Chris Reid believes that the best returns are currently made in mid-sized companies.
In light of recent market volatility, UK mid-caps, and not their larger peers, currently represent the sweet spot in terms of identifying long-term investment opportunities, according to Chris Reid of Majedie Asset Management.
The key to investing in mid-caps, says Reid, is finding companies that can grow their share price through operational improvement, and deliver an attractive yield and growing dividends as the change takes place.
“Choosing your poison in the mid-cap space is key,” says Reid. “What you’ve got currently is a lot of polarisation – some companies are fully priced, while others are making improvements the market hasn’t recognised yet.”
That process of making improvements will often herald an improved share price over the course of three years or so, says Reid, as the market begins to catch up with a company’s reform process.
“In the UK, our dream company would be one with a market capitalisation of around £2 billion, something just outside the FTSE 100 with a strong balance sheet, and ambitious management that can leapfrog competitors and move into the FTSE 100,” says Reid.
“In that process, the stock price may then double over three to five years. What you’ve got is a number of mid-cap companies that are actually global companies – they’re just listed in the UK,” he says.
Reid sees plenty of misplaced valuations in mid-cap stocks currently. In recent years, some of the best-performing stocks have been unloved companies that unexpectedly won investors over. He also found particular opportunities in the recent volatility.
“Tullett Prebon, which is an inter-broker dealer [a specialist financial intermediary], loves stock market volatility, and has experienced five years of low volatility in the market,” says Reid. “The recent environment was very positive for it, and it’s actually a global business and has offices everywhere. Those are the sort of companies that we think are attractive.”
UK retail, on the other hand, is a good example of a sector in which companies are fully priced, according to Reid.
“We think people are very keen on this theme, but we’ve actually sold the majority of our UK retail,” says Reid, who believes they eventually will see a bit of a downturn. “The sort of businesses we like to look at are those trading slightly lower than the market, with the stock markets just not sure about their prospects because investors aren’t recognising operational improvements. There is quite a lot of opportunity in those companies.”
Nevertheless, large-cap companies also offer long-term growth prospects, Reid argues. Aviva’s £5.6 billion acquisition of Friends Life at the start of the year created an insurance giant with assets of more than £390 billion – a giant Reid believes offers good long-term investment opportunities.
“Friends Life was very much a mistrusted company, but actually, when we looked at it, we realised it was a massive cash generator,” says Reid. “Aviva is a very ambitious, large-cap company that needed cash to support its growth plans. The merger has effectively strapped this big cash-generating engine onto the Aviva aircraft, which gives it the energy to grow very significantly. That’s what makes it an exciting deal.”
Chris Reid is the manager of the UK Income fund. The opinions expressed are those of Chris Reid and are subject to market or economic changes. This material is for information only and is not a recommendation or intended to be relied upon as a forecast, research or advice. The opinions expressed are those of Chris Reid and are subject to market or economic changes. The views are not necessarily shared by other investment managers or by St. James’s Place Wealth Management.
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