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Alpha attack: 10 wealth managers reveal their best ideas

Our readers reveal where they believe the best alpha opportunities lie in the second half.

James Mahon, CEO & CIO, Church House Investment Management, Sherborne

‘The sun is shining, heatwave in full swing and we believe that the second half of 2015 will be the time for the unloved European banking sector to step out of the shade. European banks have underperformed markedly over the past five years and weakness around the current Greek crisis looks like an opportunity, presuming we can eventually move on from Greece’s woes.

‘Against a backdrop of rising 10-year interest rates (banks like higher rates) and a dawning realisation by politicians and regulators that banks are necessary to fuel the nascent recovery, banks offers value. As a sector, it still trades below book value and offers some compelling dividend income. A lot of restructuring has happened since the financial crisis and most banks now have decent capital ratios. This offers the prospect of a return to loan growth and with it, dividend growth.

‘Having destroyed so much value in 2008/09 the sector has a lot of catching up to do – but please remember to move on when or if the sector moves back to valuations around twice book.’

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James Mahon, CEO & CIO, Church House Investment Management, Sherborne

‘The sun is shining, heatwave in full swing and we believe that the second half of 2015 will be the time for the unloved European banking sector to step out of the shade. European banks have underperformed markedly over the past five years and weakness around the current Greek crisis looks like an opportunity, presuming we can eventually move on from Greece’s woes.

‘Against a backdrop of rising 10-year interest rates (banks like higher rates) and a dawning realisation by politicians and regulators that banks are necessary to fuel the nascent recovery, banks offers value. As a sector, it still trades below book value and offers some compelling dividend income. A lot of restructuring has happened since the financial crisis and most banks now have decent capital ratios. This offers the prospect of a return to loan growth and with it, dividend growth.

‘Having destroyed so much value in 2008/09 the sector has a lot of catching up to do – but please remember to move on when or if the sector moves back to valuations around twice book.’

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Charles Brand, head of portfolio management, Sanlam Private Wealth, Sevenoaks

‘The defining moment of the summer is likely to be the Greek crisis. Most investors want to “call” the outcome, yet the state of Greek politics makes placing that bet an irrational thing to do.

‘We prefer to look beyond the crisis and ask where we are comfortable taking a long-term view. Markets are inefficient, driven by human emotion, as well as logic. In the end, logic wins. In the periods where emotion rules, shares get mispriced.

‘The greatest opportunities come in high quality companies with sound long-term prospects. Examples? The luxury goods sector has come under pressure and we used the opportunity to add to Burberry. Now may be the time to add to LVMH.

‘Our search for great businesses at attractive valuations continues. Some of these names we may buy, if emotions continue to rule.’

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James Rae, investment manager, Charlotte Square, Edinburgh

‘It is hard to talk about asset classes over the next six months without mentioning the potential for rising interest rates and a possible Grexit. However, with the recent surprise Conservative election win, we feel there is another story in town.

‘The removal of political uncertainty and, arguably, an anti-business agenda should spell good news for UK small caps, which tend to be more domestically oriented and higher growth than their large cap peers. Small caps are often less diversified or more single product-focused and therefore more prone to serious disruption by changes in regulation or tax. We therefore feel that political clarity will dramatically increase the likelihood of small caps hitting more ambitious analyst forecasts.

‘In addition, UK household consumption continues to grow at a robust pace as we benefit from real wage growth and a lower unemployment rate. This should feed topline growth for small caps and bring positive results over the next six months.’

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Kasim Zafar, portfolio manager, EQ Investors, London

‘A stronger US dollar is the obvious easy win, Japanese equities have a good foundation for gains and the European recovery appears to be broad based. Looking at fund flows, we are conscious these are consensus opinions, so while they may make us money, they are unlikely to deliver alpha.

‘Technology is a sector we really like. The current cycle’s scale is sometimes easy to miss, given the ubiquity of smartphones, tablets, PCs and televisions. Property developers in San Francisco will add eight million square feet of space over the next few years – equal to the entire office property markets in Reading or Oxford.

‘Software companies such as Google, Salesforce, Dropbox and Uber have signed on two million square feet over the last 12 months, enough for 12,000 employees. While price-to-earnings ratios are high, on a price/earnings growth ratio basis the sector is among the best in the market.’

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Stephen Peters, investment analyst, Charles Stanley, London

‘Our team believes the best way of winning is by not losing. Therefore, I would suggest the best opportunity to generate the best risk adjusted return over the next six months is by avoiding areas where the sheer amount of uncertainly is just unrewarding on a risk/return basis.

‘There is a significant temptation to make short term investments which seek to second guess the Chinese government, resolution of the Greek situation, or how to play a recovery in unloved sectors such as oil and basic materials across various equity markets. Diversification and patience remains one of the best ways to produce good long term returns.

‘Asset price performance over a six month period is almost entirely random and so we prefer to own a variety of asset classes, managed in a variety of styles by our highest conviction managers, but with a mild bias towards value, and away from expensive defensive assets and bond proxies.’

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Alistair Campbell, third party fund analyst, Sarasin & Partners, London

‘Quantitative easing has provided a challenging backdrop for active equity managers over the last few years. The liquidity-fuelled rally has seen dispersion between stocks fall, with many becoming detached from their underlying fundamentals.

‘We believe that these fundamentals have now started to reassert themselves, and that the most attractive alpha opportunities for the second half of 2015 lie with active managers able to exploit these valuation anomalies, generating alpha on both the long and the short side.

‘We recently added Banor North American Long/Short Equity, which buys companies trading at substantial discounts to their intrinsic value, while shorting lower quality and fundamentally impaired businesses. The three managers have worked together for over a decade and previously managed money for the renowned value investor, Joel Greenblatt.’

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Chris Kenny, partner, Smith & Williamson, London

‘The year started strongly as asset prices rose around the world but then optimism began to fade and valuations started to look stretched. So, where can a manager add value in the second half of 2015?

‘We would argue that avoiding pitfalls will be better rewarded than taking risk in the coming months. Active allocation away from potential valuation traps, be it in equities or bonds, should add more value for our clients by ensuring we preserve capital.

Indeed, some recent themes that had become gospel may now be risky. For example, the search for income has left a number of alternative asset funds with higher yields to stand far above underlying net asset value.

‘Significant alpha could be generated by ensuring that supposedly lower risk investments are realigned to respond to rising interest rates and the inefficiencies of the corporate bond market. A rush for the exit from ‘strategic’ bonds could exacerbate any normal shift in market prices. However, the heightened volatility in some markets (see Europe during the Greek tragedy) will create interesting opportunities for active investors willing to look through short term noise.’

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James Penny, investment analyst, TAM Asset Management, London

‘Well the first half of 2015 certainly hasn’t disappointed. Between Chinese equity bubbles, global rates volatility, Greek brinkmanship and ever increasing policy divergence the more risk adverse investor has had ample inflection points at which to take risk off the table.

‘Most will agree Yellen and Tsipras will continue to have their say on what is likely to be a turbulent second half. But looking through the possibility of black swan events, we still believe global growth will be sufficient to support sustainable dividends and profit growth.

‘Despite short term volatility due to Greece, we are looking at specific sector growth opportunities now that the initial euro QE euphoria has faded. We see stand out sector beneficiaries in healthcare, tech and consumables.

‘In Japan we believe the export market is the one to watch. With Abe still a long way off his 2% inflation target for 2016, a considerable amount of stimulus is still likely. This should result in a continuation of a relatively weak yen benefiting the more well-known Nikkei 225 exporters.

‘Going further afield into emerging markets we are looking towards India in the second half of 2015. Where we think Mr Modi will keep pressing on with game changing legislation against the backdrop of $60 oil to sustain the growth story.’

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Alan Miller, CIO, SCM Private, London

‘Emerging Markets Small Cap. Emerging Markets have with the notable exception of mainland China shares, been out of favour for several years and the valuation gap to their developed peers has widened considerably.’

‘It is now possible to invest in a well-diversified index of 686 stocks thereby reducing the individual risks associated with such companies, whilst accessing the low valuations and high growth potential. The index of these stocks is currently valued on 11.9x prospective earnings, with growth averaging 16.6% pa based on consensus analyst forecasts over the next 3 to 5 years.’

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Ian Woolley, investment analyst, Hawksmoor Investment Management, Exeter

'While our equity picking process is very much bottom-up and value driven, there are always attractive industries and investment themes. Two sectors that we particularly favour at the moment are the UK housebuilders and banks.

The former find themselves operating in a market with huge demand, a structural supply problem, a supportive political environment, and a strengthening mortgage market. With balance sheets in far better shape than they have been, there are some fantastic buying opportunities to be found.

'We also favour the UK and US banking sectors, which stand to benefit from the coming rises in interest rates. That said, we’re finding value opportunities across the spectrum, including retail, industrials, consumer discretionary, and technology.

In picking direct UK equities for our clients, we look for a combination of quality, value, and momentum. These characteristics over the long-term have proven to be wells of bountiful alpha.'

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