17 December 2014

Last year, Brewin Dolphin picked twelve stocks for a diversified portfolio which returned a cumulative -0.89per cent on an equally weighted basis against a fall in the FTSE 100 of -5.18per cent (at COB on 12th December). The objective was to select a diverse portfolio, across the sectors, which gave us a balanced exposure.  Clearly, the underperformance of the Oil and Gas sector made a significant contribution to the downside, but as a collective portfolio it outperformed the market by 4.28per cent. 

This year we are again picking stocks that could outperform the market over the next twelve months - but also with an eye to long-term performance. 

"Slow and steady wins the race, so we're picking stocks with good income-producing potential as well as upside in the share price," said Stephen Ford, Head of Investment Management. "Brewin Dolphin offers a bespoke service to its clients, so the sample portfolio here should be seen as a guideline - everyone's investment needs are different depending on their attitude to risk and other personal circumstances."

Guy Foster, Head of Research at Brewin Dolphin, said "Policymakers trying to fight inflation is a recipe for continued strength in the bond markets and valuations generally as all invested assets re-rate upwards.  We see this combination helping the FTSE to a level of 7000, which would represent a capital gain of 11% from Friday's closing price of 6,300.  Added to which we expect shares to yield some 3%, more than bonds and instant access bank accounts which could give a total return of 14%, though we recognise the increased threat to some dividends."

See Brewin Dolphin Senior Management and Guy Foster's more detailed predictions for 2015 here.

National Grid (Nik Stanojevic, equity analyst 020 3201 3357)

National Grid could outperform the UK market if investors continue seeking low risk, growing income yield. We like the company due to its relatively high regulated returns, lengthy revenue visibility (out to 2021), relatively low political risk and good prospective growth to its regulated asset value.

Regulatory risk is low for National Grid. Network charges make up a small proportion of consumer bills (around 13% of energy bills) but are system critical.  In addition, it has an unprecedented length of regulatory clarity. Its regulatory settlements began in April 2013 and will last eight years until 2021 under the new RIIO regime. Ofgem has said that it does not plan to reopen or change finalised regulatory settlements. As a result, it can give long term guidance.

Between 2014 and 2021, it expects the regulated asset value (RAV) to grow by 5-6% per year. It also expects the dividend to grow at RPI inflation or greater for the foreseeable future. National Grid's UK profitability is not impacted by volumes or power prices.

Vodafone (Nik Stanojevic, equity analyst 020 3201 3357)

Vodafone should outperform if European revenue growth trends improve and as capital expenditure normalises, after the current period of 'catch-up' capex. European revenue growth has been falling but we expect trends to improve over the next two years driven by reduced regulatory headwinds (not controversial) and a lower competitive environment, as many of its disruptive competitors are now making very poor returns.  One potential positive catalyst is an IPO of the Indian business which is possible in 2015.

Kingfisher (Nicla Di Palma, equity analyst 020 3201 3356)

The reform of the stamp duty system in the UK (39% of 2013 sales, 29% of 2013 profits) will have a positive impact on Kingfisher's UK business in our view. Indeed, we expect the UK home buyer to use the stamp duty savings on DIY items, as well as new kitchens and bathrooms. In France (39% of sales, 49% of profit), we expect a modest recovery, although price pressure is likely to remain. The self-help measures (increase direct sourcing and commonality) should generate further cost savings.

Weir (Nicla Di Palma, equity analyst 020 3201 3356)

With a large exposure to equipment directed to shale gas and oil, it is unsurprising that the fourth quarter of the year has been tough for Weir, due to the sudden and vast decline in oil price. Whilst the oil price could remain low for longer, we see several positives in Weir. Firstly, we expect the aftermarket and services to pick up the slack in the Original Equipment market in Oil & Gas. Secondly, Minerals aftermarket remains strong and we expect Mining capital expenditure to trough in the next 18 months. Furthermore, Weir is a nimble company, which is prepared to cut costs rapidly if business declines.

Aberdeen Asset Management (Ruairidh Finlayson, equity analyst 020 3201 3497)

Aberdeen Asset Management is weathering the slowdown in emerging markets better than most. Its excellent cost control and good asset retention has helped to maintain profitability in difficult markets. The purchase of Scottish Widows Investment Partnership will help diversify from its emerging markets focus, improve its cash flow still further and boost its presence on the world stage (it is now one of the world's largest asset managers). We expect to see share buybacks from next year but are being paid to wait with a solid dividend in the meantime. 

Lloyds TSB (James Box, equity analyst 020 3201 3361)

Lloyds is the low cost provider of UK banking services with leading positions in several areas. It has established the UK blueprint on transforming a bank with legacy issues into a more sustainable and profitable franchise. Trading on a modest multiple of normalised earnings, we believe that Lloyds' valuation does not reflect the quality of the franchise. We expect that the resumption of a dividend should eventually allow the stock to re-rate. While you wait, Lloyds will continue to generate a best-in-class normalised return on equity.

Kier Group (Stephen Williams, equity analyst 0121 710 3519)

Kier Group has become a well-balanced and integrated business - Construction accounted for 33% of profits, Services 53% and Property/Homes 14% in 2014. The combined order book is now more than £6bn and stretches out to 2022, with more than 90% of the forecast revenues for the Construction and Services divisions for 2014/15 secured. In Construction Services, Kier has a broad spread of businesses in the UK and also has overseas interests in Hong Kong, the Middle East and the Caribbean. It is achieving operating margins of over 2% from this division. Investors also gain an interest in the fast-growing affordable housing and regeneration markets.

Kier management has set, in our view, an achievable management target of double-digit growth in earnings every year to 2020.  The yield of over 5% is also attractive.

Berkeley Group (Stephen Williams, equity analyst 0121 710 3519)

Berkeley Group's business model is unlike those of the other quoted volume housebuilders. It predominantly develops brownfield sites in London which are largely forward sold. Such sites require complex planning, higher working capital and longer timescales. As a result, Berkeley limits its production to around 4,000 units per annum to maintain operational control and match its business risk to market conditions. Hence it has very good forward visibility.

The delivery of a number of key schemes in a controlled fashion in London over the next few years will fund the return of £13 per share in dividends as the housing cycle peaks, leaving a sustainable rump business ready to benefit from the next upturn. Management has a good record in calling the cycle and we expect returns to be maintained.

Wolseley (Stephen Williams, equity analyst 0121 710 3519)

Having underperformed the market for much of 2014, the Wolseley share price began to gather momentum in the third quarter as the downward revision in consensus earnings estimates over the last 18 months came to an end. While Central European markets (including France) remain weak, the US businesses are now getting a real boost from positive new residential and repair markets. Although municipal and state-funded work is still slow, demand from the water sector is now coming through and the signs look good for the next two years.

Wolseley's key businesses continue to take market share. The US operations have produced double-digit growth for two consecutive quarters and margins are still increasing as the business model continues to be refined. This is a story about the US at present, but Wolseley has a robust business with an excellent management team and a good corporate culture which will minimise the likelihood of any trading shocks. The focus on gross margins and cash, as well as keeping overall expenses under strict control, is likely to result in further steady and reliable growth.

SEGRO (Stephen Williams 0121 710 3519)

In 2011, SEGRO set out its new strategic priorities. These were to reshape the existing portfolio, improve asset utilisation and build critical mass in its target markets in the strongest locations across Europe. Good progress has been made with disposals ahead of target, reinvestment into modern warehouses and the creation of a joint venture to increase the group's exposure to European logistics.

SEGRO is now well placed for growth as the economic environment improves and the investment market for prime industrial property strengthens, particularly for internet delivery solutions and data centres. While asset sales reduced earnings in the short term, dividends and net asset values are expected to increase significantly from 2015 onwards.

National Express (Ruairidh Finlayson, equity analyst 020 3201 3497)

We believe that National Express has the potential to outperform next year for the following reasons:

Recovery of the Spanish coach business following a spate of heavy discounting from modal competition (Rail), which is not sustainable going forward, partly due to indebtedness of the rail operators.

Less exposure than peers to political risks that have emerged in UK bus business.  Going into the election year, we have heard from the Labour party of their plans to increase regulation of bus networks outside of London.  This is essentially to bring it more in-line with the Transport for London style operating model.  While we agree the model works effectively in London, it is unarguably a special case when compared to the regional cities.  Proposals have so far been little more than political rhetoric but it is likely that any changes would squeeze the margins of those bus operators outside the capital. While National Express does have regional UK bus operations, they are less exposed than competitors particularly Stagecoach.

A small but very well run UK rail operation (the C2C Essex Thamesside franchise) could lead to further wins in rail, which, in our opinion, the market has not priced in.  This would be post-2015 as NEX did not bid for the Transpennine or Northern franchises, which will be awarded next year.

Strong record of generating free cash flow, steady growth in US school bus and this all helped by very little costs headwinds, particularly fuel, going forward.   

Informa (James Hay, equity analyst 020 3201 3354)

In our view, Informa has the highest quality journal publishing business (Academic Information), with a core focus on Science, Technology, Engineering and Medical publications. On top of that, it also has a strong Events & Exhibitions business, with management exiting smaller events and tilting the portfolio toward larger events in key verticals and geographies. The Business Intelligence business has been weak but management has developed a plan to turn this business around and we are confident that it will be able to do so. With the shares trading on a one-year forward P/E of just 11.5x, we believe that the upside from management's strategy is not priced in.

Brewin Dolphin provides bespoke portfolio advice to clients. The funds below are a selection of those that we believe may outperform this year.

There's plenty to look forward to in 2015 for fund investors, including a UK market with compelling dividend yields, and a positive outlook for Japan. Our picks represent a diversified portfolio - but everyone's needs are different," said Ben Gutteridge, Brewin Dolphin's head of fund research.

Here are Ben and his team's fund picks for 2015:

UK - Majedie UK Income

Brewin Dolphin retain a positive outlook for the UK stockmarket with compelling dividend yields and internationally sourced revenues (particularly those that are dollar based) creating a reasonably attractive level of value. We have, however, recently trimmed back on these positions given the significant exposure to energy and energy related businesses. For investors wishing to express these views in a UK equity fund, whilst also targeting yield, we recommend the Majedie UK Income fund.  The fund sold the majority of its oil & gas exposure in early summer this year, following a strong first half. This has benefited relative performance in the second half. Elsewhere the bulk of the funds aggregate revenue is focused in the UK, where falling energy prices should serve to further dampen inflationary headwinds, boosting consumer performance.

The fund attempts to identify cheap companies that are changing for the better and will deliver appropriate levels of income whilst this change takes place. This process is underpinned by rigorous analytical research, leveraging off Majedie's experience and capitalising on their proprietary research systems. Importantly, the manager attempts to grow the income distribution in excess of inflation each year. The investment universe subsumes the FTSE 350 and the manager has the flexibility to invest up to 20% overseas,  which is a current feature of the fund. The fund is differentiated from the traditional UK equity income funds by its multi-cap remit and limited capacity.

US - Dodge & Cox US Stock Fund

One of the most rewarding asset allocation decisions for Brewin Dolphin has been the long standing overweight to US equities. As we move into 2015 we see no reason to reverse, or even trim, this position. Talk of valuation excess is overdone; US equities are fairly priced, and the attractions relative to other asset classes remain highly compelling. Of course the US economic story is now well understood, but in the face of an increasingly benign inflationary outlook, we expect the Federal Reserve to remain highly accommodative. Such a stance could well drive US equities into a sustained period of over-valuation.

Our preferred means to achieve exposure to the US stockmarket is via the Dodge & Cox US Stock Fund. This strategy employs a disciplined valuation approach, buying companies undergoing some degree of turmoil but trading on commensurately cheap ratings. This process should help the fund capture those stocks most sensitive to economic recovery - something Brewin Dolphin is increasingly sure of. The Dodge & Cox name might be relatively new to UK investors but they are a formidable brand in the US.  Of considerable interest too was the extremely low level of staff turnover. This is clear evidence of the collective support for how the strategy is managed, and the firm's ability to retain talent.

Japan - Schroder Tokyo (Sterling Hedged)

We retain a positive outlook for the Japanese equity market going into 2015. Our central thesis is that the unparalleled cohesion demonstrated between Prime Minister Shinzo Abe and the Bank of Japan, to help stimulate and reflate the Japanese economy, will continue to weaken the yen and lift equity markets. For investors wishing to participate in this trade we would highlight the Schroder Tokyo fund, and given our expectation for a weaker currency would recommend purchasing the hedged share class.  The fund is managed by a veteran of the industry, Andrew Rose, who has over 34 years' experience in the asset class. He has produced a very consistent return profile over this career, generating strong relative performance in a variety of market environments. The manager currently shares our positive outlook, and has therefore positioned the fund with a moderately pro cyclical bias through overweight positions in the industrial and auto sectors.

Europe - Edinburgh Partners European Opportunities Fund

Europe began 2014 a consensus overweight after it exited recession in 2013. Fast forward and we now find Europe once again unloved, investors having taken flight in response to a multitude of worsening political and economic developments.   At the most recent asset allocation meeting, Brewin Dolphin decided to raise our overweight exposure to Europe. In part this is due to more attractive valuations, but the more pivotal factor has been the progress the ECB has made at healing the banking system. Via the host of extraordinary policy endeavours, peripheral European bank lending rates are converging on the core, and is exactly the stimulus the more troubled areas require.  Any decision to begin outright sovereign bond purchases is not something we see as particularly helpful, given how low bond yields already are, however it would be sure to give markets a boost. Europe remains a long-term multi-year recovery story.

Since 2008, a combination of extreme risk aversion and search for yield has meant investors have been prepared to pay a very high premium for companies delivering high and consistent earnings growth.  As a result, the value style has underperformed growth and has the greatest potential for outperformance as Europe recovers.  We believe the Edinburgh Partners European Opportunities Fund offers an attractive exposure to the value style.  The fund stands out compared to other value managers offering a more balanced sector exposure while avoiding the imminent political risks of Greece and Spain.  While the fund is exposed to economic recovery, it is a consistent performer and has historically offered decent protection in falling markets.

Fixed Income - AXA Short Duration US High Yield

For the year ahead our Fixed Income collectives team like the AXA US Short Duration High Yield fund, a defensive strategy within a 'riskier' part of the fixed income market. The fund will exhibit lower levels of volatility than a typical high yield fund due to the shorter maturity of the bonds it holds. In that regard the mandate is less likely to suffer capital losses as a result of any rise in interest rates. There is still a reasonable degree of corporate and liquidity risk within this strategy but again due to the short duration, but also the 'higher quality' investment approach, at least part of this has been mitigated.

It has been a difficult year for high yield with growth disappointments in Europe and emerging markets, as well as building liquidity concerns, weighing on sentiment. It was also interesting to see that despite the regional dislocation in growth performance/expectations, European high yield fared better than the US. No doubt this was a result of the ECB increasing its support (at least vocally) for fixed income assets, along with the greater concentration of Energy names in the US market. With the yield on US junk bonds widening to 6% versus roughly 4% in Europe, this looks like a reasonably attractive entry point. A word of caution, however, volatility is likely to persist so investors may want to wait or incrementally build positions. The primary concern centres on the tumbling oil price; the underweight AXA have assumed to the Energy sector is, therefore, reassuring.

Spice up Portfolios - Ocean Dial Gateway to India

In amongst a more cautious view on Emerging Markets we have become increasingly positive on the outlook for the Indian market. Following the landslide victory of newly elected Prime Minister, Narendra Modi, the government has been able to pursue an ambitious program of much needed reforms. India is one of the few emerging markets, therefore, where the potential growth rate is moving higher. Indeed in 2016 we could even see India growing faster than China!

Our preferred fund to access this story is the Ocean Dial Gateway to India fund. Ocean Dial is still a relatively unknown fund management company, formed following a management buyout of the Indian investment team from Caledonia Investments. The Gateway to India fund is managed by Sanjoy Bhattacharyya who has an exceptional long term track record running Indian equity portfolios. His style is best described as GARP; he looks for high quality companies with attractive through cycle earnings that are available on reasonable valuations. We identified this opportunity at an early stage in the fund's life cycle, and as such it is still quite small in size.

 -ENDS-

Disclaimers

The value of investments can fall and you may get back less than you invested.

No investment is suitable in all cases and if you have any doubts as to an investment's suitability then you should contact us.

Past performance is not a guide to future performance.

Any tax allowances or thresholds mentioned are based on personal circumstances and current legislation which is subject to change.

If you invest in currencies other than your own, fluctuations in currency value will mean that the value of your investment will move independently of the underlying asset.

The opinions expressed in this article are not necessarily the views held throughout Brewin Dolphin Ltd. No Director, representative or employee of Brewin Dolphin Ltd accepts liability for any direct or consequential loss arising from the use of this document or its contents. 

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