Over an investment cycle, one must have conviction in themes to have a chance of outperforming, writes James Sullivan, managing director of Miton Optimal.
This conviction can come at a cost of being 'too early' but can be very powerful as the theme matures and comes to fruition.
Two themes we have been pollinating within our Opportunities portfolio in recent months include real estate investment trusts (REITs) and asset managers.
The REIT stuff...
Within our REIT exposure, we have been buyers of Land Securities, British Land and, more tentatively, Hammerson. All three trade on material discounts to their net asset values as the market is sceptical on property valuations.
Land Securities trades on a price to book of 0.65x, giving it a discount to NAV in the region of 35%, which has bounced nicely off the recent low of a circa 43% discount.
The company has been conservatively managed for a number of years now, disposing of assets above carrying value, and returning proceeds to shareholders, whilst distributing a healthy dividend north of 5%.
The loan to value ratio is far more modest than its historic average paired with the cost of serving that debt at an all-time low. It is our observation that some of the prime REITs are trading close to their residual value, discounting any upside in fundamentals.
There is little doubt asset values will come down, but we believe the price of many REITs is underpinned by the discount they trade on and the subsequent yield being distributed, which is pricing in much of the negative sentiment and then some.
Activism in some cases (notably Hammerson and their 'relationship' with Elliott Advisors) will help underpin pricing.
Asset management companies
Additionally, in the past few months we have owned a combination of asset management companies, attempting to capture the sell-off in that sector, and capture a higher beta play on a market recovery from the December lows.
We have owned Jupiter Asset Management and benefitted greatly from their results at the start of the month, whilst re-entering our position in Miton Group as one of the cheaper stocks in the sector.
Additionally, we have a modest position in Gresham House, a specialist asset manager focusing on alternative investment strategies, including forestry and new energy; an area where we expect to see exponential growth in the years ahead.
More so within the institutional arena there is a sea change of sentiment away from what could be perceived as traditional alternatives towards specialist investments, and Gresham are well placed to capture the changing landscape.
Japanese stocks have more than doubled their returns since December 2012, on the back of Abenomics, but many investors are still not convinced of the sustainability of the rally.
Shares up 15% on Friday