Each week, a professional investor tells MoneyWeek where she'd put her money now. This week: Catherine Stanley, manager of the F&C UK Dynamic Fund
The market environment has been very tough since Peter Lees and I took over the F&C UK Dynamic fund, with the FTSE All-Share Index down 14.36% year-to-date. As the market has become more risk-averse, we have re-focused on high-quality growth stocks. We look for firms with strong fundamentals, such as experienced management, a competitive business model and a financial position that allows for sustainable growth. We aim to find firms that we expect to perform well over the cycle, rather than trying to chase short-term gains. Overall, we want to avoid treading on mines and to focus on buying companies at attractive prices.
Two themes running through the portfolio are technology and support services, which both have solid medium-term growth characteristics. My first pick would be Spice (LSE:SPI), a support services firm providing outsourced infrastructure solutions mainly for regulated utility companies. This makes it quite a defensive play, as growth has been driven by regulators demanding higher levels of investment from utilities. On top of this, rising consulting revenues have improved margins, combining long-term customer relationships and lengthening contracts to offer stability.
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I also like Pace (LSE:PIC), a leading developer of set top boxes (STBs), which are used for receiving digital satellite, digital cable and internet TV. It operates globally for the pay TV market, supplying firms such as DirectV, Comcast and BSkyB. Although its track record has been mixed, the last three years have seen Pace rehabilitated with improved margins. It's brought new technologies to market in a cost-effective way and ahead of rivals. This was key to its entry into the US market a few years ago. Pace's relatively small scale means flexibility, with quick customer responses. Demand for the likes of personal video recorders has led to new opportunities. More recently, Pace bought Philips' STB business, introducing diversification and opportunity for growth. This re-introduces the company to the higher-risk retail market but ranks Pace number three internationally and offers more opportunities than risks. This is a good opportunity to own this undervalued stock.
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My final stock pick would be Domino's Pizza (LSE:DOM), which I consider to be a classic best-of-breed company. It is currently the UK's largest pizza home-delivery chain and it seems to be reaping the rewards of British consumers deciding to eat out less and rein in spending as rising inflation, food and fuel costs become a growing concern. The franchise model allows for rapid growth with a limited demand for capital. It has a virtuous circle in terms of marketing spend driving growth. Each franchise pays a percentage of its profits into the national advertising fund. As the business grows, so will the amount of money in this fund, offering the group more opportunity to sponsor mainstream television, most notably the recent season of Britain's Got Talent.
The firm's long-term growth potential is also highly visible, with a simple, easily funded roll-out model, which gives scope for increased geographical penetration. Relatively low-cost items means growth should stay solid even in harder economic times the company recently confirmed that pre-tax profit in the six months to the end of June rose from £8.28m to £9.7m.
