In the video series, "Fund Managers' Favourites", Morningstar speaks with UK-based fund managers to learn about their top investment picks. In this video, Morningstar journalist Alanna Petroff speaks with Old Mutual fund manager Dan Nickols about his three favourite equity picks.
Funds and Securities Mentioned in this Video:
Old Mutual UK Select Smaller Companies Fund
Fenner (FENR)
Anite (AIE)
Telecity Group (TCY)
Previous videos from the “Fund Managers’ Favourites” series:
- Fund Managers’ Favourites: Small-Cap Picks
- Fund Managers’ Favourites: More Small-Cap Picks
Video Transcript:
Alanna Petroff: As investors, we're always on the lookout for top notch investment ideas and who better to speak with than a professional fund manager. Today, I’m joined by Dan Nickols, he is a fund manager at Old Mutual and he runs the Gold-Rated UK Select Smaller Companies fund, which has seen actually very impressive growth so far year-to-date, double-digit growth. So Dan, now let’s start with briefly going over your investment strategy.
Dan Nickols: Okay. Well, if we look at our process, we describes ourselves as flexible investors, so we’re not pigeon-holing ourselves as either growth or value investors. What we look to do is to combine top-down analysis, so an understand of where we are in the economic and stock market cycle and essentially pick ideas which we think fit with the point in the cycle that we’re actually at.
Petroff: So, right now we have three top picks to go over and let’s start with Fenner.
Nickols: Okay. So we think about Fenner, well what does it do? This is a manufacturer and an installer and a service provider of heavy-duty conveyer belting for use in applications such as iron ore mining or coal mining.
Petroff: So they work in the mining space, and if you are bullish on gold and mining and all that jazz, that’s where you would want to be right now.
Nickols: If we think about our rationale for holding the stock, the reason we like it is that we think demand is likely to remain very strong for companies like Fenner well into the medium and probably the long-term. The reason for that is a simple one: it's the belief in the ongoing nature of the commodity supercycle. The fact that through the growth of the economies like China, for example, we will see an ongoing growth in the demand for commodities like coal and iron ore.
Petroff: Now, your next top pick is a very different company; very different from the mining space. That’s Anite.
Nickols: Yes. This is a software business and the particular area of focus that it has is on software that enables the testing of mobile phone handsets and smartphones. The key growth driver for it right now is the growth of 4G telephony.
I think there are two or three things worthy of mention. Firstly, we think this technology wave is going to be very big, much bigger than previous technology iterations, be it 2G or 3G. This time around it is much bigger.
I think the second key attraction for us is the fact that we feel we’re in the relatively early stages of that technology wave as well. Anite looks very well positioned to benefit from that.
Petroff: So, ifyou are out buying an iPhone and you think maybe they will be making another bigger, better iPhone in the future, then Anite might be something that you are interested in, if you are interested in that kind of space.
Nickols: Anite should be a beneficiary of that technology wave, yes.
Petroff: Now, let go over Telecity Group. Also in the technology space, but a little bit different.
Nickols: Yes. So what does Telecity do? Well, it owns and operates data centres. So for example, in the east end of London, where you’ve got very high connectivity of the telephone network and a range of servers for high volume users like banks, online retailers, businesses involved in the streaming of media, be it music or visual media. These are the sort of activities that they are involved in and they support.
Petroff: So it’s server centres to the east side of the city. Would I be using those servers when I am checking my email in the cloud or something like that?
Nickols: Not so much. The particular focus for Telecity is on the so-called low-latency application, where you really need that immediate response. With e-mail, for example, the fact that there might be few seconds delay, that doesn’t really matter. For that sort of thing, they’ll use data centres, server farms, in more remote locations. It’s for the highly connected use that you need those data centres right on the telephone network.
Petroff: Okay. Now let’s go over some of the key risks that we have for each of the companies. Let’s review one of the main key risks per company.
Nickols: Okay, well, we start with Fenner; I mean the risk really is that we’re wrong in our assessment of the shape of the commodity supercycle. If, for example, we see the Chinese economy slow or grow less rapidly and than we think is currently likely, it's highly likely in turn that the production of commodities like iron ore and coal would be at a much lower level than is currently seen. And Fenner I think clearly would suffer as a result.
If we think about Anite, again similarly, the key risk really is that we’re wrong about the shape of the 4G telephony cycle. We think, certainly compared to previous cycles, it’s likely to be both much bigger and last much longer. Clearly, if we are wrong then Anite won’t see the growth that we currently think it's capable of producing.
Finally for Telecity, it's more of almost a sort of equity market, sort of, share rating risk. Telecity is a highly rated share: it trades on a P/E of around 20 times for its financial year 2013. So it clearly is an expensive stock. If for example, we see risk aversion strike equity markets, then it is possible that Telecity could de-rate as a share, even if doesn’t deliver the growth that we think it’s capable of delivering.
Petroff: Because when you do look at the stock graph for Telecity, shares are up roughly 200% over the last five years. So, perhaps we could see that correction, if people get jittery I suppose.
Nickols: Yeah, it's entirely possible, yes. It's one of the risks that we have to take account of.
Petroff: So the share price has done really well over the last five years and it's up roughly 200%. I am curious when you bought.
Nickols: Well, the shares are trading at just shy of GBP 8 at the moment. We bought the major part of our holding at around GBP 2.
Petroff: That’s a good timing. Okay. Thank you for joining me today.
Nickols: Thank you.
Petroff: For Morningstar.co.uk, I am Alanna Petroff and that was Dan Nickols from Old Mutual.
Old Mutual Disclaimer
The views expressed were held at the time of publication, are subject to change, and do not constitute investment advice. No liability is accepted to recipients acting independently on its content.
