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More best stock ideas from fund managers
In the second part of our two-part feature we get another fascinating range of responses on what did and didn’t work out for top fund managers during a tumultuous 2020 and which stocks they are most excited about now.
Interestingly computer games firm Codemasters (CDM:AIM) features as both a success story in the eyes of one manager and a disappointment in the eyes of another. Read on to discover more insights from the professionals behind fund portfolios.
Most pleased with in 2020: EKF Diagnostics
‘EKF Diagnostics (EKF:AIM) has been a large position for the fund, having been held since 2017, and the share price approximately doubled in 2020.
‘More significantly I am pleased with the way management are reinvesting in the business for future growth.
‘Cash windfalls from contract manufacturing of components for Covid-19 testing kits are being deployed into new joint ventures with the Mount Sinai healthcare system in the US and into the core analysers and enzymes business, with enough left over for EKF to have paid a maiden dividend in 2020.’
Most disappointed with in 2020: Codemasters (CDM:AIM)
‘My disappointment here may seem surprising, with the share price closing the year almost 100% above the fund’s first purchase price in July 2020. However, Codemasters (CDM:AIM) looks set to be acquired, forcing us out of our holding.
‘There are some extraordinarily favourable dynamics at play in the computer games industry and I feel that management rolled over too readily in return for short-term rewards. That Codemasters had only joined AIM in 2018, less than three years ago, adds to the disappointment.’
Most excited about for 2021: Qinetiq (QQ.)
‘New holdings are rare for Free Spirit and inevitably come with excitement, and Qinetiq (QQ.) has just joined the fund. Qinetiq has intellectual capital nurtured by its c.3,000 scientists and engineers, and a specialist customer base that combine to create formidable economic moats. I see some traits that are similar to Avon Rubber (AVON), which has served the fund so well.’
Most pleased with in 2020: Belvoir (BLV:AIM)
‘2020 was a difficult year for dividends, with many companies choosing to retain cash during the height of the pandemic uncertainty. Property franchise group Belvoir (BLV:AIM) was not our best performing share price in 2020, but the group managed the challenges of the pandemic well.
‘Management provided clear guidance throughout the year and ultimately the strong trading performance showcased the underlying resilience of the group’s franchise model.
‘While the 2019 final dividend was cancelled in March, the group reinstated its progressive dividend policy at the interims, and has paid two ‘catch-up’ dividend payments.’
Which stock were you most disappointed with in 2020: Bloomsbury (BMY)
‘Operationally this is a well-run company and performed well in 2020, however as long-term income-focused investors, we see dilution as a major headwind against achieving good returns over the medium/long term.
‘As such we believe equity should be treated as a scarce resource. Unfortunately 2020 saw a number of management teams raise new equity at very low prices, to give their businesses a short-term buffer against potential downside scenarios.
‘While a number of businesses, particularly in the leisure sector, genuinely required a capital injection to see them through the pandemic, other businesses raised cash where there was simply no need, and the dilution from these raises is permanent. One of the most saddening examples was Bloomsbury Publishing (BMY), which despite having a net cash position of £31 million at February 2020, proceeded to raise a further £8.4 million via an equity placing in April.
‘The group went on to report its best first-half earnings since 2008 and reinstated its dividend, but the dilution will not be unwound. Bloomsbury remains well placed to benefit from the shift to digital products going into 2021 and beyond but tops our list of disappointments in 2020 due to factors which were within the board’s control.’
Most excited about for 2021: Randall & Quilter (RQIH:AIM)
‘Randall & Quilter (RQIH:AIM) is a stock that we know well and have held in the income investment trust for over 10 years, where it has delivered steady growth and regular cash returns to shareholders.
‘The group has simplified its operations in recent years and is now focused on two lines of business: Legacy M&A and Program Management, which began operations in 2017 and is seeing strong growth.
‘The Covid-19 crisis is creating a positive environment within the insurance market for both divisions, and we believe the group has a unique competitive position from which to take advantage. With the investment case much more ‘investor friendly’ than it has been in the past and the Program Management division likely to become more material to the group, we believe 2021 could be the year when more growth orientated investors start to take notice.’
Most pleased with in 2020: Kainos (KNOS)
‘Sometimes the stock that gives the most satisfaction is not simply the best performer: Kainos (KNOS) wins the award for us last year. Founded in 1986 in Belfast, Kainos provides both IT services and software tools to its customers, delivering digital transformation programmes primarily to the UK Government.
‘Examples include DVLA, where you can now view your driving licence records online; updating the MOT system with a new online service; the Register to Vote online system; and first time passport applications. Kainos is seen as a “safe pair of hands”.
‘In the sell-off last Spring, investors worried that demand would fall as Government budgets were postponed and risked being cut.
‘This allowed us to increase our holdings ahead of Kainos subsequently beating expectations leading to analyst upgrades.
‘Over the year, the shares rose by almost two thirds.’
Most disappointed with in 2020: James Fisher (FSJ)
‘Not simply the company that gave the lowest return, the greatest disappointment was an investment held for more than a decade that had a history of delivering 10% earnings growth every year: James Fisher (FSJ).
‘This is a mini conglomerate with a portfolio of niche businesses operating in the global marine, renewables, oil offshore, nuclear, defence and shipping industries.
‘It was hit hard by the fall in the oil price last year with particular weakness in the Marine Support division.
‘The company recently acquired two dive support vessels (Paladin and Swordfish) for diving in West Africa at a cost of over £56 million which saw a collapse in demand causing losses. It is always disappointing when a company loses its reputation for consistency and conservative management.’
Most excited about for 2021: Treatt (TET)
‘2021 is likely to be a challenging and volatile market with a tough economic outlook. So the choice is for a defensive company that has the potential to beat expectations with low risk: Treatt (TET).
‘It makes ingredients for flavour and fragrance houses and beverage manufacturers around the world. Founded in 1886, it specialises in citrus oils including innovations such as Treattarome, a natural sugar-like tasting solution that can be added to beverages and food products for maximum flavour but less sugar, for example in iced tea, which is very popular in the States. It is also working on natural solutions for cold brewed coffee.
‘Other opportunities include seltzers, alcohol spirits, flavoured craft beers and flavoured tonics.
‘Treatt recently completed the expansion of its US facilities, while the new UK facilities are expected to open up in 2021 reflecting confidence in future demand. This investment is transformative.’
Most pleased with in 2020: Halfords (HFD)
‘We are in a very unusual situation. Recessions are typically caused by rising interest rates and liquidity in general drying out, resulting in a squeeze in monetary conditions, but the current situation is very different as interest rates are very low and credit facilities for firms and consumers are plentiful.
‘As a result of lockdown, consumers are spending considerably less on transport/travel, leisure activities and eating out, and more on housing, DIY, electronics and sports equipment/clothing. This has benefited several of my holdings, but I have been particularly pleased with Halfords (HFD) which has seen stronger-than-anticipated trading, especially in bicycles.’
‘The pandemic has had a profound impact on both individual businesses and the overall economy, which shrank by a record 20% in the second quarter of last year. Our holdings were not immune and a few, like aerospace equipment supplier Meggitt (MGGT) and alcoholic drink manufacturer and distributor C&C Group (CCR), two normally-resilient businesses, have been severely impacted by the disruptions as fewer planes fly and pubs and restaurants have to operate under considerable restrictions.’
Most excited about for 2021: Aviva (AV.)
‘Life insurance is a space I am excited about and where I increased exposure further last year, as they were shunned by investors who saw them as UK GDP proxies vulnerable to economic and Brexit risks. Since the virus outbreak, life insurers have proved resilient and my conviction has increased due to improved company disclosure. The sector offers an attractive combination of cheap valuations, strong demand/supply fundamentals and growing earnings.
‘One of the stocks I have added to is Aviva (AV.) whose decision to temporarily pause dividends, despite not being required to do so, spooked the market and caused its shares to lag. Aviva is a great example of the value currently on offer and is one of our largest holdings. It trades on six times 2021 earnings, despite reporting strong results last year that underlined its resilience during the Covid-19 crisis and seeing record sales of bulk annuities.
‘The new CEO is implementing far-reaching strategic changes aimed at refocusing on the core businesses in the UK, Ireland and Canada. The disposal of a number of its international businesses is under way and deals for its Singapore operations and parts of Italy joint venture were announced, valuing those at close to 19 and eight times earnings respectively. The company also has significant scope to improve its cost base, another key initiative.’
Most pleased with in 2020: Codemasters (CDM:AIM)
‘The two computer game developers we hold, Frontier Developments (FDEV:AIM) and Codemasters (CDM:AIM), both performed well during the year as lockdown measures stimulated a broad increase in demand for all forms of in-home entertainment.
‘Events in 2020 have really accelerated what was already a very attractive long term structural growth opportunity for both companies, driven by a strong pipeline of future releases and the ongoing shift towards digital downloads rather than physical disc sales.
‘Towards the end of the period Codemasters also received bid approaches from two US peers – highlighting the unique, IP-rich qualities of the computer developer space.’
Biggest disappointment of 2020: Travel stocks
‘Going into 2020 one of our largest sector weightings was in travel and leisure, which has clearly found itself in the eye of the storm in terms of the pandemic restrictions.
‘Given the nature of the challenges faced by companies in this sector and the admirable way many have coped it’s unfair to single out an individual company, but it’s clearly been the sector that’s hurt us the most in 2020.’
Most excited about for 2021: Fulham Shore (FUL:AIM)
‘Restaurants have had a very tough year as enforced trading restrictions and overcapacity have seen a number of permanent high-profile closures.
‘These are very challenging conditions for all operators but those that survive should be well placed to thrive in the recovery as pent-up demand for eating out and an attractive property market create favourable conditions for growth.’