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Jupiter's Matthews prepares to rotate his fund for the next sell-off
Jupiter Growth & Income manager Philip Matthews says big, ultra-defensive stocks have become expensive while some steady names have been overlooked.
Jupiter Growth & Income manager Philip Matthews has used what he views as a divergence between the valuations of different types of defensive stocks to build up positions in some that have lagged their larger, ultra-defensive rivals.
Matthew says that many of the big, globally orientated, ultra-defensive stocks such as British American Tobacco (BATS.L), Unilever (ULVR.L) and Diageo (DGE.L) have become relatively expensive on their perceived status as safe havens, while other steady defensive businesses are still trading at much lower multiples, making them good candidates for inclusion in his fund, which features in Citywire Selection.
Backing Reed Elsevier
'Reed on 10 times earnings is more interesting than Diageo on high-teen valuations, so this is where there are still pockets of value in the market,' he said.
Having swapped cyclical exposure – meaning holdings in companies whose fortunes are closely correlated with the broader economic cycle – for defensive exposure after the liquidity-driven rises of the first two months of the year, Matthews then reduced the more defensive parts of the portfolio in April and May to build up sold-off cyclical stocks once again, and was able to reap the rewards of the subsequent market rally.
'We tilted the portfolio to capture that recovery by putting 1% of the fund into [tech firm] Logica (LOG.L), and 1% into [private equity firm] 3i (III.L), which looked set to benefit from a management change.
'Logica had been trading at very low historic valuations and we then made 60% profit on it after it was bid for. We also added a position in Schroders and benefited from a bid for engineering firm WSP.'
Adding to Rio Tinto
Matthews has also continued to narrow his longstanding underweight to miners by building Rio Tinto (RIO.L) up to 3.5% of his £240 million fund. He believes the diversified mining giant offers the best relative value of all the miners and is the highest quality of its sector, with high returns on capital.
Other recent activity includes adding to his top 10 fund holding in Lloyds insurer Beazley (BEZG.L). 'We have been gradually adding to Beazley this year as it has benefited from its takeover of Hardy. It has a strong long-term record of returning capital to shareholders, a strong balance sheet and is yielding 6%. It is also a strongly capitalised business and is ahead of the game in terms of understanding the new Solvency II rules.
'We expect to see them either issuing special dividends or buying back their own bonds. Both should be positive for shareholders.'
Taking profits on defensives and cyclicals
Matthews has enjoyed a strong first half to 2012, driven partly by an underweight to Asia and mining companies and partly by a successful rotation between defensives and cyclical holdings.
After strong runs, profits have been taken on British American Tobacco, Imperial Tobacco (IMT.L), WH Smith (SMWH.L), William Hill (WMH.L), Balfour Beatty (BALF.L), Vodafone (VOD.L), Talk Talk and pharma giants AstraZeneca (AZN.L) and GlaxoSmithKline (GSK.L), with the proceeds recycled into Rio Tinto, Logica and BT.
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- British American Tobacco PLC (BATS.L)
- Unilever PLC (ULVR.L)
- BT Group PLC (BT.L)
- Diageo PLC (DGE.L)
- Reed Elsevier PLC (REL.L)
- Logica PLC (LOG.L)
- 3i Group PLC (III.L)
- Rio Tinto PLC (RIO.L)
- Beazley PLC (BEZG.L)
- Imperial Tobacco Group PLC (IMT.L)
- WH Smith PLC (SMWH.L)
- William Hill PLC (WMH.L)
- Balfour Beatty PLC (BALF.L)
- Vodafone Group PLC (VOD.L)
- GlaxoSmithKline PLC (GSK.L)
- AstraZeneca PLC (AZN.L)
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