Richard Watts is confident of a UK recovery. It's a good job, too, because he's managing the Old Mutual UK Mid Cap fund (ISIN: GB00B1XG9482) - and around 50 per cent of the companies in the fund's portfolio are UK-facing and extremely exposed to fluctuations in the economy.
It's a high-risk approach but he's encouraged by some of the recent data, which is steadily improving as second-quarter growth has further accelerated in July and August. Purchasing Managers' Index data also shows manufacturing and construction industries are bouncing along nicely. The UK is expected to post between 1.3 to 1.5 per cent quarterly growth in the third quarter, which he says is very good news. "Annualise that and you get a 4 per cent to 5 per cent annual growth, which is a really strong figure," he says.
He's also seeing a pick-up in merger and acquisition (M&A) activity, which he says is "a function of confidence". As consumer confidence improves and the recovery gets into full swing, he's expecting a bigger pick-up which could benefit the fund. Engineering group Invensys (ISYS) has been the biggest instance of merger and acquisition in the portfolio - it received a big money approach from Schneider Electric in July 2013. "This was very good for us," he says. "We bought the shares at around 300p at the back end of last year and now the price is 500p, so it's been a very good return."
One of the biggest themes he's investing in is housebuilders, a sector he says is more attractive now than at any time during recent history. Stocks have largely seen a welcome performance boost over the past 12 to 18 months. "I started off trading these companies at very distressed valuation multiples because the housing market in the UK was basically on the floor.
"As recovery comes through, they have also been aided by government initiatives such as Help to Buy, which have also benefited them. They have done well and they will continue to do so. They will become even more profitable over the next few years and have potential for significant cash returns - this will be the next leg of the story for the housebuilders."
Two housebuilders he favours at the moment are Persimmon (PSN) and Taylor Wimpey (TW.). Both have the attractive prospect of accelerated cash returns over next 12 months. And over the next five years he expects up to 60 per cent of their market capitalisations coming back to shareholders
But if he had to pick one stock he thinks is about to bring home the bacon, he'd pick Barratt Developments (BDEV). It has an attractive valuation multiple for a start - trading on just over 1.2 times book value. And land buying is predominantly being done by the quoted housebuilding companies in the UK, crating a monopoly Barratt Developments will benefit from.
Sceptics say this theme could be short-lived, because the government's Help to Buy scheme will help volumes over three years, but then they will fall soon off after. Watts isn't worried, though. His counter-argument to this bearish idea is that housebuilding in the UK is still depressed. And if in three years' time the UK is on a solid path to recovery, we'll start to see more normalised rates of growth emerging.
Richard Watts CV Richard Watts became manager of the Old Mutual UK Select Mid Cap Fund in December 2008, having been deputy manager since 2006. He joined Old Mutual in 2002 after some years as an equity analyst at Orbis Investment. Prior to this he was a senior associate in the Investment Management division of PriceWaterhouseCoopers. He graduated with a degree in Mathematical Sciences from Oxford University in 1998, and is now IIMR qualified and a CFA Charterholder. |
He's also heavily invested in the travel and leisure sector - Restaurant Group (RTN) is one of his favourite holdings, as well as Thomas Cook (TCG), which he describes as a "special situation". He's not in it to get exposure to recovering UK consumers - it's the change in management he's interested in, as they've reduced costs and restructured the balance sheet to make the group run more efficiently.
Since inception in 2002, the Old Mutual UK Mid Cap Fund has substantially beaten the index - a testimony to Mr Watt's investing abilities. But over a five-year period it has struggled to beat the FTSE 250, begging the question as to whether investors would have been better putting their money in a cheaper tracker fund over the period. Mr Watts says he holds his hands up to this failure. At the end of 2009 there was a very strong recovery, with lots of very distressed companies, although he wasn't holding enough of them in a decent size in the portfolio. As such, he thinks risk should be measured in two ways - the chance of losing out - but also the chance of missing out on upside gains. Does he believe his strategy can outperform through time and deliver consistent returns? Absolutely. And his track record has been good enough to earn the fund a place in our Top 100 Funds list this year.
There have been repeated concerns about his fund being too large - at £1.18bn - but he refutes these claims. "Look at the performance and you'll see it has been very strong. It certainly doesn't suggest we are struggling with the size of our fund," he says. "A lot of the expansion has been due to market expansion. We have had some modest inflows coming in, but the size of the fund is perfectly manageable."
IC VIDEO: Watch Investors Chronicle's personal finance writer Katie Morley interview Richard Watts here.
