The mining sector might not be the large-scale contrarian bet many investors believe, as the industry has made positive steps investors should be aware of, Citywire AA-rated Ian Butler has said.
Butler said the sentiment towards the sector remains very bad and valuations are cheap. However, some companies are beginning to address their balance sheet concerns.
‘Glencore for example started tackling its major issues by cutting dividends, raising fresh capital and divesting under-performing assets,’ said Butler.
Butler and Barakos decreased their mining underweight through perceived quality names, such as British-Australian metals and mining corporation Rio Tinto. Materials as a whole now makes up 4.9% of the fund.
Butler is also overweight industrials, which make up17.9% of the fund, which is 7.3 percentage points above the benchmark. In his low turnover portfolio, Butler increased positions in the automobile sector in recent months.
‘We focus on European names such as Peugeot, where the valuation has become greatly discounted based on the believed collapse in profitability. But the company demonstrated good results with the margin of their auto business being ahead of expectation. We are also continuing to see the recovery in the car market in Europe,’ said Butler.
He added production momentum for these companies is strong through measures such as bringing new models to the market. Butler said he also likes automobile components companies, such as German manufacturer Continental.
‘Low oil price will have a positive effect on the European car market, although not as profound as in the US. The European consumer looks healthy with disposable income being positive and car registrations increasing,’ said Butler.
The overall exposure of the portfolio to financials is 37.6% which is four percentage points above the benchmark. However, Butler recently decreased exposure to the banking sector due to the deterioration of operating fundamentals in a number of names.
He said he and Barakos still see several attractive stocks, which he considers to be good value opportunities. ‘We like Lloyds Bank as it has rebuilt its profitability in the last few years through cost cutting, they have strong capital position and announced special dividend.’
Within the banking sector, Butler especially favours Scandinavian banks, as these tend to be well capitalised and have plenty of room for cost-cutting. One such name is Danske Bank.
‘Danish market looks attractive as property prices are recovering, its unemployment numbers are falling, while GDP growth is healthy,’ said Butler.
Elsewhere, Butler is also bullish on the insurance sector over the long-term. ‘In a low yield environment the companies in the insurance sector have had an increased focus on the quality of the underwriting books, which benefited them.’
‘There were fewer natural catastrophes, which was also a positive development and the industry demonstrated good capital returns,' said Butler.
The JPM Europe Strategic Value fund returned 25.75% in euro terms over the three years to the end of January 2016. This compares to a rise of 18.17% by its Citywire-assigned benchmark, the MSCI Europe Value TR EUR, over the same period.