Equity valuations and a cheap tech titan

Neil Goddin, manager at Kames Global Equity Market Neutral fund, is skilled at finding companies that the market has got wrong. Here's his approach to stock picking.

How has the fund performed relative to its benchmark and peer group since inception, and what are the main drivers?

I have been co-manager of the fund since October 2014. The fund is 1st quartile in its peer group of IA Global over one, three and five years. The fund was incepted in 1989, but I was in High School, so the performance that far back is not that relevant.

2017 was an especially strong year which was pleasing. We enhanced the process in March last year to focus more on small and mid-sized companies with a lower market capitalisation, and it is pleasing to see this leading to strong returns.

Following the recent stockmarket correction, what do you think about equity valuations?

To me this was a healthy correction to a market that is pricey but not in bubble territory. Whilst I expect more volatility in 2018 than we saw in 2017, I still think we are set for strong equity markets for the foreseeable future.

That said market direction is not the key focus of our analysis. At Kames we are bottom up stock pickers. We can't influence market direction or how strong inflation is. What we can do is fundamentally research differentiated ideas, meet companies and try to find ideas where we disagree with the market and so see an opportunity.

Where do you see most opportunities at stock, sector and country level? Is it time to short growth and buy value stocks?

We believe in bottom up stock picking, so see most opportunity at the stock level. In terms of the growth versus value argument, we try to build well balanced funds with a growth tilt but are also happy to invest in value stocks.

I think this balanced approach will help reduce the impact of any value rally if it were to happen. I think a point often missed is that the value bucket is always changing. For much of the last five years, but especially in January 2016, the cheapest bucket of value was dominated by cyclical stocks.

These days you are just as likely to find retail, utility or telecom stocks in the value bucket as you are a cyclical play. The chances of us seeing a value rally like we saw in 2016 are fairly slim. Yes, growth stocks had a strong run in 2017, but many of them are actually cheaper today on a price-to-earnings (PE) basis than they were 12 months ago, as earnings have eclipsed the returns made.

This is what prevents me saying the growth stocks are in bubble territory. Facebook is cheaper that it has ever been on a PE basis (23x) yet is expected to grow sales at 36% in 2018. That sounds attractive to me.

What does Brexit mean for your portfolio?

We are very lucky to be global fund managers. We are even luckier that we are not like so many global fund managers who are always very highly weighted in their home country. We presently own two UK stocks, but we are only half weighted against the index we use as a comparator which is the MSCI All Countries World.

This is very much a bottom up decision rather than a statement about Brexit, but it does mean it is something we don't have to fixate about and are not doing so.

Do you see many opportunities in the UK?

We are bottom up stock pickers so do not really think about things country by country. As I said earlier, we are presently 'underweight' the UK, but that is more a reflection that we have found some more interesting stock picks in other regions. We are always on the lookout for good companies and would not be afraid of these being in the UK just because of Brexit.