Revera managers switch focus to macroeconomics
Top-performing, bottom-up fund managers Glen Nimmo and Stephen Grant have been zeroing in on macroeconomic issues amid the ongoing economic turmoil.
The Revera Asset Management duo runs the group’s UK Dynamic fund, which is currently a member of the Investment Adviser 100 Club of consistently strong-performing portfolios.
The duo’s standard approach is to focus on the bottom-up or fundamental factor of company cashflows – targeting shares whose price suggests the value of future long-term flows has not yet been fully recognised by the wider market.
But lately they are having to call on their additional focus on how macroeconomic risks can affect cashflows, as the question of a potential rate rise in the US and monetary changes in the eurozone dictate the agenda for the UK stockmarket.
“With Europe heading down the route of quantitative easing, the Federal Reserve indicated that the strengthening US economy might give it cause to increase interest rates in the second half of the year,” the pair wrote in a recent update to clients.
“This raises the prospect of an overly strong dollar, which may constrain US corporate earnings and destabilise markets if investors attempt to repatriate funds from Europe or emerging markets.”
In terms of Europe, the managers said the main issue was not whether Greece could pay back its debt, because “it can’t”, but rather the “possible contagion” to other countries.
“The most likely candidate is Spain and investors are likely to consider the ramifications of a Podemos success in the Spanish elections in December,” the duo said.
They also said while GDP growth in the US and UK was being helped by the falling price of oil boosting disposable incomes, the “next component of rising real wages needs to fall into place”.
In terms of recent movement in the portfolio, the managers added Keller, the world’s largest independent ground engineering company. The business is now a 3.9 per cent weighting in the fund, making it their fourteenth largest holding.
The managers said the company had strong market positions in North America, Europe, Asia, Africa and the Middle East and operated in niche areas that few could replicate.
The duo also used the weakness in the Aga share price to “rebuild the size of our investment”.
“Aga’s year-end trading update confirmed that trading in its core UK brands was strong, with the early success of the City 60 offset by a still sluggish market in Ireland and, more importantly, poor trading at furniture business Grange,” the managers said.
“Management indicated both an intent to take more decisive action to tackle Grange’s performance and their desire to crystallise value in the Fired Earth retail tile outlets.”
Elsewhere, the group’s investment in transport company First Group was “mixed”. The positive impact of cost-cutting in the UK is being countered by the negative impact by its US business Greyhound, which saw “the decline in the oil price lead to greater use of cars to cover distances”.
Top-10 holding Diageo also performed well with investors “helped by a 9 per cent dividend increase”, which the managers said made the company’s rating look “fairly full”.
“In our view, this reflects Diageo’s medium-term potential based on its strong business model, potential for further dividend growth and the benefits from the cost-saving programme,” they said.
While the fund produced top-quartile returns in 2012 and 2013, it lost investors nearly 0.4 per cent in 2014, which put it in the third quartile of its peer group. Its 3.2 per cent position in BP may not have helped the managers, given the oil giant’s share price is down nearly 2.5 per cent in the past year, according to data from FE Analytics.
