Citywire printed articles sponsored by:
View the rest of this gallery online at http://citywire.co.uk/wealth-manager/gallery/a736298
My top five equity bargains: Four Capital's Alex Schlich
by Elsa Buchanan on Feb 26, 2014 at 11:45
In the third instalment of our series, Four Capital's Alex Schlich reveals where he believes the best bargains can be found in the UK stockmarket.
This week, Wealth Manager is speaking to five managers about their top bargain stocks with good growth prospects.
Today we speak to Alex Schlich, manager of the Four Active UK Equity fund, and fervent supported of financial-linked firms and e-invoice platforms.
Over the last 12 months, the fund returned 12.51% compared to the FTSE All Share's 10.1% rise. Over three years, however, the fund rose 23.85%, compared to the benchmark's 27.65%, which returned 27.65% over the same period.
Aberdeen Asset Management
Execution risk and the uncertainties attached to that is another area which has thrown up some interesting opportunities. Aberdeen Asset Management is in the process of buying Scottish Widows. There is an excellent fit between the two companies and will give Aberdeen greater geographic diversification.
The opportunities for cost reduction are substantial and even without any revenue benefit the company should be able to drive good earnings progression. Lloyds retains a 9.9% stake in the enlarged entity and to maximise its eventual value on exit they are clearly incentivised to provide good flows to the enlarged group.
The timing of the transaction has also put any share buy back on hold with an intention to resume in due course - another piece of uncertainty that provides attractive valuation opportunity.
The insurer may not have the same degree of operational gearing into economic recovery as some other insurance companies, but its position in long term growth markets means it's a better growth prospect over the medium to longer term, and that’s not currently being priced in.
Its Asian exposure is currently 40% of the business and growing fast on the back of selling simple savings products with limited health and life cover to an increasingly affluent middle class facing rising life expectancy and higher medical services costs. Prudential have successfully doubled Asian profits in the last three years and they target at least 15% growth per year until 2017.
Quindell is another company with a compelling proposition, improving the profitability of insurance companies through lowering the cost of claims management, reduction of insurance fraud and more accurate pricing of risk, although a couple of short term issues have made some investors wary.
Uptake from insurance companies validates the proposition but has put pressure on working capital and the balance sheet. Addressed in a rights issue in December, delivery of the proposition in 2014 should lead to a rerating of the stock.
Finally there are some attractive opportunities in good companies in unloved sectors. The mining sector is a classic example where a stronger economy and more stable commodity prices will help. Management at many of the companies in the sector have heeded investors and cut back on expansionary plans, reduced capex at existing sites, implemented efficiency plans.
All with an aim to improve corporate cash flow. The process has taken some time as investors didn’t just want to hear good intentions but they wanted to see good deeds. Confidence is building slowly and we believe Rio Tinto looks particularly attractive here.
We have also found some interesting opportunities in small or new businesses which are not yet on the radar of general fund managers. One such example is Tungsten, the leading e-invoice platforms with over 50% of FTSE100 companies and 50% of Fortune 500 companies signed to their network. The network processes over £100 billion of invoices/ year, substantially reduces costs and errors in e-invoice processing for both buyers and sellers.
The real key to future growth will come in their lending side which offers lower risk and higher profit margins by only approving the lending once the invoice itself has been approved and securing repayment direct from the buyers with their higher credit quality. Risk of fraud, impairment and dilution are reduced substantially.
When investors become more familiar with these companies and they gain greater coverage from the analyst community a significant rerating of the company is possible. Also, an eventual move from the AIM market to the full market look what can happen - you only need to look at Entertainment One to see the impact on the share price.