Every week, a professional investor tells MoneyWeek where he’d put his money now. This week: George Latham, manager, Henderson Global Care UK Income Fund
I tend to keep turnover on my fund quite low and invest with a long-term view. This seems increasingly unusual in a market where the average holding period has fallen to less than a year. I manage sustainable and responsible investment funds, so I’m looking for firms that are benefiting from the shift to sustainable development and/or companies that we have assessed as being responsibly managed.
My recent activity has fallen into two categories. I’m still finding opportunities in small firms and new offerings related to sustainability themes. One strong theme for us is resource efficiency. Cutting energy usage is an even bigger part of the battle against climate change than building renewable energy sources. Improving insulation is one of the most cost-effective ways to boost heating efficiency and governments across Europe are encouraging greater use of insulation through new regulations. I’ve held Sheffield Insulation Group (SHI), the UK’s largest wholesaler of insulation materials, for a number of years and it has been very profitable. I recently took positions in glasswool manufacturer Superglass (SPGH), and EAGA Group (EAGA), an installer of insulation products, both of which listed in London in the last couple of months.
Within our theme of social property, we have invested in Aim-listed Dawnay Day Sirius (DDS), which is developing office space for small businesses in Germany. This has been a successful model in the UK but is underdeveloped in Germany, where the economic background is strong and property valuations still attractive.
At the other end of the spectrum, I feel the last five years of outperformance by mid-cap stocks has left certain anomalies in the market. The strong performance of mid-sized stocks has been partly driven by a wave of bid activity; this has largely been due to the availability of cheap money to private-equity firms with significant amounts of liquidity to invest. This wave of bid speculation saw many larger stocks left behind because they were considered less likely to become targets. The disparity in valuation has become obvious. The largest 20 stocks in the UK now yield 3.9%, compared with 3.2% for the FTSE 250, a premium of over 20%. Bank stocks, such as Lloyds TSB or HSBC, are now yielding over 5% with well-covered dividends, while in the mid-cap market such high yields are only seen where a dividend cut is quite likely. I’ve been adding to some of these underperforming larger firms, including Vodafone (VOD) and Aviva (AV). GlaxoSmithKline (GSK), meanwhile, has been victim of poor news flow about Avandia, its leading diabetes drug, but is now valued on a p/e ratio of 12.5 with a dividend yield of 4%, which is twice covered, and an undergeared balance sheet.
This year bond yields have been creeping higher and over the last couple of months risk-aversion has risen sharply. This could cut off some of the liquidity that has driven bid activity in the mid-sized names and result in a flight to quality in some of the larger stocks. For me, this is particularly true of banks, telecoms and pharmaceuticals, and given these are large sectors within the index, this should be supportive of the market as a whole.
The stocks George Latham likes
Stock, 12mth high, 12mth low, Now
Sheffield Insulation, 1,488p, 895p, 1,258p
Superglass, 220p, 200p, 216p
EAGA, 236p, 203p, 213p
Dawnay Day Sirius, e1.13, e0.85, e0.89
Vodafone, 175p, 100p, 155.5p
Aviva, 951p, 655p, 668p
GlaxoSmithKline, 1,993p, 1,205p, 1,276p