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The five mid caps powering Richard Watts' outperformance at OMAM

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by Annabelle Williams on Nov 06, 2012 at 11:41

Old Mutual Asset Managers' Richard Watts picks out the mid cap gems which have helped power outperformance in his Old Mutual UK Select Mid Cap fund.

In the three years to 5 November Watts' Old Mutual UK Mid Cap Select fund has returned 52.7% versus a 44.8% rise in the FTSE 250 Mid index.

The fund has also outperformed in the year to the end of September, returning 31.1% versus a 25.5% in the benchmark.

Watts attributes a large part of his success to the following five stocks.

Debenhams

This high street staple has been one of Watts’ strongest performers this year, up more than 20% year to date.

‘We have owned it for a number of years, but we bought a bit more on the basis that it offered a prospective dividend yield of about 5% while earnings are forecast to grow about 10%,’ he said.

Although fellow high street retailer Next recently saw its share price dip on a disappointing set of results, Watts has no such concerns about Debenhams. ‘I’m still optimistic. Debenhams had a trading statement a couple of days after Next, and Debenhams’ trading actually accelerated. There will be winners and losers here.’

Provident Financial Group

One that has been particularly successful is doorstop lender Provident Financial.

This stock has been ‘terrific performer’ Watts said, although he added that growth of the main business would not exactly be stratospheric.

‘It’s fair to say it’s not a profit stream which will grow particularly strongly over time, it’s a pretty crowded market.’

Where growth will come from, however, is the company’s venture in to the credit card space, with its Vanquis business.

‘Vanquis has been growing quickly because big banks have pulled out of the market. People wanted to borrow money and couldn’t. Because it’s growing quickly its allowing the overall profits of the group to grow.’

Earnings grew 20% in the first part of the year, he said, and the stock was yielding 8% when he bought in.

Unite Group

Watt first bought into student accommodation provider Unite at 170p, but says its book value is closer to 320p a share, so he effectively bought the company at around half price.

In spite of figures suggesting student numbers will fall after the recent hike in fees, Watts argues Unite’s business model is safe since it has focused its efforts on building at elite Russell Group universities, which will not struggle to attract students.

‘Shares are now at 255p, so we made more than 50% there. We think the net asset value will grow somewhere around 15% from here.’

Ashtead Group

The company provides rental equipment to building sites and has 90% of its revenue coming from a US subsidiary, Sunbelt. ‘Some of Ashtead’s competitors were struggling to access financing to renew their fleets, and the older your fleet gets, the less desirable it becomes to rent,’ Watts explained, adding that with more customers choosing to rent the gear rather than buy, Ashtead has eaten up market share and seen earnings growth of 17%-18%.

Big Yellow

Watts tried to buy into storage company Big Yellow at 240p but struggled to find many shares. Instead, he built the position in the high £2s and has since seen the stock rise to around £3.

Big Yellow is attractive not just for the ‘decent’ 3.5% dividend yield but because trading performance has been strong.

‘The basic story here is that they have an established portfolio of sites that were opened pre-credit crunch,’ he said, adding the company has 25 ‘immature’ sites that operate at less than 75% occupancy. ‘The investment case is simply the fact that those immature sites will mature very rapidly and get up to mature occupancy levels.’

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