’t see this changing soon: we expect the FTSE 100 to make further gains and the 4 per cent average yield on the FTSE All Share looks attractive considering cash and bonds currently pay out next to nothing. DESPITE ITS FOOTPRINT, CAR DEALER INCHCAPE has yet to become a household name. It operates in 29 countries and is trusted by luxury retailers to promote their products in a high- quality manner, especially in some of the smaller markets where it is the exclusive distributor. Revenues increased from £7.8bn to £8.5bn in the 12 months to June 2017 and Inchcape’s international coverage affords it a degree of insulation from the post-Brexit uncertainty, separating it from most other retailers in the UK. WEIR, A MANUFACTURER OF PUMPS FOR MINERS AND OIL & GAS COMPANIES, has recently seen a rebound in revenue growth, primarily driven by the recovery in North American shale drilling. The collapse in the rig count through 2015 meant Weir’s oil & gas business, which has historically been highly profitable, just about broke even last year. However, with activity having resumed, revenue expectations for 2017 have increased by around 30 per cent in the last 12 months and margins are quickly recovering. trustnetdirect.com W E’VE MADE NO SECRET OF OUR CURRENT RISK-OFF POSITIONING, so it may seem curious that we remain overweight European equities compared with our standard asset allocation. This is perhaps even more surprising given our most recent purchase in this space was a fund with a mid-cap bias, which may be perceived as higher up the risk scale than traditional large-cap European equities. However, this fund has actually held up well during the post-Macron weak period. While this is perhaps too short a timeframe to prove the diversifying benefits of investing in smaller companies, it is a good start. It seems Europe is always punished excessively when markets begin to falter; take the recent “fire & fury” episode, where Europe’s largest stocks sold off as much as the South Korean market. In contrast, US equities dropped just over half as much and even “riskier” assets such as frontier markets, an area we also like, stayed broadly flat. However, if you invest further down the capitalisation spectrum, away from the stocks most vulnerable to the whims of passive flows, you are typically rewarded with a smoother ride and a better return. While the European rally peaked around the time of Emmanuel Macron’s victory in the French elections and we accept it can be vulnerable to market jitters, we still fundamentally like the continent. As a result, we have held off from taking profits, although we appreciate we need to be careful with how we play this position. Europe still feels like a good place to be, even if the market may not currently agree: political risks have subsided, earnings have trustnetdirect.com picked up and the fundamental backdrop is much improved. So we think Europe remains attractive, and in the context of the recent softer performance, possibly even more so. Miton European Opportunities, for us, is a fund that complements our overall European exposure, investing in niche companies that are more immune to economic ups and downs and under-researched by analysts – this creates opportunities. It is also why it fits in with our current risk-off positioning. The fund eschews more expensive, larger cap defensive growth stocks that may be vulnerable to rising rates. It favours mid-size companies with strong balance sheets and a competitive edge that offers superior growth potential in a low-growth world. Miton European Opportunities is one for the bottom drawer, hunting for under- researched companies whose performance is uncorrelated with the wider economy. The funds universe is crowded with European “me too” products, but growth-oriented managers hunting in the mid-cap space are far thinner on the ground.  Tony Lawrence is an investment manager on 7IM’s multi-manager team 29