Income Stock Tips from a Silver Rated Fund Manager

Emma Wall: Hello and welcome to Morningstar. I'm Emma Wall and I'm joined today by Alex Crooke, Manager of the Bankers Investment Trust (BNKR) to give his three stocks picks.

Hi, Alex.

Alex Crooke: Hello.

Wall: So what's the first company you are highlighting today?

Crooke: Well, it's the second largest holding in the portfolio and it's called Delphi Automotive (DLPH). So, it's listed in America, used to be General Motors car parts business. So lot of car parts that go into cars in America, in Asia, in Europe it has roughly a third, third of its market share.

But what's interesting to me, it's all about the electronic architecture of cars, I do feel cars increasingly going to more electric motors, but also the technology within the car, so the cabling, the connectors, they'll all be Wi-Fied up and have other technologies within there. So Delphi I think is perfectly placed to take advantage of that, they have lot of market share in those key areas and I think just therefore it looks a very interesting stock.

Wall: The automotive industry in the U.S. is often a barometer for how well the economy is doing and both look good. However there are some concerns about the U.S. economy. Some people say that, there is too much contagion risk with other parts of the world. If the U.S. economy was to slow, how at risk would this stock be?

Crooke: I think fairly limited, for starters it has got international exposure. So we would hope some of that slack is taken up in Europe and where we should see some more positive action in European car sales definitely bottoming and coming up. And the American economy is though quite self-content, they've got more of a closed economy.

It doesn’t export an awful lot, therefore really it's about the dynamics within the U.S. economy and I think we're still seeing positive results in terms of lending. So again it's very key, a lot of cars are sold on finance deals, so the bank's lending there and they are. So there is also lot of stock that needs replacing because in the previous crisis, people keep their cars a little bit longer and again, the technology is of hybrids, of electric motors, I think will just drive replacement cycles lot quicker than we've previously seen.

Wall: What's the second stock today.

Crooke: Second one I'd talk about is Amcor (AMC), which – I'm going right at the other side of the world now in Australia. So it's an Australian listed company, but again a global player in packaging. So particularly plastic, rigid and flexible plastic for fast moving good. So beverages; foods, tobacco all sorts of things like that. Again, it's a same sort of theory.

I do see a little bit growth appearing in the world and the markets are very skeptical of these international stocks that play into that. So just like autos I quite like just consumer goods, people spending a little bit more on their products. But what Amcor is great is, it's all recyclable, lot of technology actually coming into these products to allow them to recycle very efficiently.

Wall: How dependent on is, individual companies are – is that company, so for example, does it have a big deal with Coca-Cola, should it loose that one client, would it be responsible for sort of 75% revenue loss et cetera?

Crooke: It shouldn't be because the scale of these customers, they are all international names that you know and love and they actually embed that packaging plans almost next door or within the factory. So it's part and parcel of the process. So it's almost very difficult to extract them. There is obviously tough decisions about the pricing of product.

And again with plastics, the price of oil falling, there should be some gains to pass on their customers. So those are the tricky conversations. But I think really the market share if you look at the cash they generate just keeps growing, it supports 4.5% dividend. And the company strategy is to produce 10% to 15% shareholder return for us. So 10% to 15% with a major player I think is quite a good trade-off in these markets.

Wall: What's the third and final stock?

Crooke: So now we're going a bit more emerging market. We go to China and again it's often perceived as very volatile, dangerous market. But we actually within Bankers have access to the A share, this is the local domestic market in China.

I'd like to talk about Yutong Bus (600066), which is the number one manufacturer of sort of six meter very large buses. But particularly their dominant market share is electric buses. So China is definitely on a reform package of environmental standards trying to remove clean-up the air. And one of the key aspects, the largest polluter of air in China is the busses. They are all diesel engine. So I think they have 30% market share in electric buses. Again, it's the same character as Amcor, big cash generation, lot of cash in the balance sheet. So it's not a risk, I think, to fluctuations in markets. Again, the international market is new to them. So could they open up in there? I think they can, yeah.

Wall: Alex, thank you very much.

Crooke: It's a pleasure.

Wall: This is Emma Wall for Morningstar. Thank you for watching.