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Investors hunting for good quality companies trading at attractive valuations may wish to examine the recent stock picks of top rated fund managers. To find the recent buys and sells of top UK equity fund managers, first identified five funds Gold rated by Morningstar analysts using the free Fund Screener on Morningstar.co.uk. They are CF Lindsell Train UK Equity, Artemis UK Special Situations Fund, GAM UK Diversified and AXA Framlington UK Select Opportunities, and Investec UK Special Situations Fund.
Then using Morningstar Direct we looked under the hood at recent changes in their portfolio line up.
Top Managers Target Big Bank
Among these top five top rated UK equity funds, three funds have recently adjusted their holdings in HSBC (HSBA).
GAM UK Diversified Fund added 28,000 HSBC shares to its portfolio in December 2015, taking the total holding to 2.3 million shares, worth £12 million in today’s market. This makes it the largest holding in the fund at 6.4%.
Artemis UK Special Situations Fund recently added 1.8 million HSBC shares to its portfolio, taking the total holding value to £37 million. HSBC now makes up 3% of the Artemis UK Special Situations fund.
Investec UK Special Situations trimmed its HSBC holding by 689,000 shares in December, although HSBC still makes up 9% of the fund.
HSBC’s latest results show that adjusted profit before tax of the third-quarter of 2015 was down 14% from the previous year. Morningstar analyst Erin Davis says this showed the impact of slow global economic growth since HSBC is exposed to nearly every economy in the world. HSBC is refocusing its business on the region as China’s growth slows, and earnings could be volatile, she added. “Therefore HSBC’s growth prospects will be dampened and it could lead to a sharp increase in loan losses,” Davis says.
Services Companies Snapped Up
Managers of the Gold Rated CF Lindsell Train UK Equity Fund made a number of additions to their existing top holdings, according to Morningstar Direct. The fund managers increased their holding in RELX (REL) to nearly 15 million shares by the end of 2015. This company now makes up 9.3% of the fund.
The position in Sage Group (SGE) was enlarged to more than 22 million shares by the end of 2015, a market value of £135 million. The company now makes up 7% of Lindsell Train UK Equity. Sage remains the number-one accounting and business management software provider around the world. The company noted organic revenue increased nearly 7% during the first quarter of fiscal 2016, according to Morningstar analyst Andrew Lange.
With the shift to subscription-based billing, group revenue is roughly 73% recurring, Lange says. This recurring revenue stream provides Sage with better revenue visibility, predictability, and customer engagement, Lange says.
Lindsell Train fund managers also increased their position in Unilever (ULVR), buying 6.5 million shares in December. The company now makes up almost 10% of the fund. For long-term investors who are willing to look past near-term volatility, this high-quality business, Unilever, has a modest upside, Morningstar analyst Philip Gorham says. Unilever’s underlying sales growth of 4.9% comprised 2.9% higher prices and 1.9% volume growth. This was a sequential slowdown from the 5.7% growth in the third quarter. Yet Gorham considers it as a solid achievement for the company under recent market slowdown. Gorham believes Unilever’s exposure to emerging market offers the potential for long-term volume growth.
Buying and Selling Cheap and Troubled Mining Stocks
A new name has been added to GAM UK Diversified in December last year, Glencore (GLEN). The fund holds 1.2 million shares, valued at £1 million, making up 0.6% of the fund. As China is the key demand driver for nearly everything Glencore digs out of the ground, diversification benefits are limited, Morningstar analyst David Wang says. Weaker Chinese GDP growth and the end of the investment-led economic model portend tepid demand and lower prices for most of Glencore’s industrial commodities, Wang reports.
The same month, GAM managers sold 1.1 million shares in Anglo American PLC (AAL). GAM’s position in Anglo American holdings was dropped to 568,000 shares worth £1.7 million. China’s crackdown on luxury spending has hurt sales in the company’s diamond business, and a recovery will likely be protracted, Morningstar analyst David Wang says. However large platinum and diamonds businesses give Anglo the kind of exposure to “late stage” commodities that major mining peers simply don’t possess, Wang says.
Investec UK Special Situations added Rio Tinto (RIO) to the portfolio in December 2015, with 642,000 shares worth £12.7 million. Rio Tinto is one of the direct beneficiaries of the increasing appetite for natural resources in China, Morningstar analyst Mathew Hodge says. However, the global economy is cooling off. Demand for natural resources in China has peaked, and commodity markets are at the beginning of a long and painful structural decline, Hodge says. Hodge now expects quite flat volumes for Rio Tinto across the board, reflecting the outlook and intense pressure on the capital budget.
Supermarket Stocks
GAM UK Diversified held nearly 3 million Tesco (TSCO) shares held in the fund in September 2015, but in December 2015, holdings were down to 1.3 million. Fund managers have significantly reduced their position.
International growth opportunities could drive profitability of Tesco higher as its stores mature, Morningstar analyst Ken Perkins says. Despite Tesco shares have rebounded of lows as results have improved, the company is still scrambling to fight for market share. Existing players could become even more price competitive. If consumers continue migrating to other channels, Tesco may struggle to maintain historic productivity and profitability levels at its large stores.
Investec UK Special Situations’ major recent investments have been in grocery retailers. Managers bought three million Morrison Supermarkets (MRW) shares in December taking the total allocation to 17.9 million, making up 2.5% of the fund. Managers also bought 1.1 million shares in Tesco in December.
Morningstar analysts believe that Morrison's recent partnership with online distributor Ocado is a solid strategic move, as it should allow the company to quickly expand into the online channel without the execution risk associated with building this platform from scratch.
