The mining and financial sectors are poised to lead market gains in the year ahead as investors gear up for an increase in interest rates, according to GLG’s Henry Dixon.
Mr Dixon is strongly backing the sectors in his £47.1m GLG Undervalued Assets fund, launched last month, as well as the five-year-old FP Matterley Undervalued Assets fund.
The manager’s process – which involves identifying companies that are trading at a price lower than the cost of replacing the business from scratch – has led Mr Dixon to invest almost a quarter of the portfolios in financials, plus 24 per cent in industrials and materials stocks.
Although he estimated that interest rates are unlikely to rise before 2015, he said investors should “not worry about when” this happens but back stocks that will benefit when it does.
Mr Dixon added that he is backing the mining sector since it is “extremely out of favour”.
“The opportunity set is not as big as we would like; some management teams are still too ambitious,” he said. “But some are [now] more focused on costs and returning cash to shareholders. We are seeing the first signs of real capital discipline.”
He cited FTSE 100 mining giant Rio Tinto – the Matterley fund’s fourth-biggest holding at the end of October – as an example of a particularly undervalued company. He said the company would still be able to break even if the price of iron ore, its main commodity, was trading at $40 a ton, compared to its current price of $130 a ton. Rio Tinto’s shares are 13 per cent lower than at the start of the year, but have risen more than 18 per cent since the start of July.
Turning to his financials exposure, Mr Dixon said: “Currently, bank shares are trading below book value; now they are being prudent with cash and their potential returns on replacement cost are being undervalued by the market. People don’t believe their earnings.”
Mr Dixon joined GLG in September from Matterley, the fund management arm of broker Charles Stanley that he co-founded in 2008. The GLG Undervalued Assets fund was launched last month as a mirror of the Matterley product, which has almost doubled the return of the FTSE All-Share index since its launch in August 2008, gaining 101.2 per cent.
The manager said Charles Stanley had elected to keep the FP Matterley Undervalued Assets fund – with Mr Dixon as manager on a “sub-advisory” basis – because the Matterley fund range is still important to Charles Stanley’s business.
This is in spite of the departures this year of Mr Dixon, Jack Barrett and Alice Sharp to GLG, and George Godber and Georgina Hamilton’s decision to leave to launch a UK equity product for Miton Asset Management.