In this third part of our investor survey, we asked some of the UK’s leading fund managers which sectors or stocks they thought were the most promising for 2024.

The responses were as varied as they were thought-provoking, with only a couple of managers singling out technology stocks.

As before we would like to thank all those who took part for sharing their views, and we hope readers enjoy them.

WHERE ARE MANAGERS FINDING OPPORTUNITIES?

George Ensor

R&M UK Listed Smaller Companies Fund (B1DSZS0)

‘In terms of 2024 picks, alongside e-commerce companies, early-stage enterprise software businesses have probably experienced the greatest change in how they are viewed and valued by investors over the last three years. We think they now represent some of the best opportunities.

‘We have positions in ActiveOps (AOM:AIM), GetBusy (GETB:AIM), 1Spatial (SPA:AIM) and Kooth (KOO:AIM), and have recently initiated a position in Windward (WNWD). These are all companies with a high proportion of high-quality recurring revenue, net revenue retention in excess of 100% and high gross margins. Each business has strong net cash on its balance sheet (on average 11% of market cap) and scope to deliver double-digit top line growth, margin expansion and improving return on capital. Yet on average they trade on a multiple of just 1.7 times 2024 sales.’

Jean Roche 

Schroder UK Mid-Cap Fund (SCP) 

‘I think the consumer space is the one that catches people out because it feels as though the stocks are easy to understand. Therefore, the opportunities are enormous, particularly in general retail, because there is a tendency to ‘averagise’ and assume that weakening retail sales data applies to all parties.

‘Although it’s not a retailer, Inchcape (INCH) is an example of a stock which is often mistaken for a UK car retailer. In fact, it is a data-rich distribution partner for global car brands from Mercedes to Subaru, and is plugged into opportunities in Hong Kong, Singapore, Latin America and Australia.’

Julian Bishop 

Brunner Investment Trust (BUT)

‘Our newest holding is Spanish infrastructure company Aena (AENA:BME). The firm owns 46 airports across the Spanish mainland and islands, giving them effective control over all air travel into, out of and within a country that relies on tourism for a substantial portion of its GDP.

‘This is a regulated, partly state-owned asset where profits are capped via mechanisms which set the fee the company is allowed to charge airlines per passenger, for example. However, the company also has an unregulated commercial business which allows it to maximise rents from retailers and car hire companies who occupy airport space.’

James Henderson

Henderson Opportunities Trust (HOT), Law Debenture and Lowland 

‘That's like asking me which is my favourite child. Hydrogen business Ceres Power (CWR) has had a torrid time but made real progress, licensing its technology to create hydrogen from steam and electricity from hydrogen and oxygen.

‘Bigger companies like Bosch and South Korean company Doosan, who can afford the necessary capital spend, are building the plant. Doosan’s plant gets commissioned next year and then royalties should start coming through. Ceres’ technology addresses a vital and huge problem so it is very promising and I like their approach.’

Simon Barnard

Smithson (SSON)

‘Due to poor market sentiment we have found a myriad of opportunities across the small- and mid-cap equities space, adding several new companies to the portfolio this year.

‘This included high-quality companies where the stock market appears to have become overly concerned about the risk of recession, such as the US fluid control and dispensing company Graco (GGG:NYSE), or those exposed to life sciences where the fallout from the Covid boom has caused heavy falls in share prices, such as the UK specialty chemicals company Croda (CRDA).

‘We have also bought high-quality fast-growing companies such as Oddity (ODD:NASDAQ), which creates cosmetics and skin care products that it sells online directly to consumers.’

William Tamworth 

Artemis UK Smaller Companies Fund (B2PLJL5) 

‘We’re always looking for companies with strong market positions, strong cash flows and strong balance sheets. An example of a company that meets those criteria would be Mears (MER). It’s more than three times the size of its next biggest competitor in social housing maintenance. It’s got a net cash position – and that’s after returning £35m through buybacks announced over the course of this year. It generates more than 10% of its market cap each year in cash flow.

‘There’s a big opportunity for Mears over the next few years to benefit from the need to decarbonise the UK’s housing stock, which is the biggest emitter of carbon in this country. Mears maintains 750,000 homes. It is ideally placed to help reduce the carbon emissions of those homes as and when funding becomes available. And that’s the big question mark, it’s not a 2024 issue, but over the next few years I think that’s a huge opportunity.’

Guy Anderson 

Mercantile Investment Trust (MRC)

‘We’re optimistic about certain domestic consumer facing sectors as sentiment is overly negative and valuations appear attractive. With inflation lower than a year ago and employment and wage growth still reasonable, in aggregate the UK consumer is now experiencing real wage growth again and we are seeing gradual improvements to consumer confidence. Within this area we prefer those companies that have more levers under their own control and can benefit from market share gains, such as Dunelm (DNLM), Jet2 (JET2) and WH Smith (SMWH).

Stuart Gray 

Alliance Trust (ATST)

‘Given the focus on stock picking as opposed to investment themes, our managers are finding underappreciated opportunities in a wide variety of sectors. One recent purchase by Ben Whitmore at Jupiter is Nokia (NOKIA:HEL), the Finnish telecom equipment manufacturer. ‘Although Nokia has suffered from temporary weakness in spending by US carriers, Ben believes this is a short-term headwind and that when demand for its products normalises the company will benefit from its dominant market position, alongside Ericsson (ERIC-B:STO).

‘Sands Capital, one of our growth managers, sees an attractive opportunity in US-based Roper Technologies (ROP:NASDAQ), a diversified industrial technology company that operates in over 40 businesses in more than 40 niche markets.

‘The company is indiscriminate in the types of businesses it seeks to acquire, rather, it focuses exclusively on free cash generation and management quality. Each business is decentralised and operates autonomously, with a mandate to grow and generate cash.’

Charles Montanaro  

Montanaro UK Smaller Companies (MTU)

‘It is widely recognised the UK stock market is cheap especially relative to other global equity markets, and we believe there is a lot of value to be found in the UK small cap universe in particular.

‘Housing-related companies have been derated to reflect investor concerns about a possible property collapse. Much of the bad news may be reflected already in the share prices of companies such as Marshalls (MSLH) and Genuit (GEN), which are being valued as ex-growth in perpetuity, which strikes us as unlikely.

‘Property development companies have fallen due to rising interest rates that led to net asset values being marked down. On the other hand, as interest rates fall – which appears increasingly likely next year – we expect a recovery. It generally pays to back the best management teams, such as Andew Jones, chief executive of LondonMetric (LMP), and Nick Vetch, executive chairman of Big Yellow (BYG).

‘After more than 40 years as an investor, you learn a number of tried and tested maxims. “One profit warning leads to three – buy after the third”: Marshalls had three profit warnings this year. “Follow the money”: Big Yellow raised £110 million in October 2023 to invest in developing their property pipeline. Management made a substantial personal investment in the placing which we also supported.’

Simon Gergel

Merchants Trust (MRCH)

‘In general we see the best opportunities in medium-sized companies, which have underperformed larger companies significantly. Particular areas of focus include building and construction, where we own shares in a diverse collection of businesses, many of which are trading on depressed valuations. These give the portfolio exposure to different parts of the building market, from heavy materials and lighter building products to ground engineering and house building, as well as a range of geographies, including the UK, Ireland and the US.

‘We also have a large exposure to the reinsurance sector, where strong industry pricing is improving the outlook for profitability and there are several companies trading on modest valuations.’

Kartik Kumar  

Artemis Alpha Trust (ATS)

‘For the 4th year running it has to be Frasers Group (FRAS), which has been our largest position since 2018. The company has a robust position in sporting and luxury goods in the UK. I think it’s exceptionally well-run despite noise about its governance. Real wage growth is accelerating as inflation headwinds are easing. The stock trades at a discount to the sector and has a strong balance sheet, and business returns are compounded by share buybacks.’

Richard Penny 

Crux UK Smaller Companies (BQV37J7)

‘Our research has found that the best returns come from investing in long-term growth companies with high product margins at times of pessimism, as they often suffer most from economic headwinds. Whilst these shares are normally highly-valued, recessionary pressures can cause a triple negative: reduced revenues, big profit diminutions and a collapse of investor sentiment. This can cause shares to trade at significant discounts to tangible assets or invested capital.

‘Such conditions can mark exceptional entry points for long term growth companies and when these companies recover, the upside is substantial.

‘Our favoured contrarian growth companies include FD Tech (FDP:AIM), 1Spatial (SPA:AIM), AdvancedAdvT (ADVT), Creo Medical (CREO:AIM), Zegona (ZEG:AIM), DP Poland (DPP:AIM) and IQE (IQE:AIM).

James Harries  

STS Global Income & Growth Trust (STS)

‘We are excited about the prospects for the industrials sector. The developed world is increasingly onshoring industrial capacity to reflect both geopolitical concerns as well as addressing the fragilities of global supply chains highlighted by Covid. This is leading to an onshore capital expenditure boom.

‘We have a number of companies that are likely to benefit from this but are currently at valuations we deem to be too expensive. One company that did offer us an opportunity to invest and one of our most recent purchases is Texas Instruments (TXN:NASDAQ).

‘This is an exceptionally high quality and well-managed company engaged in the manufacturing of analogue semiconductors. These products tend to be embedded in other people’s products and are essential to the functioning of the modern economy. The company enjoys impressive margins and returns. Concerns relating to the upcoming economic slowdown allowed us to establish an investment at an attractive valuation.’

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