Skip to the content

Where to look for resilient companies in a market downturn

09 February 2023

Experts recommend sectors and funds to make the most of possible re-pricings.

By Matteo Anelli,

Reporter, Trustnet

In an environment where economic growth is weak and the debate centres around whether there will be a shallow or deep recession, the search for companies with earnings growth can feel like the quest for the Holy Grail.

Against this backdrop, investment approaches can vary considerably and while someone might decide to entrust their money to more established, dependable companies, others might want to look at distressed areas of the market hoping for an inversion of fortunes.

Fund managers sometimes speak of “resilience” to indicate stocks that are less exposed to an economic downturn or with strong enough pricing power to hold their own. In a recent Trustnet article, Brewin Dolphin’s John Moore highlighted five stock that showcased such “discipline”.

But when overall growth is scarce, investors might also see a case for hunting out shares that have a re-rating potential.

Here experts discuss where they would look for value, whether through a dedicated fund that buys cheap shares, or by buying heavily discounted investment trusts.

Jason Hollands, managing director at Bestinvest, suggested focusing on unloved and oversold companies, or those undergoing a restructuring or other catalyst for change.

“A new management or strategy, the acquisition of a business that could generate either cost or revenue synergies, or maybe they are potentially a takeover target themselves – these types of ‘special situations’ can unlock value or cause the valuation the markets apply to their shares reassessed,” he said.

One such example is the Fidelity Special Situations fund, or for investors who prefer the investment trust structure, its sibling Fidelity Special Values.

Performance of fund and trust over 2yrs against index
 
Source: FE Analytics

FE fundinfo Alpha Manager Alex Wright, looks for companies with unrecognised growth potential and expects to see the process of recovery take place over three years.

The portfolios invest in companies of all sizes but have around 45% in smaller companies, which were hit hard in the slide in equity markets last year as investors reacted to the abrupt end to more than a decade of ultra-low interest rates and relentless money printing by central banks.

“This has opened up opportunities for the special situations manager, creating a fertile hunting ground,” said Hollands.

 

Peter Sleep, senior portfolio manager at 7IM, said value funds could be in a good position to outperform their growth counterparts from here, after spending most of the decade in the doldrums.

“The academic research tells us that value generally beats growth over the very long term. Going all the way back to the 1880s, value always outperformed in the long term, although there can be prolonged periods when growth beat value,” Sleep said.

“I believe the extremes of overvaluation of growth and undervaluation of value has barely started to unwind, but I would expect them to continue to unwind regardless of the economic environment. This is not to say that value will go up in an absolute sense, just that it will beat growth.”

The best-known example in this field is Man GLG UK Income, run by Henry Dixon, who “looks for ‘undervalued assets’ – profitable companies trading below the replacement cost of their assets and ‘undervalued returns’, or companies that are trading cheaply but with high profits,” Sleep said.

Performance of fund over 2yrs against sector and index
 
Source: FE Analytics

For investors that want a double-whammy effect when it comes to value, Rob Morgan, director at Charles Stanley, said widespread investor pessimism in many areas offers opportunities in the discounts that have opened up in investment trusts, with the average now at 11%.

“There are no guarantees any discount to net asset value (NAV) will narrow, and investment performance is likely to be a more important factor in overall returns,” he said.

“However, there are a couple of opportunities worth picking out that shouldn’t take much good news to be able to deliver on the upside – regardless of the depth of the recession that takes place.”

Firstly, healthcare, where the structural drivers of growing patient numbers, spending and drug approvals remain strong.

“Some governments have been trying to rein in spending, but demographic trends are firmly against them.  At the same time, the industry is producing cures, treatments and technologies at a faster pace than ever before – so it is well-placed to meet the growing demand,” Morgan said.

As such, the double-digit discount on Worldwide Healthcare investment trust looks appealing.

Performance of fund over 2yrs against sector and index
 
Source: FE Analytics

The second area he highlighted is private assets, where he encounters “widespread scepticism of valuations”.

“Investors are understandably nervous about how all private equity will perform in a recession but there is likely value to be found in trusts such as Pantheon International, where the discount of 42% to NAV likely compensates investors well for the recession risks and the lagging nature of valuations in the private space.”

Performance of fund over 2yrs against sector and index

Source: FE Analytics

“The depth and expertise of the investment team combined with the broad nature of the underlying portfolio and solid long-term track record makes this a worthy consideration for exposure to the asset class,” he finished.

Editor's Picks

Loading...

Videos from BNY Mellon Investment Management

Loading...

Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.