Artemis fund manager Ed Legget, who famously got caught out by the EU referendum vote, has upped his exposure to Shell and BP as an insurance policy if the UK gets a ‘bad Brexit’ deal.
Legget, who runs the Artemis UK Select fund, had a tough start to life at the firm after his move from Standard Life Investments at the end of 2015, with his fund down 16% in the first six months as he tilted the portfolio to benefit from a ‘remain’ vote.
Legget (pictured) said the firms have been ‘more successful than anticipated’ in ‘getting their costs down quite quickly’ and pointed to their ‘attractive’ free cash flow yields of 8-9% and dividend yield at 6%.
On Brexit, he added: ‘From a top-down risk perspective, they provide you with a very different exposure to other things.
‘If Brexit’s bad, it’s not going to have a big impact on Shell, a $50 billion company with most of its assets outside of the UK, and if anything, if Brexit’s bad expect sterling to weaken so Shell in pound terms will do very well.’
While Legget is underweight oil and gas, one growth stock he highlights is Fenner. Traditionally a conveyor belt manufacturer, this company is taking advantage of the rise in shale oil production by providing products for oil and gas firms.
A perpetually popular share with investors on internet forums, alongside the likes of Fever-Tree Drinks, Fenner has risen from around 313p a share a year ago to around the 470p mark at the time of writing.
Legget said: ‘We are believers that shale oil will be transformational for the oil and gas industry.
‘You’ve got a very responsive supply coming in at the lower end of the cost curve, which means the rest of the industry, such as onshore and offshore, is having to bring its costs down
‘Their products are linked to production so it fits well from a top-down perspective and, from a bottom-up perspective, why we are particularly interested in it is that it’s taking huge amounts of market share at the same time, so you’ve got that double gearing.
‘If you look at where it will be when shale activity recovers, it will be a bigger business.’
Along with Brexit and growth in commodities, the other main macro theme influencing Legget’s portfolio is the acceleration in global growth, which he said is bringing a return to conventional monetary policy, with rate hikes expected and quantitative easing starting to be unwound.
Overweight financials, Legget said the biggest beneficiaries of the gradual normalisation of monetary policy will be life assurance companies such as Aviva, Legal & General and Prudential. This is due to their higher long-term bond yields, which helps their capital positions and ‘gives them more capital to invest in the business or give to shareholders’.
Seen as the area in financials where there is still growth, Legget said: ‘The demographics are on their side: the requirement for consumers to save for long-term healthcare, long-term social costs and pensions.
‘That’s all going from companies and governments onto the individual, and is quite a powerful driver for their ability to gather assets and manage that life cycle for each and every one of us.’
But despite the general lack of growth in banks, Legget said shareholders could still benefit from a normalisation of monetary policy.
‘Banks have been an underperformer as the interest rate cycle has been lower for longer and you’ve had a lot of regulatory pressures,’ he said.
‘They’ve finally built capital to the point where the regulator appears to be happy, and when combined with the turn in monetary policy, either on a profit or capital front, I think that relatively they look quite interesting against that backdrop.
‘So there are opportunities to pick up yield and a free option on a multiple expansion if monetary policy does continue to normalise.’
An antidote to Carillion
Aside from oil and gas and financials, the one stock Legget is quick to highlight is Renishaw, an engineering stock popular with UK fund managers, which could be seen almost as an antidote to collapsed engineering giant Carillion.
While, as has since been revealed, Carillion directors focused almost exclusively on short-term targets, Renishaw places very little focus on the here and now.
In fact, the FTSE 250 listed firm is still majority-owned by its founders and has very little communication with the City, besides its results and an investor day once a year.
The company’s strategy has been to grow organically, sustained by patented innovations. ‘They have a vision of how they see manufacturing systems and measurement systems with manufacturing changing over the next 20 years,’ Legget said.
‘They don’t worry about short-term profits and they just re-invest the profits constantly to grow the IP base. It’s an example of one of those founder-led businesses which looks to maximise the opportunity in the medium-term and don’t worry about meeting short-term targets.’
Over three years to the end of January, Artemis UK Select has returned 32.6% compared to the sector average of 26.3%.