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 Henry Dixon from Matterley Asset Management about some recent investment opportunities that have caught his eye. He discusses one large-cap, one mid-cap and one small-cap company. Dixon runs the Matterley Undervalued Assets Fund.
Video Transcript:
Alanna Petroff: For this episode of Fund Managers' Favourites, I am joined by Henry Dixon. He focuses on investing in overlooked, unloved and undervalued stocks. And this strategy has paid off well in the past. In fact, in 2012, his fund returned 24% to investors, which was way better than its peers. So he's joining me now to talk about his top picks and his overall investment strategy. So Henry, thanks for coming in.
Now, let's talk specifically about your strategy. Now, you focus on these undervalued areas. Are there certain kinds of stocks that you look at?
Henry Dixon: Yeah. I think I could sort of sum up generically the type of stock I'm interested in. I'm interested in stocks that you'd absolutely have no chance of replicating for the current price on the screen, and the overlay I would add to that also is I’d demand that these stocks be cash generative. And what you tend to find therefore is that weaker competitors will exit the industry, the strong get stronger, and the business comes back and makes more money than it did in the last cycle.
Petroff: Okay. Now, your top three picks that you've brought today… We have Carnival in the large-cap area, Bank of Georgia, mid-cap FTSE 250 and H&T Group, a small-cap company. So let's go over each of these stocks and why you like them.
Let's start with Carnival. Not everyone is going around saying that they like this company right now. Why do you like it?
Dixon: Yeah. I think there are two things. I think as I make every investment, I always like to test the downside thesis and I think we are just approaching the time when we know Costa Concordia is still on peoples' minds, but obviously [it was] slightly over a year ago now. But we are in a situation where I thought the most interesting data point that we got out of it was the insured payout that Carnival received for Costa Concordia and as I transpose that value across this entire fleet, we are in a situation whereby the insured value of the fleet is slightly above the current value of the company. So I think that gives us a great deal of confidence on the downside.
With regards to the upside, I think we've got a situation whereby we see a slightly better picture in the US with regards to the consumer returning, with house prices picking up, and that’s very relevant. And then also, a key cost in that profit and loss account will be the oil price. If the oil price is starting to fall, be it because of better supply or falling demand in the US, then that will also be incredibly positive.
And the other area as well, I think it’s all very well these earnings are picking up, but if it's not going to be returned to shareholders, then to some extent, it's a little disappointing.
But the other area I'm also very optimistic about is that over the last 10 years, the company has been guilty of building too many ships, in my opinion. They are however reining back on that ambition of building new ships. That means any cash that’s generated has an incredibly good chance of being returned to shareholders in the form of dividend or buyback.
Petroff: Okay. Moving on to your mid-cap pick: Bank of Georgia Holdings. I did not even realise that this was in the FTSE 250. Tell me, how you found it and what you like about it.
Dixon: Well, you definitely won’t be alone in not realising it’s in the FTSE 250. I think this will obviously fall into the overlooked area. It's very poorly covered by the Street and I absolutely adore finding situations which are poorly understood, poorly covered, because it does allow me as a stock picker to be really able to express myself when it comes to value.
With regards to the value, this company is the cheapest share in the FTSE 250 on price/earnings, which is a very relevant metric that many people use. It's trading on about five times earnings.
As I move to the balance sheet as well, it's trading well below book value and it's trading about 0.9 of its book value. Now, of course we can find banks in the Western world below book value, but typically they are loss-making or making exceptionally poor returns on equity. But in this instance, Bank of Georgia is generating return on equity in excess of 20%. So it looks standout value on the profit-and-loss and incredibly good value on the balance sheet as well.
Petroff: And it's a well-run company as well?
Dixon: Yeah, fantastically well run. I think we can take a lot of comfort from how it coped with the downturn in '08. The business remained profitable, the operating level didn't require state aids and I think that gives us a huge amount of confidence in the ability of this business to weather tough times.
Petroff: Now moving on to your third top pick in the small-cap area, H&T Group. A pawnbroking business. Tell me a bit about why you like this company.
Dixon: Yeah, I think it's – the first reason I think would definitely be valuation. Again I see a very undemanding sort of earnings-led valuation, approximately eight times, which puts it on a really healthy discount to the market. Also with regards to its balance sheet, this is a business that specialises in secured loans against personal items, be it a watch or a clock or a gold chain for example. The way it holds these items as they are traded into this business is incredibly conservative. Typically they hold them at about 50-60p on the pound relative to their true value. So to be buying this business in and around book value when I believe the asset value is incredibly conservatively stated, I think is really exciting. So I see great balance sheet value and very good earnings-led value as well.
Petroff: Now, moving on to the key risks for each of these companies, let's go over one key risk per company and let's start with Carnival.
Dixon: I think an obvious key risk would be a spike in the oil price. All I could do to put people at ease with that is that I see the net speculative longs in the oil price are at 25 year highs, so I'd say political risk is in the price, not out of the price. But that would definitely be a key risk.
Petroff: For Bank of Georgia, what would you say the key risk is there?
Dixon: I think it's a very generic term, but obviously it would be political risk. But I think it's worth pointing out there's political risk everywhere in the world. BP found that out to their cost probably in the Gulf of Mexico. Yes, as you know Georgia’s proximity to certain areas in the world means that people will probably tower it with a sort of political risk brush. All I can say to offset that is the astonishing starting valuation relative to peers, on emerging market bank peers it looks incredibly cheap. And as I say, I draw huge amount of confidence from how it handled itself in an incredibly difficult period in the financial crisis.
Petroff: What about H&T?
Dixon: I think probably there I would probably say the biggest risk to H&T would be quite a sharp fall in the gold price. Historically this company has done quite well from people trading in their gold products and monetising them for cash. So I think that would probably be the key risk that I'd highlight. If the gold price was to fall by let's say, over 10%, then I think that would reflect badly on H&T.
Petroff: So people might stop trading in their gold.
Dixon: Absolutely.
Petroff: Okay. Thank you very much for coming in today.
Dixon: No problem.
Petroff: That was Henry Dixon, from Matterley Asset Management and I'm Alanna Petroff. Thank you very much for watching Morningstar.
