Citywire AA-rated Ardevora UK Income manager William Pattisson has been buying BG Group and Tullow Oil, arguing both stocks have been overly punished by the market due to negative sentiment towards oil.
‘BG Group looked quite cheap to us and we think oil is one of the areas that people are starting to get overly pessimistic about,’ Pattisson told Wealth Manager.
Pattisson said he and co-manager Jeremy Lang, also AA-rated, had been tempted into Tullow Oil as they believe the business has ‘randomly had a lean time of it’. Although he acknowledges it may take some time for the share price to recover (it is down nore than 30% since the start of the year at 839p), he says sentiment on the stock has turned too negative.
Aside from these positions and top 10 holding Royal Dutch Shell, Pattisson is broadly negative on commodities alongside pharmaceuticals, viewing the latter as a value trap.
‘There are long-term structural pressures on these companies. Some ostensibly look cheap – but there is a reason they look cheap,’ he added.
The portfolio currently has more of a growth-orientated tilt than some might expect. While it looks and breathes like its competitors, he says it operates in a different way.
ITV is a good example of this growth tilt, with Pattisson noting that having staged something of a turnaround over the past few years, it has made the transition from value to growth.
‘It is now going to benefit from the economy improving and there is still a lot of capital discipline in the way they manage the business,’ he explained.
‘Next is another business where it is easy to say it has run its course, but it has moved over the last three years from a value to a growth stock. It is an incredibly well-run business,’ he added.
He says analysts are still underestimating the company’s scope for future growth. Elsewhere in the portfolio, AB Foods is another stock that catches analysts out, he says. The managers were tempted into the stock in June and July as they believe the growth associated with its retail arm, Primark, has been undervalued.
‘Everyone knows it is a good business and growth will come from it, but we think they are underestimating growth for Primark if it rolls out in Europe,’ Pattisson said.
The duo also recently bought Britvic, attracted by its new management team and its approach, which they expect will result in positive surprises for the stock.
‘We are completely bottom-up driven in terms of themes. We have quite a high exposure to high quality consumer cyclicals such as AB Foods, Next, Whitbread and the housebuilders. I think they will go through a consolidation phase for six to nine months and have been consolidating now for six months.
‘Just looking at Barratt Developments – it is looking cheap again. It will probably go nowhere for the rest of the year, but once the consolidation phase is worked off there could be another strong run,’ Pattisson added.
The fund manager is by no means enthused by BT’s recent foray into TV and broadband.
‘This is not of interest for us. If anything, it makes us queasy around the edges,’ he said.
However, he stresses that BT is a large company that has seen a turnaround in its prospects and can afford to move into new areas. And while broadband and TV are competitive areas, he expects the company to benefit from broader growth in the sector alongside its competitors.
‘My suspicion is it is indicative of an industry settling down over the next few years, so you could be caught out as this could be good for all of the players,’ he said.
It is not about who will be the winner at the expense of the loser. I expect there will be more winners as there is growth in the industry.’
Period of flux
Home Retail Group, owner of Argos and Homebase was similarly in a period of flux, he added. The company is currently adapting to online retail, trialling a collection service with eBay that would potentially turn its retail stores from a liability into an asset.
‘We think analysts and investors are prone to bias when assessing change, especially when there is an easy narrative to reinforce a potential bias. We think the changes going on at Argos are easy to downplay.’
Over the year to the end of October, the Ardevora UK Income fund has posted a 37.4% return versus a 20.9% rise by the FTSE 350 High Yield index, according to Lipper.
Pattisson said performance had been driven by a structural underweight in mega-caps, while the portfolio’s exposure to consumer cyclicals has done well.