March 8, 2019 / 5:07 AM / 7 months ago

U.S. Lipper Award winners bet big on Brexit, global slowdown

NEW YORK (Reuters) - Japanese automakers, a U.S. municipal bond insurer caught up in the Puerto Rican debt scandal, and UK’s largest online classified advertising site for used cars are among the top picks by equity fund managers who received a U.S. Lipper Fund Award in New York on Thursday night.

Anti-Brexit demonstrators waving EU and Union flags are reflected in a puddle in front of the Houses of Parliament in London, Britain, March 28, 2018. REUTERS/Toby Melville/File Photo

The wide swath of investment ideas partly reflects the unsteady global stock markets, which have swung from the edge of a bear market during the final 2018 quarter to a nearly 10 percent gain in the new year after the Federal Reserve indicated it would slow its pace of interest rate hikes.

Without a U.S.-China trade deal or the exact path of Brexit finalized, global stocks could remain volatile throughout the year, fund managers said. Global stocks slid on Friday after the Trump Administration said it had not set a date for further face-to-face trade talks with China and a disappointing U.S. payrolls report suggested U.S. economic growth is slowing.

The annual Lipper Fund Awards by Refinitiv, formerly the Financial and Risk business of Thomson Reuters Corp, recognize the top funds and fund management firms in more than 20 countries based on risk-adjusted returns.

“We’re trying to be relatively focused and concentrated (by holding a small number of stocks), which should help us pick our spots and find opportunities despite what the broader market may do,” said Todd Beiley, a portfolio manager of the $4.6 billion Virtus KAR Small-Cap Growth fund.

Among his fund’s largest holdings is Auto Trader Group Plc, one of three that Beiley added in 2018. He was attracted to the company’s dominant position in a high-margin business, and its attractive valuation at a time when concerns about subdued UK consumer spending weighed on its stock. Shares of Auto Trader are up 4.5 percent so far this year.

“The macro concerns with Brexit on the horizon gave us a chance to buy a very good business with good long-term prospects,” he said.

Matthew Finn, co-portfolio manager of the $698 million Thrivent Small-Cap Stock fund, said he remains bullish on Assured Guaranty Ltd, a municipal bond insurer ensnared in legal cases regarding Puerto Rico’s plans to restructure about $120 billion of debt and pension obligations in federal court.

“We feel like they could more than satisfy their obligations in the event of an adverse outcome. It’s been a strong performer but it’s still extraordinarily inexpensive,” said Finn. Shares of the company are up nearly 15 percent for the year, or about 5 percentage points more than the benchmark S&P 500 index .

Assured Guaranty trades at a trailing price-to-earnings ratio of 9.5, and at about 70 percent of its book value.

SMOOTH BREXIT

Ongoing concerns about a global recession and the fate of Brexit are creating opportunities in European financial stocks, said Lily Beischer, a portfolio manager of the $9.4 billion Dodge & Cox Global Stock fund.

“The group is now trading at levels typically seen during periods of severe economic stress,” she said. “At these levels, the market is pricing in significant deterioration in earnings and capital levels reminiscent of prior crises, and yet fundamentals have greatly improved.”

The fund holds positions in BNP Paribas SA, UniCredit SpA and UBS Group AG.

“We believe these companies can also further improve profitability largely through self-help initiatives” such as strengthening their balance sheets and increasing their capital cushions, she said.

Shares of UBS Group are down nearly 30 percent over the last 12 months at a trailing price-to-earnings ratio of 9.8, and shares of BNP Paribas are down nearly 31 at a price-to-earnings ratio of 7.5.

Sam Chamovitz, portfolio manager of the $2.1 billion Fidelity International Small Cap fund, said the recent global market volatility has allowed him to build what he called “starter positions” in companies including Japanese automakers and housing-related companies that had sharp sell-offs due to concerns about slowing economic growth.

While the valuations of some of those stocks have risen in the market rally over the last few weeks, Chamovitz said he is ready to sell top performers to keep adding to his most recent acquisitions.

“I want to be in a position where I’m fully comfortable doubling down if things really go wrong,” he said.

Reporting by David Randall; Editing by Jennifer Ablan and Richard Chang

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