Henry Dixon, the Citywire AAA-rated manager of the Undervalued Assets fund who Wealth Manager revealed recently moved from Matterley to GLG, has shared three companies he believes will drive his performance in the months and years ahead.
At Matterley, the house he co-founded in 2008 before selling it to Charles Stanley in 2009, Dixon’s Undervalued Assets fund has returned 166% over the past five years compared with 97% from the FTSE All Share – a top-decile record in its giant UK Equities category.
Despite the market’s surge over the past year, Dixon (pictured) maintained that 55% of its constituents were still undervalued. He supposed that the FTSE 100 would only hit dangerous territory around the 7,400 mark, more than 10% higher than today’s level.
As an example of an undervalued larger company at the moment, Dixon suggested Direct Line. The insurer trades on a multiple of 10 times its earnings, with a price-to-revenue ratio of less than one.
However, Dixon commended Direct Line’s management as ‘very much more disciplined’ as they were ‘not afraid to retreat from the market’ when conditions were unfavourable. ‘There is no point grabbing low-margin business,’ he said.
This had left Direct Line very well capitalised, noted Dixon. ‘That paves the way for attractive returns to shareholders in the form of dividends,’ he remarked. Its forecast dividend yield is around 6%.
Furthermore, Dixon contended that the money Direct Line pours into gilts and other bonds could prove more profitable as quantitative easing unwinds and interest rates rise. ‘That investment return could pick up markedly,’ he argued.
A mid-cap highlighted by Dixon is QinetiQ, the defence group that has been weighed down by concerns about lower military spending. ‘We do not like to buy things that are in favour,’ stated Dixon.
For Dixon it is also a self-help story as it has rationalised its portfolio, making it more attractive on a valuation basis even though its share price has almost doubled since its 2010 trough. ‘The debt has fallen so it is cheaper now,’ Dixon observed. ‘That is a very rare characteristic, I can assure you.’
And as with Direct Line, Dixon expressed confidence that the better financial position would enable a ‘material step up in cash returns’ from QinetiQ. ‘There is the opportunity and intention there from management,’ he relayed.
Dixon mentioned publisher Trinity Mirror as an interesting small-cap too. In part, this is a play on the UK’s domestic recovery. ‘If there are more builders, there will be more Mirrors sold,’ he surmised.
But the newspaper firm is also significantly undervalued, added Dixon, pointing out that its property portfolio and printing presses were recorded on Trinity Mirror’s balance sheet at far less than their true worth.
Dixon imagined that Trinity Mirror could replicate the near 100% rally of ITV, a holding he sold out of earlier in the year. ‘We rotated from fair value into great value,’ he explained. ITV’s price-to-earnings ratio is now 19.8, compared with Trinity Mirror’s 5.9. Trinity Mirror’s price-to-book ratio is also 0.7, valuing the company at less than the sum of its assets.
Since unveiling the GLG version of the Undervalued Assets fund last week, Dixon confirmed that he had raised another £5 million on top of the £40 million seed capital. Although the Matterley entity has only £75 million of assets under management, Dixon felt around £500 million would be an appropriate size for the strategy at current market levels.
On his move to GLG, Dixon cited the Man Group division’s superior resources as a principal attraction. He had already benefited from being able to bring sector specialists into meetings, greater access to chief executives, and better visibility of deal flows, he told Wealth Manager.
‘I had to put that aside,’ Dixon said of his five years at Matterley. ‘This was absolutely accretive to doing the job better. We hope the resource will help us push on.’