LONDON -- The Cazenove U.K. Opportunities Fund is a 500 million-pound fund run by manager Julie Dean. In the last 12 months, the fund is up 23.9%. In that time, the FTSE 100 (UKX) rose 10.9%.
I spoke with Julie Dean to understand her investment process.
Julie Dean describes herself as an acolyte of no traditional investment style: "I'm not a income, growth or value investor. I am simply seeking the best risk-adjusted returns on capital for investors."
"There are signs that the U.S. economy is improving. China, however, is slowing and Europe is struggling -- including Germany because of China. The overall economic picture is mixed. Globally, there is a very weak level of underlying economic growth. Quantitative easing around the world leads to pulses of business activity. This gives periods where more cyclically sensitive stocks do well. I look for the companies that are best positioned to benefit from these conditions. It is important to understand how different companies perform at different stages of the business cycle. This typically depends on their sensitivity to the cycle and their operational gearing. I also want companies that are underrated or have something about them that will help them to outperform."
Here are the 10 shares that the best-in-class U.K. Opportunities Fund has the highest (relative to its benchmark) exposure to:
Market cap (in millions of pounds)
|Reed Elsevier (LSE: REL.L )
|Sage (LSE: SGE.L )
|ITV (LSE: ITV.L )
|Legal & General (LSE: LGEN.L )
*Melrose last reported negative earnings per share.
I've picked out four of these as particularly interesting.
Sage is one of the few world-class software companies in the U.K. today. Sage provides accounting software to businesses of all sizes. The company has grown fast. Since its formation in 1981, Sage has quickly grown into a FTSE 100 company.
Sage remains a growth company today. Five years ago, earnings per share (eps) was 11.7 pence. It rose every year to hit 19.4 pence in 2011. Further growth is expected, with eps forecast to hit 22.1 pence for 2013.
As growth has moderated, Sage's price-to-earnings (P/E) ratio has also declined. Five years ago, Sage shares typically traded on a P/E of 20. Today they trade on 15.2 times the 2012 forecast. Apart from a brief period in 2009, they have never been cheaper.
As Sage has matured as a business, its income fundamentals have improved. Sage has been increasing its dividend to shareholders year over year since 2003. Sage is expected to increase its dividend by 6.2% this year, giving a 3.4% yield.
2. Reed Elsevier
Reed Elsevier is a business information company. The company also runs a number of industry events such as The London Book Fair.
As you might expect from such a business, profits dipped between 2007 and 2010. However, the company remained profitable and continued to pay a dividend throughout. This resilience is testimony to the quality of Reed Elsevier's products and management.
Despite this, shares in Reed Elsevier are still moderately priced. Better still, they are accompanied by a solid dividend.
Consensus expectations are for Reed to deliver 49.8 pence of eps for 2012, rising to 52.2 pence in 2013.
3) Legal & General
Legal & General is one of two insurance companies that the fund is heavily exposed to.
Like its peers, Legal & General shares tend to do well when the market is doing well, and vice versa. At the market's nadir in 2009, shares in the company changed hands for less than 30 pence each.
Though the company cut its dividend for 2008 and 2009, it has since been recovering -- fast. The dividend for 2012 is expected to exceed the company's pre-crisis payout.
Legal & General's dividend has a much better level of earnings cover than its cousins Aviva and RSA. If you are looking for an income from the insurance sector but are worried by the possibility of dividend cuts, Legal & General could be the share for you.
Management is clearly confident in Legal & General's future. The company announced an 18% increase in its interim dividend with half-year results in August.
ITV is the household name TV company. In recent years, shares in the company have proved highly sensitive to economic sentiment. The shares have four-bagged since the market lows of March 2009. In that time, the FTSE 100 is up "just" 60%.
Profits and dividends at ITV suffered between 2008 and 2011. ITV reported a loss for 2008. A sharp dividend reduction in 2008 was followed by two years without paying. The dividend has since been restored, albeit at a much lower level than was enjoyed pre-crisis.
As a large supplier to corporate advertisers, ITV will always be regarded as a highly geared play on economic confidence.
The confidence of ITV's own management has improved significantly. At the half-year stage, the company announced a 100% increase in interim dividend.
If you think Julie Dean's top picks might be worth further research, then check out the track record of top fund manager Neil Woodford. He is one of the U.K.'s true super-investors. If you want to find out what shares he has been buying, then download the free Motley Fool report, "8 Shares Held by Britain's Super Investor." The report is 100% free and will be delivered to your inbox immediately.
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Further investment opportunities:
David does not own shares in any of the above companies.