|jonwig: Lowland hunts for unloved gems
By James Kenny
Published: July 25 2008 03:00 | Last updated: July 25 2008 03:00
Negative investor sentiment towards medium and smaller-sized companies is creating opportunities for Henderson Global Investors' £247m Lowland Investment Company.
The unit trust focuses on income and growth and, according to manager James Henderson, tougher times for the UK economy, are resulting in low valuations for many quality UK small and mid-size companies - a situation that he hopes to exploit.
Mr Henderson said: "At the moment we are buying a number of undervalued companies such as steel highway safety manufacturer Hill & Smith. My view is the company will continue to grow and we are in a position to take advantage of this. Other companies we have recently bought include Senior, an engineering company mainly involved with aerospace that is getting strong demand from the middle and far east."
As well as smaller companies Mr Henderson said he was also increasing his exposure to banks because in his view, share price falls have overly discounted their present problems.
He saw margins for UK banks improving as they increase charges to borrowers. Bad debts will rise, but from low levels, and the banks are prepared for a more difficult climate. In this respect Mr Henderson has bought banks such as HBOS, Barclays and Lloyds, increasing his exposure to between 14-15 per cent overall, up from 7 per cent a year ago.
In spite of the general malaise in the financial sector, insurers - which have been tarred with the same brush as the banks - still represent a good buying opportunity, he added.
He said: "We have been buying general insurers. They have been tarred with worries along with other financials but I do not think this should be the case as they do not have the same subprime exposures and they will be more resilient in this downturn then usual. This time there is less that can go wrong and this isn't reflected in the share price."
Other undervalued areas Mr Henderson has been adding to include housebuilders and insurers.
He has bought housebuilders Bovis, Bellway and Redrow as they are trading on what he sees as attractive discounts and are likely to survive the downturn over the long term.
The manager said he has been reducing his exposure to utilities as their yields were not high enough compared with the yields available elsewhere in the market.
He has also been lowering his holding in Royal Dutch Shell, the fund's largest holding at 5.2 per cent. Again Mr Henderson said he thought the yield on a relative basis was too low.
For the foreseeable future Mr Henderson said he would continue buying smaller and mid-sized companies as he saw the sector continuing to offer quite a few opportunities.
"As an overall view, there's good value emerging, when the yield on the gilt falls below the yield on equities you're usually right to be buying it. I think that is where we are heading at the moment: there is growth coming through so the yields are high enough to be discounting quite a bit. I'm expecting dividend growth and that puts us in good value territory."