Each week, a professional investor tells MoneyWeek where he’d put his money now. This week: James Ross, UK equity fund manager, Henderson Global Investors.
Like most markets and asset classes around the world, UK stockmarkets have been increasingly caught up in ‘big picture’ macro-economic concerns in recent months. Investors have become fixated on the ongoing slowdown in China’s economy, the knock-on impact on other emerging markets and the interlinked concern of impending monetary tightening in America.
At the Henderson UK Alpha Fund, we tend to take a step back from short-term macro-economic concerns and focus on the opportunities this creates in the resulting volatile equity markets. The last few weeks have been no exception. We have found a number of opportunities to add to positions in high-quality, structural (long-term) growth companies, especially in the mid-cap area of the UK market, which tends to be our core hunting ground. Below are three examples of companies that we believe represent compelling investment opportunities in the current environment.
Online gaming has been a very successful area of investment for us. This subsector has seen strong growth, high profit margins and very solid cash generation – very attractive characteristics. Playtech (LSE: PTEC) provides software and analytics to the vast majority of the online gaming industry. Its leadership in technology, customer relationship management (CRM) and analytics has enabled it to build a powerful position, with significant pricing power, in a growing industry.
Management has recently made a number of acquisitions of contracts-for-difference (CFD) trading companies. This is another fast-growing, high-margin area that management should be able to apply its core technology and CRM expertise to. The valuation looks compelling. The company has a strong balance sheet and multiple earnings drivers, so we remain confident on the outlook for the shares.
Another area that has provided money-making investments for the fund is the “challenger bank” sector. In the UK, the high street has been dominated by a handful of large retail banks for several years. This is slowly changing, partly encouraged by regulators and the government. This has created a number of exciting investment opportunities. We first invested in Aldermore Group (LSE: ALD) at its March 2015 initial public offering. This has already proved a very good investment – and Aldermore’s prospects remain attractive.
Loan book growth should remain strong, driven by growth in asset finance provision and buy-to-let mortgages; areas that are under-served by the big banks. Profit margins should also remain resilient, helped by an efficient online deposit-taking model. Finally, the level of bad debt remains benign. We see plenty of upside for the shares on a medium-term view.
There is a handful of companies listed on the FTSE 250 whose only connection to the UK is the geography of their listing and the UK’s corporate governance regime. NMC Health (LSE: NMC) is a good example of this. NMC owns a number of hospitals and clinics across the United Arab Emirates.
It is seeing very strong growth in demand, driven by ageing populations and the increasing prevalence of mandatory employer-provided health insurance in the regions in which the company operates. The company’s valuation does not yet reflect the structural organic growth opportunity here, nor the potential for further consolidation in attractive end markets.