View the article online at http://citywire.co.uk/money/article/a888931
Why AAA-rated Colin Morton could not resist Ashmore
Manager of Franklin UK Equity Income fund says Ashmore, an emerging market investment group, was too cheap to ignore in January.
In his opinion, the asset manager simply got too cheap to ignore when the share price fell to 195p in January. He bought in at this level and the stock has since enjoyed a strong rebound, with the shares up 22% in the past month.
A coterie of core ‘boring’ but steady stocks lie at the heart of the Citywire AAA-rated fund manager’s portfolio, including AstraZeneca (AZN), GlaxoSmithKline (GSK) and Imperial Tobacco (IMT). Morton took the decision to reduce some of these positions to take advantage of Ashmore’s attractive valuation.
‘We have taken some money off the table from the long-term stable holdings and used some of it to buy Ashmore Group,’ said Morton.
Although he acknowledges that emerging markets face a number of headwinds, Ashmore’s 30% share price slide over the three years to January, combined with its robust balance sheet, rendered it too good an opportunity to pass up.
‘Ashmore has around £300 million net cash in the bank, management owns around 50% of the stock so it is well-incentivised, and it is still a good business.’Comparing his 1.3% Ashmore weighting to the typical 3.5% to 4.5% devoted to ‘safer’ holdings, Morton reasoned that even with a smaller weighting the nature of the exposure can contribute just as much to the fund overall.
‘The market Ashmore is in means that there is higher risk earnings and volatility, so we prefer to have a lower holding than in some of the more “boring” stocks,’ he said.
‘However, arguably you don’t need to put 3% in a company like Ashmore, because if you get it right on 1.3% then the price rising 40%, as it has [Ashmore was trading on 267p on 7 March], adds 0.5% to the fund overall.’
Don’t overlook utilities
Morton is similarly upbeat on another difficult area of the market: utilities.
The sector faces uncertainty due to an impending government review, which will examine how domestic energy and utility companies charge for their services.
Morton is well aware of the potential impact of the review, but believes the positives associated with a number of companies are underappreciated.
He describes yields of around 4% on water suppliers United Utilities (UU) and Severn Trent (SVT) as ‘dull’, but is positive about the security of income. Only three of the 12 original quoted UK water companies are still in business, which improves the prospects of healthy returns for another six years.
The sector represents a 4.85% overweight in his portfolio compared to the FTSE All Share index.
Morton highlights top 10 holding National Grid (NG) as another top contributor within the portfolio.
‘National Grid has a stated aim of growing the dividend at least in line with inflation, and the stock is still yielding about 4.5%,’ he said.
‘With the market yielding below 4%, 10-year bonds yielding 1.5% and cash yielding nothing, National Grid looks reasonably attractive.’
While National Grid can benefit from its review being pushed out to 2022, Centrica (CNA) and SSE (SSE) face more imminent appraisals. Nevertheless, Morton owns both companies aashmnd has topped up his Centrica weighting, taking it from 1.25% to 2% since the turn of the year.
‘While there is undoubtedly a risk there, I have actually been adding to Centrica because the share price has been so weak. I recently picked more up at around £2, and the share price has since rallied to above £2.20,’ he said.
‘Centrica cut its dividend by a third a year ago to improve its credit rating, but even after that it is still yielding 5.5%, and the 2015 results that came out [on 18 February] were much better than people had expected.’
Recent market volatility has tested investors’ mettle and Morton believes a ‘real growth scare’ lies behind the movements.‘The last two or three months has been brutal, but there are opportunities coming out of the sell-off. We are still worried about the global growth outlook and are positioned reasonably defensively, but we do hold some more risk-on areas.’
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by Gavin Lumsden on Dec 08, 2016 at 10:33