The materials sector is subject to heightened pessimism due to the commodities slowdown, but savvy long/short investors can capitalise on improving fundamentals among its major players.
Materials make up 11% of net exposure, which comprises 13.1% long exposure and 2.1% short. This compares with a 15.2% long bet on consumer discretionary and 10.3% short position in the same sector.
In this approach, which he co-runs with Samantha Gleave, Inglis-Jones said many companies viewed as under pressure in the wider market have much stronger cash flow dynamics than headlines would lead you to believe.
‘We have found there are quite a few stocks that were sitting in the top quartile when we measure them on a cash flow basis and we are focusing there, as our cash flow solutions model focuses our investments in that area of the market,’ he said.
‘If you had looked at those top quartile stocks six or seven months ago, then there was a skew towards earnings outlooks and generalist investors were meeting these companies with high levels of pessimism.’
While many investors viewed these stocks of high risk, particularly in light of the oil price drop, Inglis-Jones said the fact capital expenditure products had been shelved reinforced many big company’s cash balances.
‘While there are opportunities for some shorts in materials, we have not had to take any, as we are finding good opportunities in our long book,’ he said. ‘Be that Rio Tinto, BHP Billiton or others of that ilk.
‘We are aware that companies are under pressure, in one sense, because of that low oil price and the oil price pressure as a whole. But, we can definitely find stocks, however unloved, which are retaining capital and improving that cash flow dynamic.’
On a three-month basis, the Liontrust GF European Strategic Equity fund has returned 1.9% in euro terms against a 0.8% loss by the average manager in the Alt Ucits – Long/Short Equity sector over the same period. On a three-year basis, the fund returned 4.8% against an average manager return of 7.9%.