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. Click here to see the last ‘Fund Managers’ Favourites’ video with Dan Nickols from May 2012.
Video Transcript:
Alanna Petroff: If you had invested £10,000 back in 2004 when Dan Nickols had started running his fund at Old Mutual, you'd probably be very happy right now because you would have tripled your money. Dan Nickols runs the Old Mutual UK Select Smaller Companies Fund, which tracks, obviously, small caps and it is Gold-rated by Morningstar OBSR analysts. He joins me now to talk about his top picks.
So, Dan, thanks very much for coming in.
Dan Nickols: Thank you.
Petroff: Now, we've gone over in a past video your investment strategy, so let's just get straight to your top picks this time. We have DS Smith, TalkTalk Telecom Group and Perform Group. So, now DS Smith works in the paper and packaging area, tell me a little bit about why you like them?
Nickols: Well, I have to say at the outset, yes, this is a cyclical business, but the particular reason we like this as an investment case is that we think there is a lot of self-help that's going to give rise to very good earnings growth over the next two to three years. Quite simply the shares don't look very expensive.
Why do we think we're going to see good earnings growth? Well, at the beginning of 2012, the company acquired SCA Packaging's European corrugated assets, and we think that was a very good acquisition. But quite simply, the benefits of that acquisition we don't think are really fully captured in forecasts going forward, so there are further cost synergies to come through. We think there are revenue synergies that are going to get executed as well. So, as we look out over the next couple of years, we think we're going to see very good 20%+ rates of earnings growth come through in the context of a cheap share.
Petroff: Okay. You'd normally think that paper is a little bit boring, but when you hear growth rates like that, that sounds good.
Now, let's move on to TalkTalk Telecom Group a bit of a different kind of company, operating in telecom. Tell me why you like that?
Nickols: Okay. Well, the reason we like this particular story is that in many ways, like DS Smith, there is a lot of self-help going on here. This was a business which was assembled by acquisition and it is really only now that the management team are beginning to drive cost out of the business.
Over and above that, they're beginning to complement the telephony and broadband offerings with a mobile telephony and TV as well through their YouView offering. And what all of this is bringing together is the ability to raise ARPU, average revenue per user, to drive cost synergies, to reduce customer churn as well.
So, when we look out over the next couple of years, we can see very strong earnings growth from this business, and realistically £0.25+ per share of earnings in their 2015 year, alongside 15% compound dividend growth as well. So, we have a share which is not expensive, where you have a good yield, which is growing as well. And in an uncertain economic environment, again I think that's the sort of share which will do very well.
Petroff: Now, let's move on to Perform Group, which is a very different kind of company. Tell me a bit about what they do and why you like them.
Nickols: Okay. Well, the bottom line here is that we think this is a company again which can grow very well, but the delivery of that growth will be very much a function of them executing on a unique business model, rather than what happens to the wider economy.
What do they do? Well, in essence they buy sports rights and monetise these in a range of very clever ways. The principal means of which is to actually package it into a service called Watch&Bet, which is sold around the world to online gaming companies to facilitate in-play betting, which is a real growth area. So again, when we look at the earnings growth that we think this company can achieve over the next two to three year, we are realistically looking, we think, at mid-20% rates of earnings growth. So again, in this sort of economic environment, I think that's a share which will do very well.
Petroff: Now, generally we have gone over key risks in the past when we've looked at top picks, but I am more interested this time around to look at the top picks that you've had previously. When we spoke in May 2012, your top picks at the time were Fenner, Anite and Telecity Group. Are you still invested in these three companies?
Nickols: We still have our holdings in Anite and Telecity. If we look at Fenner, well, I think the facts have changed slightly there. This is a business which is driven principally by the outlook for mining CapEx, and we think that outlook has deteriorated since we last looked at that company. So, we don't have a position there, but we do retain our positions in Anite and Telecity. While we've had good returns over time, we still think the shares are well placed to do well.
Petroff: Okay. Thank you very much for coming in today.
Nickols: Thank you.
Petroff: That was Dan Nickols from Old Mutual and I am Alanna Petroff. Thank you very much for watching Morningstar.
