Ben Yearsley: You'll never get a bum steer from Artemis UK
Saturday 13 August 2011
I am going to avoid writing in detail about the wider markets this week. Events are moving so quickly that as soon as I write something they have moved on! So, for those still venturing into the markets I thought I would highlight a fund manager with an excellent pedigree who is looking to exploit a range of long-term structural growth opportunities. The manager is Tim Steer, and the fund is Artemis UK Growth.
If you turn the clock back to the early part of this century, one of the major themes for financial markets, apart from the bursting of the dotcom bubble, was major accounting scandals and the collapse of companies such as Enron and WorldCom. What is the relevance of bringing up this ignominious stock market history? Quite simply that one of Mr Steer's unique selling points is his passion for dissecting company accounts looking for dubious practices and numbers that don't add up, essentially avoiding Enrons. Indeed, in his hedge fund (sadly not available to retail investors), he shorts companies where he finds evidence of such accounting shenanigans.
One of his most famous triumphs was Connaught, the property management and environmental services group that went into administration in September 2010. Among the questionable practices, he found that its balance sheet recognised profits from activity that had not yet been fully carried out or paid for. As Connaught's financial position deteriorated in the wake of government spending cuts, there was insufficient cashflow to pay suppliers. The company was eventually put into administration, wiping out shareholders.
Needless to say, this was a very profitable trade for Mr Steer and, although shorting is a risky strategy, he needs only a couple of successful shorts each year to add a tremendous amount of value for his investors. With more than 2,000 companies in the UK to choose from, there will always be suspect accounting somewhere. In this retail fund, Mr Steer can go short with up to 10 per cent of the portfolio, and it can really give him an extra source of returns over his rivals in the sector. Plus, for his long positions he actively avoids what he calls "the high cliff-divers of Acapulco" – companies that sail too close to the wind, hoping things will turn out alright.
Although a UK fund, Mr Steer fervently believes this is a global investment with only 29 per cent of the portfolio by revenue exposed to the UK. Quite simply, he is seeing lots of opportunities in Britain that offer inexpensive exposure to the rapid growth of emerging markets. He also believes UK companies generally have the added benefit of good corporate governance and accounting standards, though clearly there are exceptions!
So what sort of companies is Mr Steer looking at? Examples include Devro, a company making sausage skins, and a beneficiary of the increasing consumption of meat Asia, and Aggreko, a firm with significant emerging market exposure providing temporary power generators.
The top holding, Weir Group, is the world's largest manufacturer of pumps for "fraccing" – essentially extracting oil and gas from rock formations. Mr Steer believes many of his holdings are well protected from any global slowdown as they dominate specific niche areas offering strong growth.
To accompany his forensic accounting approach, Mr Steer calls upon his quantitative system built by Stephen Yiu, the assistant manager of the fund. This looks at a variety of company factors including price-to-earnings multiples, earnings growth, share price momentum and technical analysis. Each stock is scored out of 100 and the system is used to search for new ideas, as well as to sense-check existing ones.
At the end of July, the UK market looked good value, based on our analysis. The recent significant falls have made stocks cheaper still to the point that earnings and dividends would have to fall a good deal to justify it. For investors prepared to venture into the markets and hunt for bargains rather than batten down the hatches, I believe this fund represents interesting way to exploit the varied opportunities in the UK market.
Ben Yearsley is an investment manager at Hargreaves Lansdown, the asset manager, financial adviser and stockbroker. For more details about the funds included in this column, visit www.h-l.co.uk/independent
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