River and Mercantile’s smaller companies star Dan Hanbury has revealed that he is likely to up his exposure to established “quality” stocks in the coming months due to changes in the market cycle.
The manager of three UK equity funds said recent work on the business cycle of the UK market had confirmed his view the market has moved from “mid cycle” to “late cycle”. This has led to an emphasis on stable businesses with strong balance sheets and good cashflow, which he classifies as “quality”.
Mr Hanbury said: “Growth stocks have been hit in the past few weeks as the market has become concerned with overpaying for growth.
“It seems to have hit early-cycle stocks as well as people worrying about interest rate rises.”
He claimed the sell-off was a “run of the mill correction” in stocks that had seen “a good run” and had become “overbought”.
Mr Hanbury said the indiscriminate market fall had meant he was “seeing good companies being sold off”, so he has been using the opportunity to buy into his favourite stocks where he sees liquidity present itself.
The manager clusters the stocks in his funds into four categories: quality, growth, asset-backed and recovery, using an extension of the quant screening process he developed at Investec. Within this stage of the business cycle, he “naturally tend[s] to shift towards growth and quality stocks”.
Mr Hanbury said he is always likely to have a high proportion of quality stocks in his funds because “through the cycle you get better risk-adjusted rewards from these companies”, saying it was an area in which he had a “preference” for investing.
In the late cycle he tends to find opportunities in growth stocks as well as quality. Mr Hanbury has taken some money out of growth stocks this year, which has benefited the fund as the recent sell-off in markets has disproportionately hit mid-cap growth companies.
Mr Hanbury runs the R&M UK Equity Smaller Companies fund, the R&M UK Equity Income fund and the R&M UK Equity Unconstrained fund.
He has managed the UK Equity Unconstrained fund from launch in 2007, but also took on sole management of the UK Equity Income and UK Equity Smaller Companies in July 2013 when Richard Staveley left to join Majedie Asset Management.
However, he is set to hand over the management of the Smaller Companies fund to Philip Rodrigs later this year, and the pair will co-manage the Unconstrained fund.
Mr Rodrigs, Mr Hanbury’s protégé at Investec, joined River and Mercantile in March, but is unable to officially run any money until September.
In the past year, inflows into the R&M UK Equity Income and the R&M UK Equity Smaller Companies funds, both top performers in their IMA sectors, have accelerated significantly.
The UK Smaller Companies fund has grown from £58.4m at the start of November 2013 up to £311.7m last week.
What has R&M star Dan Hanbury been buying?
UK Equity Income
Mr Hanbury has been topping up his holdings in the utilities sector, buying into companies such as Centrica and National Grid.
He said they had been “hammered” for the past six months on the threat of government regulation, but claimed “there is a price for everything and the shares are pricing in these fears”.
He added: “At current prices the risk/reward dynamic looks quite compelling.”
Mr Hanbury has also upped his exposure in this multi-cap fund to both large mining companies, such as Rio Tinto, and oil majors.
UK Equity Smaller Companies
Mr Hanbury has been making a number of changes to the smaller companies fund as the rush of new money into the fund presented him with opportunities.
He participated in some of the initial public offerings (IPOs) at the start of the year, such as Excel Media, a company that drives high-quality consumer traffic to online gaming websites, and Quixant, which sells hardware and software for gaming machines.
He said he had avoided some of the more high profile IPOs, such as Just Eat, because they were hyped up and too expensive.
UK Equity Unconstrained
The Unconstrained fund is a ‘best ideas’ mandate, from which Mr Hanbury looks to take higher conviction positions in stocks that may occupy his other funds.
Mr Hanbury insisted that the fund was not a “closet smaller companies fund”, but was instead a genuine multi-cap mandate.
He recently bought into window manufacturer Safestyle in both the Smaller Companies fund and the Unconstrained fund, but it is a much larger position in the latter.
He is looking for companies that can benefit from the increased confidence in the housing market.
