OMAM's Nickols adds UK banks and housing on recovery hopes

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Old Mutual Dublin UK Select Smaller Companies manager Dan Nickols has been modestly increasing the cyclicality of his fund as he sees further signs of global recovery.

Euro Stars A-rated Nickols has increased his overweight exposure to the UK’s housing market, as well as to the more advanced recovery in the US housing market. He has also closed a long-standing underweight to financial stocks, with the addition of selective specialist stocks in the sector.

The most recent financial addition to the fund, which is a more concentrated version of his £520 million Old Mutual UK Select Smaller Companies fund was a 1% fund stake in private bank Close Brothers, while he has also topped up his 2% core holding in Jupiter on recent weakness.

A new position in F&C was also initiated in the last few weeks, and with Nickols holding specialist lenders Paragon and International Personal Finance, the financials weighting of the fund has gone from a 2% underweight to a 1.5% overweight position.

He told Citywire Global: ‘Jupiter has given a bit back recently [after recently trading at its highest premium to the sector] but we think it is relatively attractively valued now and a high quality franchise.’

The addition of F&C was more of a fixed income play for Nickols and he sees the asset manager as having further grounds to improve margins under the stewardship of chairman Edward Bramson.

‘We expect to see further cost savings ahead for F&C,’ Nickols said, ‘and we like International Personal Finance because of its focus on developing economies in Latin America, where lending is still very underdeveloped.’

At the end of the year Nickols increased his exposure to general retailers, having been underweight the sector for some time due to pressures on consumers’ spending power.

With capacity coming out of the market and the latest UK employment numbers slightly better than expected, Nickols has added to his stake in DSG International as it continues to benefit from the demise of rival Comet. He has also added travel operator Thomas Cook and pub operator Enterprise Inns.

‘With pessimistic predictions on growth and spending, the whole sector was priced for downgrades which have not come through and the overall view is that the key global economies are showing signs of renewed traction.'

‘The significant fears around the US fiscal cliff, the eurozone and a Chinese hard landing seem to be starting to dissipate and so we are seeing a raft of modest reratings of businesses exposed to global growth.’

He said despite concerns that Thomas Cook might need a further refinancing, the company was making great strides to strengthen its balance sheet. ‘Enterprise Inns has been viewed as toxic but we think the balance sheet is sustainable due to its strong cash generation and we expect it to enjoy a steady rerating.’

Other significant recent increases have been to exploit the improved backdrop to the US housing industry as well as a more encouraging backdrop for the UK’s housebuilders.

Almost 5.5% of the fund is now in stocks exposed to the US housing recovery, after a position in equipment lending firm Ashstead was increased. A stake in doors and windows manufacturer Lupus has been increased and US-focused ground engineering specialist Keller has been added.

Nickols, who has a long-standing overweight to UK housebuilders, continues to see positive signs for the sector. He holds Bellway, Galliford Try and Barratt Developments and has around 6% of the fund in the sector, compared to its index weighting of 2.5%.

‘We still like the sector as we are now seeing a number of structural improvements coming through. Quoted operators now have a much clearer run in buying the land as there is not much sign of non-listed operators bidding to buy.’

He added: ‘These stocks can now buy land that should be able to deliver 20% plus, in gross margins when they build on it and as they work through their land banks they should be able to get back 18% margins. They still look attractively valued on around 1.5 to two times book values.’

Nickols’ overweight to globally focused manufacturers has been trimmed back slightly after some profits were taken on Renishaw and Oxford Instruments following strong market runs in 2012, and mining conveyor belt supplier Fenner has been sold completely.

Over five years to the end of December, the fund has returned 45.6% compared to 44.3% by the Numis Smaller Companies benchmark.