Each week, a professional investor tells MoneyWeek where he'd put his money now. This week: Alex Savvides, JOHCM UK Dynamic Fund.
The easing of the eurozone crisis after the European Central Bank’s public commitment to buy the short-term debt of distressed eurozone economies has finally lowered the risks surrounding Europe. This has enabled investors to re-engage with individual company and industry fundamentals rather than speculate over the perceived direction of the wider economy.
We look for companies that are benefiting from change that is misunderstood or unappreciated by the rest of the market. Here are three examples.
BP (LSE: BP) remains a core holding. Progress on a number of fronts has been slower than we anticipated. These include Gulf of Mexico production and the Macondo settlement with the US Department of Justice. Meanwhile, resolving the TNK/BP joint venture has proved to be complicated.
Nonetheless, as we look forward into next year we are confident that Gulf of Mexico production will recover and at higher marginal rates of return. Coupled with the completion of the sale of the TNK stake to Rosneft and a likely settlement of the remaining Macondo liabilities, investors can start to look forward to a recovery in the share price.
Private-equity provider 3i (LSE: III) has been deeply undervalued by the stockmarket, albeit it has been poorly managed until very recently. Unsatisfactory cost controls, weak balance-sheet capital management and a lack of clear focus have weighed heavily on the share price.
After discussions with shareholders, the resulting management change and promise of a strategic review was initially viewed cautiously by the market. But the purchase of four million 3i shares by the new CEO forced investors to think seriously about his plans. We believe the new strategy is correct – it is focused on gearing 3i to today’s private-equity environment by dramatically shrinking the cost structure.
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There is a renewed emphasis on expanding management fee income, while the core private-equity business will compete only in areas where management feel they have a real advantage in terms of deal size and access. Individual company performance will be driven harder and all stakeholders will be exposed to the performance of private equity. A percentage of gross realisations in any one year will be returned to shareholders primarily as dividends.
Our third pick is Xchanging (LSE: XCH), a business process and technology services provider. It has had a chequered history on the UK market, but things are changing for the better. A cash-focused restructuring over the last two years under the new CEO has been successful, resulting in a stabilised balance sheet.
At the same time, selective investments have been made. For example, an investment of £20m to renew and improve the group’s insurance software platform for claims management processing has been completed. We expect the new platform, named Xuber, to allow Xchanging to win new business globally, particularly in the US market (against competitors such as Guidewire, a Nasdaq-listed pure play insurance software company with a market cap of US$1.5bn).
Success in growing its technology platform will help improve margins in that division. This, along with continued improvements in the core business processing and procurement platforms, should help drive Xchanging’s revenue growth and profits at rates ahead of market expectations over the next few years.
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