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JOHCM manager prefers de-rated stocks

JOHCM manager prefers de-rated stocks

The best investment ideas going forward are likely to be found in stocks and sectors that have spent the last few years de-rating and de-gearing, Ben Leyland, Citywire + rated manager from J O Hambro Capital Management (JOHCM) told Citywire Asia.

In general, Leyland believes that the next five years will look nothing like the last five years.

‘It is impossible to enjoy the same degree of multiple expansion as we have seen already, and the scope for balance sheet re-gearing is much more limited,’ the London-based manager said.

In his JOHCM Global Opportunities fund, Leyland is keen to focus on stocks that have limited downside if things do not go so well, and lots of upside if unexpectedly positive things happen, such as a cyclical recovery in earnings power or management making value accretive investments.

In contrast, the stocks that have re-rated and re-geared are priced for disappointment, therefore, they need to be avoided. Moreover, in the last five years, the most notable feature has been the re-rating of earnings multiples and this re-rating has not been restricted to or led by “bond proxies”.

The market has also been buoyed by bond investors moving into high-quality dividend-paying stocks in sectors with the most reliable cash flows.

In his current portfolio, Leyland believes sectors such as consumer staples (4.7%), healthcare (3.2%), utilities (13.2%) and telecommunications (2.5%) are reliable cash generators.

Additionally, he prefers to invest in businesses with strong and sustainable client relationships over those with ‘killer technologies’, as the former tend to last much longer than the latter.

‘Companies like Accenture can use artificial intelligence to evolve and enhance their existing service proposition, but in general we see technological change as a downside risk to incumbent businesses much more than an investible theme, because it is much harder to pick long term ‘winners’ in a fast-changing environment,’ he said.

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