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How River & Mercantile's Staveley is playing pension reform
Markets
by Danielle Levy on Mar 12, 2013 at 13:17
River and Mercantile UK Equity Income manager Richard Staveley has increased exposure to companies with large pension deficits that could benefit from a potential government move to lift the discount rate and lower liabilities.
Staveley (pictured) has added to his holding in BAE Systems and recently bought corporate travel company Hogg Robinson. He also holds Trinity Mirror and Invensys, and expects all of these stocks to benefit if the Department for Work and Pensions moves to a five-year average for gilt yields, which would lower liabilities.
‘There has been a call for evidence and a move to smoothing where you would maybe use a five-year average of gilts. This would immediately lift the discount rate and reduce liabilities,’ he said. ‘If that happens, the discount rate would go up, there would be less liabilities, corporates won’t have to put as much in pension funds so they can spend more money.
‘From a stock specific perspective, I have been adding to my holdings and buying new holdings with some of the biggest pension deficits in the market. I think that is going to become what was considered a “don’t go near that, it has got a big pension deficit” to “oh gosh, that isn’t so much of a problem and it is getting a lot better”,’ he added.
Elsewhere, Staveley says the online gambling sector offers access to high quality stocks that have been missed by the market as they have been deemed too risky. Although the sector faced difficulties following a US ban, Staveley is positive because the US is now in the process of re-regulating online gambling at a state level. The activity is also now regulated in several European countries.
‘Online gambling companies are very high quality companies. They have a leading edge technology platform that doesn’t require a lot of capital and people once you have built it. Every piece of growth you can link into, and online gambling is still a growth industry, drops through to higher and higher cash-based returns for shareholders,’ Staveley said.
He holds Playtech, the company that developed the software behind William Hill’s online franchise, which yields around 6%, together with 888, which offers a similar dividend stream.
Staveley’s portfolio has a value bias, with a large allocation to recovery prone financials, including Royal Bank of Scotland and Lloyds. He was early into the latter in 2011, which he acknowledges initially hurt performance, but has since benefited from the bounce from the summer lows. He became more comfortable with RBS in autumn 2012 and says it is likely banks will resume making dividend payments by 2014.
‘It is interesting that Lloyds has risen 80% over the last year, so I have got more comfortable with that. It shows the path of what will happen with RBS when gradually people realise is it is not as risky as some people want it to be. There are still significant opportunities to improve returns.’
Staveley is also positive on HSBC, which he refers to as a rare example of a mega cap offering all three of the criteria underpinning his approach: potential, value and timing. He sees value in the global bank and highlights the attractive yield on offer.
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- BAE Systems PLC (BAES.L)
- Hogg Robinson Group PLC (HRG.L)
- Invensys PLC (ISYS.L)
- Trinity Mirror PLC (TNI.L)
- Playtech Ltd (PTEC.L)
- 888 Holdings PLC (888.L)
- Royal Bank of Scotland Group PLC (01IE_p.L)
- Lloyds Banking Group PLC (GBB1HKYH4.L)
- HSBC Bank PLC (GBB5BP354.L)
- Close Brothers Group PLC (CBRO.L)
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