Mark Hall, fund manager for Rensburg Fund Management's UK Select Growth Trust tells MoneyWeek where he'd put his money now.
The recovery in the UK equity market in 2003 was welcome, but the big move now appears to be over. The market is now in fair-value territory, which has made it harder to make good returns in 2004. And as we enter the second half of the year, the FTSE 100 index is languishing below its 2003 closing level.
Given this, and the uncertainties in today's global macro-economic environment, I believe that investors' time is best spent, not on betting on the market as a whole, but on attempting to identify catalysts for change in medium-sized and smaller firms. This entails looking for factors that will cause investors to reassess the value of a business, such as management changes, acquisition or disposal activity, a refinancing, or perhaps just a change in underlying trading conditions.
Good investments like these don't come along that often, and finding them requires a patient and disciplined approach but the returns can be spectacular. In our fund, the Rensburg UK Select Growth Trust, we run between ten and 20 positions of this nature at any one time, accepting that in doing so we take on additional risk.
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One stock generating interest is Thorntons, the chocolate manufacturer and retailer. In April, the group appointed a new executive chairman, Chris Burnett. Over the past 20 years or so, he has been successfully involved with a number of quoted family-dominated businesses that have, for one reason or another, lost their way. Thorntons fits this pattern neatly and we think he can help revive the group's fortunes.
A second stock we've been following closely is 4Imprint Group, the corporate gift supplier. The business had a horrid time during the advertising recession, but after a number of management changes over the past 18 months, and with trading improving, we see better times ahead. We've been particularly interested to see the recent appointment of Ken Minton as executive chairman. His involvement in previous turnarounds bodes well. Both the US and UK businesses are now profitable and, with significant cash balances on the balance sheet, we await developments with interest.
Cardpoint, the independent cash-machine operator, has recently completed a transformational deal' with the acquisition from HBOS of their remote cash machines. All now depends on how successful Cardpoint is in changing these machines over to their charging model. It will be a number of months before this is clear, but early indications are encouraging, and on the basis of earnings forecasts for the year to September 2005, the shares are very modestly rated.
At the sector level, real estate is still of interest. In spring 2003, the sector was trading at a 50% discount to its net asset value (NAV), but this has narrowed due to the possible introduction of real-estate investment trusts and an improvement in underlying tenant demand. Most of the stocks in the sector now appear up with events, and there is still value in smaller special situations, such as Unite Group (UTG) and CLS Holdings. These trade on 30% and 25% discounts to NAV respectively we expect these discounts to narrow over the next 12 months.
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