Every week, a professional investor tells MoneyWeek where he’d put his money now. This week: Tony Nutt, manager of the Jupiter Income Trust and Jupiter High Income Fund
The current turmoil in credit markets is part of a wider process of repricing credit risk to levels where investors are once again paid properly for taking on risk. This process still has some way to go. Fears that many collateralised debt obligations may become near-worthless have led the market to mark down all financial stocks because no one can be sure how much banks may be forced to write off. Major banks have even become wary of routine lending to one another. The three-month London interbank rate (the risk-free rate for transactions around the world) has risen to more than 6.8%, well above the Bank of England’s (BoE) 5.75% interest rate. The fact that banks are not rushing to borrow from the BoE to lend on at a higher rate suggests some might be as worried about their own balance sheets as those of their rivals.
But it’s an ill wind that blows no good. Several businesses can benefit from these events. Intermediate Capital (ICP) is a provider of loans to medium-sized firms that wish to borrow money to buy out their business. Recently, the wave of cheap cash thrown into debt markets created a lot of competition from care-free lenders. But the permanent capital on Intermediate’s strong balance sheet, which is very unusual, will give it a considerable advantage as the credit cycle turns. It enables the company to make very long-term loans on its own terms as the current largesse of debt markets disappears. The group aims to double its business every five years using highly-skilled staff across the world. It recently hiked its dividend by more than 20%, an indication of its long-term confidence, although the current trading year is likely to be subdued.
ICAP (IAP) is the world’s largest inter-dealer broker. These companies help investors to place large deals cheaply, quickly and anonymously across a wide range of markets. As markets become ever more sophisticated, ICAP is set to benefit from a growing volume of trade, while new products, the shift towards electronic trading and a rising market share should all boost its operating margins. ICAP should also benefit from higher volatility, which means a greater number of trades. Providing market players with access to capital when they need it has been an underrated virtue in recent years. ICAP’s balance-sheet strength (it has more capital than it needs) should stand it in good stead here. Although its business is inevitably one that ebbs and flows, ICAP offers reasonable growth and remains highly cash generative.
Anglo-Irish Bank (ANGL) is a well-run company offering potentially attractive returns for investors. It lends in the UK, Ireland and the US to small but growing professional businesses, such as solicitors and accountants, which wish to expand. Loans are secured against clients’ existing commercial properties. Crucially, these are underpinned by the cash flows of the businesses, so Anglo should not be regarded as a direct property lender. Its competitors are the major high-street banks. As big lenders become less willing to make loans, Anglo should win more business from them. Although the shares have been marked down over the summer, the bank recently announced that it will beat analysts’ expectations for the year. Deposits are up 40%, growing faster than its loan book. As the bank has always raised capital before lending, this source of funds means it should not be troubled by dependence on uncertain capital markets, allowing growth to continue.
The stocks Tony Nutt likes
Stock, 12mth high, 12mth low, Now
Intermediate Capital, 2,030p, 1,280p, 1,595p
ICAP, £550, £416, £481.50
Anglo-Irish Bank, e17.90, e12.13, e13.83