As 2022 draws to a close amid continuing market volatility Shares has canvassed leading fund managers to find out where they have been finding the best opportunities.

Jamie Ross – Henderson Eurotrust (Hne)

LOOKING OUT FOR BOMBED-OUT GROWTH STOCKS

We have spent the last 12 months trying to find opportunities within the growthier area of the market – our favoured part of the market and the part of the market that has been hit the hardest.

For example, we have initiated new positions in Deutsche Borse (DB1:ETR), music content owner Universal Music (UMG:AMS) and biopharma equipment company Sartorius (SRT:FRA).

Universal Music owns almost a third of global recorded music, streaming is driving strong growth in listening hours, industry pricing is starting to move higher and the valuation of the company doesn’t seem to reflect the long term opportunity in our view. In the shorter term, consumer weakness is weighing on the share price performance and creating the opportunity for investment.

Andy Brough – Schroder UK Mid & Small Cap Fund (SCP)

HUNTING OUT UNIQUE BUSINESSES

Man Group (EMG), one of the world’s biggest hedge funds, is a company we see as unique amongst its peers. Volatility in markets is leading investors to look for uncorrelated returns, investments that can perform differently to the prevailing market.

Man Group has transformed its quantitative analysis capabilities to a degree that we believe leaves other asset managers behind. This technological development offers growth opportunities from its existing client base, higher fee capital and growth potential. We believe this makes Man Group an example of the future of fund management and could lead it to break into the FTSE 100.

James Harries – Securities Trust of Scotland (STS) 

A QUALITY CYCLICAL

The most recent purchase in the trust is Texas Instruments (TXN:NASDAQ) or TI for short. TI designs and manufactures relatively ‘simple’ analogue chips that don’t require the latest manufacturing technology and have incredibly long shelf lives.

While other semiconductor companies must constantly design and manufacture new CPUs to satisfy the insatiable need for greater computing power, TI chips work for decades. The result is a business with little technological risk and relatively low capital intensity.

The semiconductor industry has a degree of cyclicality, however in the case of TI, we consider this risk to be mitigated by having a conservative balance sheet and capital allocation policy that rewards long-term shareholders. 

The business is fantastically profitable, ranking in the 89th percentile of S&P 500 companies in terms of free cash flow margins. Cyclical concerns gave us an attractive price at which to invest.

Stuart Gray – Alliance Trust (ATST)

SMALL CAP AND VALUE OPPORTUNITIES

The market’s shorter-term focus on macro issues is leading to interesting stock mis-pricings that our managers are seeing across a wide spectrum of sectors and regions. We have investments in good quality companies that are performing well right now in this period of high inflation.

We are also seeing opportunities in a select few growth stocks that are perhaps now becoming oversold, but also in smaller cap and value stocks which are now looking excessively cheap. For example, Kyndryl (KD:NYSE) is small cap company but one of the largest managed IT services companies in the world. It was spun out of IBM in late 2021.

The shares are lowly rated as the company has been emerging as a business that is no longer captive to IBM products and can compete more freely across the entire range. If it can move to industry margins from current break-even then we see substantial upside.

Carlos Hardenberg – Mobius Investment Trust (MMIT)

TARGETING EMERGING MARKETS WHEN SENTIMENT IS WEAK

We are excited about the prospects in emerging markets and believe the best time to buy is when sentiment is low. Right now, we are close to an all-time valuation low compared to developed markets. Our largest exposure is Asia where we keep finding some of the most attractive investment opportunities. India, for example, is a $3 trillion economy today and has overtaken the UK to become the world’s fifth largest economy.

While the developed world remains worried about inflation, it is largely under control in India at 7% and is expected to peak soon. India is expected to keep up its growth trajectory and grow faster than other major economies at 6.8% this year.

We do not invest in the large Indian companies. We are finding smaller, lesser-known companies that are carving a niche for themselves and growing much faster.

For example, we invested in Persistent Systems (PERSISTENT:NSE). This Indian technology company offers digital engineering solutions across the globe to small and large companies like IBM (IBM), Wells Fargo (WFC:NYSE), Cisco (CSCO:NYSE) and partners with leading software vendors like Salesforce (CRM:NYSE), AWS and Microsoft (MSFT:NASDAQ).

Thomas Moore – Abrdn Equity Income Trust (AEI)

FOCUSING ON PARTS OF THE MARKET WHICH ARE MOST HATED

Investor concerns about a deep and prolonged recession are beginning to ease as it becomes clearer that inflation is getting closer to peaking. We see the greatest opportunities in the parts of the market that are most hated, namely financials and consumer stocks. We are finding many leading companies that we believe are capable of delivering meaningful growth on a medium-term view once the current period of uncertainty abates.

At a time of rising funding costs, we expect incumbents to win market share, driving out loss-making upstarts whose business models were reliant upon the continued flow of cheap money. As this is recognised by the wider market, we expect to see a resurgence in industry leaders such as DFS (DFS).

Kartik Kumar – Artemis Alpha Trust (ATS)

EYES ON COMPELLING UK CONSUMER CYCLICALS

I think prospective returns across UK consumer cyclicals look very compelling. You can understand why – newspapers are full of doom and gloom. We came out of a pandemic and into a war that caused a recession. Despite the various headlines, the fact is that inflation-linked 10-year bonds still have zero returns and the UK has record low unemployment.

In cyclical sectors, valuations have decline by 30% to 50%. Balance sheets were strengthened during Covid, and so most companies will weather the storm. So, I would advocate buying strong franchises in cyclical sectors (e.g. retail/banking/airlines) where my judgement is that three-to-five year returns may be as high as 20% to 30% per year.

Simon Barnard – Smithson (SSON)

ADDING SERIAL ACQUIRERS TO THE PORTFOLIO

As increasing interest rates have brought down asset prices, we have been increasing the weight and number of what we call ‘serial acquirers’ in our portfolio. These are companies that supplement their organic growth with regular small acquisitions in their existing product markets or geographies.

We believe that over time they should stand to benefit from lower valuations of target businesses which will ultimately result in a very profitable boost to their growth.

Now this won’t happen immediately, because price expectations of private business owners never fall as quickly as public stock markets, but over time they will start to come down. Companies we own that fall into this category include Diploma (DPLM), Halma (HLMA), Recordati (REC:BIT) and IDEX (IEX:NYSE).

Guy Anderson – Mercantile (MRC) 

TAKING A LONG-TERM VIEW

Before answering this question it’s important to consider the time frame over which we are thinking, as the best opportunities for say the next three months are likely to be very different to those for the next three, four or five years. Our investment horizon is geared to the latter.

This explains why we’re comfortable holding a large position in a UK retailer such as Dunelm (DNLM), which is likely to face challenges in the near-term from consumer weakness, but which should emerge from this difficult period with an even stronger competitive position and even greater earnings power. The market’s myopia, and the company’s ensuing low valuation, make this share even more attractive when looking through this longer lens. This is just one example but there are plenty like it in the UK, where many shares are trading at compelling valuations and thus providing great investment opportunities for the long-term investor.

George Ensor – River & Mercantile UK Micro Cap (RMMC)

FANTASTIC CHANCE TO PICK UP OUT OF FAVOUR MICRO CAPS

We can see there is a large premium in the market for defensive/non-cyclical earnings, for US dollar earnings and for liquidity and strong balance sheets. Smaller companies and micro caps are enormously out of favour following months of outflows and low risk sentiment. This provides fantastic opportunities, and we are fully invested.

We recently added to specialist lender Distribution Finance Capital (DFCH:AIM) which is trading at a 50% discount to book value despite maintaining a 6% net interest margin.

We’ve added to fully funded early-stage growth businesses like Kooth (KOO:AIM) and ActiveOps (AOM:AIM) at very depressed valuations. We’ve also increased our cyclical industrial exposure by adding to SigmaRoc (SRC:AIM), a Northern European quarrying business, and Renold (RNO:AIM), a global manufacturer of chains.

Recent data from the UK Government Insolvency Service illustrates deteriorating economic conditions but should support opportunities for litigation companies Manolete (MANO:AIM) and Litigation Capital (LIT:AIM).

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