Each week, a professional investor tells us where he’d put his money. This week: Daniel Hanbury of the River & Mercantile UK Equity Income Fund.
Brexit will no doubt throw up some new investment opportunities, but we will be patient. At River & Mercantile we have an approach that assesses a company’s potential and valuation. We buy a mix of growth, high-quality, recovery and asset-backed companies. After the very strong performance of growth and quality stocks in recent years we added to recovery and asset-backed stocks during the past 12 months, where we have observed more interesting large-cap value opportunities.
Alas, ever-plunging bond yields for a myriad of deflationary reasons continue to drive the rally in global quality and growth stocks. The value investors within us must remain patient. However, there is a more favourable backdrop for global industrials and services companies as things stand. If we can find global growers who are able to deliver organic sales and profit growth that matches or exceeds global nominal GDP growth, while avoiding paying excessive valuations, investors should be rewarded.
In the aftermath of Brexit, we’ve used weakness in share prices to add to our higher-conviction holdings in Smiths Group (LSE: SMIN) and Rentokil (LSE: RTO). Smiths Group is an overseas-based technology firm that delivers solutions in health care, energy, petrochemicals, threat and contraband detection, telecoms and equipment manufacture. It serves a range of global customers and the US-based Smiths Medical businesses are getting a significant boost from the strong dollar. Fears that the firm is asleepy conglomerate have evaporated with the arrival of an invigorated new CEO and expectations of downstream capital expenditure cuts by oil refineries have receded as the oil price recovers. Pest-control global leader Rentokil also has 88% of its earnings coming from overseas. While the stock has performed well, Rentokil will be a good hedge against any further weakness in the pound. We like the combination of margin improvement, sensible capital allocation and global growth opportunity.
Food and drink retailers have been out of favour in recent years. They have taken another leg down following the decision to leave the European Union. Given the proportion of food we import into the UK, there is every chance food-price inflation will start to outstrip other core inflation measures. We think that the non-discretionary nature of buying your family food will see supermarkets do better then retailers importing cars, furniture, clothes or electronic devices, which may now struggle as household spending gets squeezed. We’ve also added to McBride (LSE: MCB), a leading household-goods firm that supplies supermarkets across Europe. Led by a management team focused on driving higher returns on capital, it offers exposure to 20% earnings growth despite the tough retail backdrop, while trading on a price/earnings ratio of ten and a 4% dividend yield.