Index Funds Are a 'Naïve' Way to Invest Capital, Latitude CIO Says

Freddie Lait, founder and chief investment officer at Latitude Investment Management, discusses index funds and passive investing. He speaks with Bloomberg's Matt Miller on "Bloomberg Surveillance." (Source: Bloomberg)

Latitude’s CIO Likes Tesco, Unilever, Consumer Stocks

Freddie Lait, chief investment officer at Latitude Investment Management, discusses his favorite trades and where he’s finding opportunity. He speaks on “Bloomberg Markets: European Open.” (Source: Bloomberg)

There’s a Lot of Value in Equities Versus Bonds, Says Latitude’s Lait

Freddie Lait, chief investment officer at Latitude Investment Management, discusses the historic lows in bond yields, the rally in everything and his outlook for gold. He speaks on “Bloomberg Markets: European Open.”

The great divide: why absolute return should be split in two

There is a great divide in the absolute return sector between fundamental long-only funds and complex hedge fund-like strategies, and the latter could give the rest a bad name.

That is according to Freddie Lait, founder and CIO at UK fund boutique Latitude Investment Management, who told Citywire Selector that it would be in the best interest of investors if the sector was split.

‘The problem with the absolute return sector is I see there being a huge difference between the fundamental absolute return funds and the far more quantitative ones that invest in very small issues of bonds or over the counter derivatives.’

The absolute return fund manager said investors would benefit from increased clarity about what they are investing into. In order to do so, the sector first needs to mature in terms of its understanding.

Performance split

The key distinction in the absolute return sector between the fundamentals and the more quantitative funds is that when you split them up you can see that the performance has fallen into those two categories, he said.

It largely comes down to the investment philosophy as the more ‘straight-forward’ funds in the sector invest long-only in bonds, currencies, gold and stocks with a focus on capital preservation and return in equal measure.

‘They are very different products and some of the others are far more complex. They are chasing their own tails in terms of the hedging, there's a lot of embedded risks that are not necessarily visible.

'Funds like Jupiter, which takes very large short positions, they don't run a lot of risk on paper but being short the market is an extraordinary risk.’

Hidden risk

The use of derivatives, options and shorting in the more complex structures tends to be very expensive shorter term, he added, as investors can lower risk by using the instruments but they tend to spend premium to do so.

‘If we generate 2-3% from our more tactical cash and bonds positions, the compounding power of that compared to the more complex products in the market is enormous.’

Lait, who runs the Latitude Horizon fund, which is a long-only absolute-return fund, said he is not surprised to see fundamental strategies raising assets this year despite the sector losing money rapidly.

‘We're seeing some of the larger ones that are the more complex hedge fund-like sort of structures haemorrhaging assets. It does give the overall sector a slightly bad name but the individual businesses and boutiques who defend that sensible long-only methodology will continue to strive and thrive.’

At the next stage of the cycle, thinking about risk differently will become increasingly important, he said. Liquidity risk is one piece of that but complexity and a lack of transparency and accessibility also fall into it. 

Over one year to the end of June, the Latitude Horizon GBP Inc fund returned 3.3% in euro terms. This compares to the average manager in the Mixed Assets - Flexible EUR sector's return of -0.3% over the same timeframe. 

Freddie Lait discusses the Fed’s next move and being positioned for US $ weakness

Freddie Lait, chief investment officer at Latitude Investment Management, discusses his expectations from the Fed and his investment strategy. He speaks on “Bloomberg Markets: European Open.

Freddie Lait discusses the bull and bear case for the UK market and the opportunity for patient investors.

The UK market is a fantastic contrarian investment for those investors able to take a longer-term approach to their portfolio.

The aggregate forward price-to-earnings multiple of 11x stands out in a world of fully valued stockmarkets, and the dividend yield, which is now in excess of 5%, offers ample compensation for the patient investor.

Within the index there are market leading businesses from around the world, and this truly global earnings stream, where 85% of profits come from outside the UK, offers portfolio diversification and opportunity.

Currently, the Brexit situation is in the doldrums and once some semblance of certainty returns there will be cause for value realisation.

As we have seen with many political events of the past decade, the market abhors uncertainty, and visibility, whatever the outcome, is likely to be sufficient grounding for some kind of market recovery.

Demand for UK companies has been high, with M&A from foreign private equity and corporate investors demonstrating attractiveness to private buyers even if shorter-term stock investors are more cautious.

The single most worrying outcome for stockmarkets would be a Corbyn-led Labour government. Their anti-capitalist ideology, combined with extreme plans for the economy and taxes would drive investment offshore, lead to lower investor appetite and make Brexit-induced uncertainty look pale in comparison.

A key rub with the long-term investment opportunity presented by the FTSE 100 is the effect of a strong move in sterling. Given the high proportion of overseas sales and profits, for every 10% move in the currency we would expect an underlying 7% move in the market, in the opposite direction.

Prior to the (first) Brexit vote, sterling was trading at $1.50 against the US dollar. Should the currency return to that level, the FTSE would fall 13% in response.

Somewhat counterintuitively, a 'strong' Brexit outcome could mean the market is held back, at least in the short term.

Freddie Lait is CIO and founder of Latitude Investment Management

Bull Points

  • The UK market is a fantastic contrarian investment opportunity

  • One of the cheapest stock markets globally

  • Diversified global earnings stream and high cashflows

Bear Points

  • Brexit uncertainty persists

  • A Corbyn government would drive investors out of the UK

  • Sterling strength causes a negative impact to the stock market due to overseas earnings

Sony CEO Gives Cautious Profit Outlook as Loeb Seeks an Opening

Sony said its operating profit will likely fall this year and pulled its financial forecasts for most divisions because of substantial uncertainty in their operations.

Operating profit will be 810 billion yen ($7.3 billion) in the year ending March 2020, down from last year’s 894 billion yen and below the 843 billion yen average of analyst estimates compiled by Bloomberg. For the three months ended in March, operating income came to 82.7 billion yen, surpassing the 69.1 billion yen average projection.

Sony Chief Executive Officer Kenichiro Yoshida is known for providing conservative guidance, a practice he honed helping to lead the Japanese icon through a turnaround over the past five years. Still, he now needs to balance that caution with confidence to guard against activist investors like Daniel Loeb, who is once again circling the company. Sony vowed deep cuts in its troubled mobile division to help pay for the rising costs of developing a successor to its PlayStation 4 game console.

“We just need to see some stability,” said Freddie Lait, chief investment officer at Latitude Investment Management in London, which owns Sony shares. “If they can just demonstrate that earnings aren’t going to fall off a cliff, and they’re going to stabilize roughly here, the re-rating for the next three years could be very positive for the stock.”

Shares of Sony have fallen 2.1 percent this year prior to the results, compared with a 8.3 percent rise in the benchmark Topix. Japan is heading into a prolonged holiday, with trading in Tokyo restarting only May 7.

In a surprising move, the company pulled medium-term profit targets for electronics and entertainment that it had set less than a year ago. Chief Financial Officer Hiroki Totoki later told journalists that a major acquisition in music, big growth in game software sales, and losses in mobile made it difficult to predict future profits with enough certainty.

“Taking all of this, we thought that perhaps it would be a bit misleading to discuss only the 2020 fiscal year,” said Totoki. “For us, it is more meaningful to focus on the cumulative total.”

The company’s phone business, called Xperia, recorded a 41.1 billion yen loss in the latest quarter. But Totoki told reporters after the results the unit will speed up cost-cutting by shuttering production in Beijing and withdrawing from markets including the Middle East and South America.

Sony last month announced it will merge the Xperia unit with its other electronics businesses -- cameras, TVs and audio. It forecast an operating profit of 121 billion yen for the new division this fiscal year, up 58 percent from the prior period due to cost cuts in mobile.

In games, its most important unit, Sony forecast that operating profits will fall by 10 percent to 280 billion yen this fiscal year, citing rising costs in research and development of its next-generation console. It expects to ship 16 million PS4s this period, down from 17.8 million last year.

“The results weren’t as bad as the market feared,” said Makoto Kikuchi, founder of Myojo Asset Management Co. “Specifically in games, the market expected a very low forecast, but it came out just a bit lower. It shows that they’ve made games into a division which can permanently generate high earnings.”

The division faces a big challenge to top last year’s performance, when blockbusters like God of War drove record earnings. This year’s lineup consists of lesser-known titles, and Sony has said it won’t have a big presence at Electronic Entertainment Expo in June, where it has historically announced major games. Last week, the company said the PS4’s successor won’t go on sale this year, giving competitors a chance to win consumers over with new hardware.

Operating profit in chips will be 145 billion yen in the coming year, slightly higher from the 143.9 billion yen in the prior period. Despite a broad decline in smartphone shipments, Sony has weathered the slowdown as handset makers cram more of the company’s camera chips into each device.

“In the near term, growth in games and chips doesn’t look great, but Yoshida is building a good foundation for the long term,” said Yoshiharu Izumi, a senior analyst at SBI Securities Co.

Sony held 1.47 trillion yen in cash on its balance sheet as of March, mostly unchanged from December. In February, Yoshida authorized the company’s biggest-ever share buyback. More stock repurchases will be key to defending against activist calls for more aggressive measures, including asset sales.

“What I’m looking for from Yoshida-san is more stability, not necessarily huge growth from here,” said Latitude’s Lait.

Unilever posts solid start to 2019 with strong emerging market sales

LONDON (Reuters) - Consumer goods group Unilever is on track to meet its performance goals this year after strong sales in emerging markets led to a better-than-expected start to 2019.

The maker of Dove soap and Ben & Jerry’s ice cream said on Thursday it still expects underlying sales growth in the lower half of a 3 to 5 percent range this year. It also stood by its 2020 targets, which include reaching an underlying operating margin of 20 percent.

First quarter underlying sales, excluding acquisitions, disposals and currency moves, rose 3.1 percent. Analysts on average were expecting a 2.8 percent rise, according to a company-supplied consensus.

Growth was balanced, with a 1.9 percent contribution from higher prices, which is less than analysts expected, and 1.2 percent from volume gains, which is more than expected.

Emerging markets, where Unilever generates 58 percent of its sales, grew 5 percent in the quarter, offsetting a mere 0.3 percent gain in developed markets, which were hurt by economic uncertainty and intense price competition in Europe, particularly in Germany and France.

Rival Nestle also reported better-than-expected first-quarter sales on Thursday, with 6.3 percent growth in emerging markets far outpacing other regions.

Both companies highlighted strength in Brazil, saying that overall in emerging markets, they were able to raise prices and still sell more products. In developed markets, price increases often lead to slower volumes.

Lorenzo Re, senior analyst at Moody’s, said results from both companies showed the benefits of scale and diversification.

“Large globally diversified fast-moving consumer goods companies will continue to outperform regional players in Western Europe, where a weakening economy is hampering growth,” he said.

Unilever shares were up 2.9 percent in London at 1124 GMT, while Nestle shares were up 1 percent in Zurich.

Freddie Lait of Latitude Investment Management, a Unilever shareholder, said he was “impressed but not surprised” at the results, noting that large players often have the marketing budgets to win in emerging markets as consumers start to shop more online.

“This has been a solid start to 2019...which puts us on track for the guidance that we’ve given for the full year,” Chief Executive Alan Jope said, remarking on his first quarter as head of the Anglo-Dutch group. “We will be focusing on accelerating growth as our No. 1 priority.”

That focus includes launching new products and acquiring brands in fast growing areas like healthier foods and prestige beauty products. Unilever noted that the 29 acquisitions it has completed since 2015 added 70 basis points to first-quarter growth, with a similar lift expected for the year.

Turnover fell 1.6 percent to 12.4 billion euros (£10.72 billion), due to the disposal of its spreads business.

Reporting by Martinne Geller; Additional reporting by Silke Koltrowitz in Zurich and Simon Jessop in London; Editing by Mark Potter, David Holmes and Kirsten Donovan

Should Nervous Investors Buy Gold?

David Brenchley6 December, 2018 | 2:48PM

Gold could rebound in 2019, according to Adrian Ash at BullionVault. But there's a fellow precious metal that could be the most contrarian investment around at the moment

On the surface, gold has had a dreadful year. Looking at the price of the precious metal in US dollar terms – the currency it is usually denominated in – it is down 5% year-to-date to trade at $1,236 currently.

However, the reason for that weakness has very much been strength in the US dollar and continued rising interest rates in the United States. When you look at the gold price in both sterling and euro terms, it is flat on the year.

Rising equity prices haven’t helped, either, of course. Managed money continues to be as short gold as it has ever been. If equities are strong and you’re trying to run money on a quarterly returns basis for clients, you don’t really need gold, says Adrian Ash, at Bullionvault.

But there’s a strong case to be made for allocating part of an investors’ portfolio to gold looking ahead into 2019.

While some expect the Federal Reserve to keep ticking rates higher, many now see two rate rises in 2019 before a pause. With US growth expected to slow through the course of the year, the currency could reverse course, too.

Gold as a Hedge

Freddie Lait, manager of the Latitude Horizon fund, agrees. His fund has gone from having 5% of the portfolio in gold in July to 10% today. For sterling investors, gold has had "an incredible negative correlation" with global equity markets for the past year or so, he notes.

"I'm not a gold bug, but from time to time it makes a huge amount of sense," he says. "Right now, it's probably the best hedge we can find."

And for UK investors, Ash says the risks are so heightened, investors should be looking for some protection. “The risks are pretty obvious and the danger is everyone agrees the risks are obvious and discounts it,” he says.

Aside from the obvious risk of a hard Brexit, Jeremy Corbyn, seemingly, waits in the wings for the Conservative Government to fall – whether that be before or after the current date of the next general election in 2022.

Currently, adds Ash, markets are neither pricing in a bad Brexit nor the potential for a Corbyn Government, whether that be before, during, or after said bad Brexit.

“If you think you can go to bed on 28th March having taken zero insurance, then great. But I think there’s a serious risk of that being very complacent, almost as complacent as the markets were going into June 23, 2016.

“Obviously there’s a risk to gold if it all goes tickety-boo; that was also the risk going into the referendum. Gold and sterling had been a great trade in the first six months of 2016 and there was definite downside if the referendum went with remain.”

He notes that BullionVault has seen a recent uptick in allocations to gold by family offices and high-net-worth investors looking for a hedge. “Larger investors are anxious.”

And, despite global money managers shunning gold, Ash says we’ve not seen large outflows from those who have allocations to it. Those investors with long positions are comfortable with it.

“This year has put to bed my fears that I’ve had over the years that retail investors might turn tail out of gold as well on a price rise,” he explains.

The fear was that a rise to $1,400 would see retail investors selling out. That’s because many would have bought around that price in 2011-13 and have seen negative returns since.

“You’ve got people who got in at that level and have been under water for those six or seven years since. You could say that if you’ve bought gold in 2011/2012 it’s become a forever investment because it’s done so badly.

“But people have seen it go up and down in opposition to other things, so it’s kind of been doing its job. This year it’s done its job; if anything it’s done very well.”

What About Silver?

Silver is currently trading at around three-year lows, having fallen 15% in 2018. This means the gold-silver ratio, at around 85 times, is the highest it has been in 25 years. It reached 100 times in the early 1990s, but that was a historical anomaly, says Ash.

But Ash does not think that necessarily means silver is cheap. “I’m agnostic on the gold-silver ratio. Just because it’s at 85, doesn’t mean it has to go lower. And it might go lower because gold falls faster than silver; it doesn’t mean silver’s going to go up.”

Unlike gold, silver is primarily an industrial metal and, at the moment, Ash thinks that an industrial story that would re-rate the silver price is lacking. Platinum has the same problem, “with bells on”. That’s because platinum’s biggest use is in diesel cars.

“Now, there’s lots of good reasons to think that the diesel story is way overdone and there’s very good reasons to think that the battery electric vehicle story is way overdone,” says Ash. Still, demand for diesel cars is collapsing right now.

That story has served to boost palladium, which earlier this week became the most valuable precious metal, rising to a higher price than gold for the first time. That’s because palladium is used in catalytic converters for petrol cars, which are likely to mop up demand from those deserting diesel.

With palladium now trading at a huge $350 premium to the platinum price, Ash reckons the latter could now be very much undervalued. That said, he also thought that 12 months and two years ago.

“It’s easy to say here’s a great story about platinum – it’s horribly undervalued and the long-term outlook is much better than people think – but it could be quite a long time yet.”

While 10 to 20 years is a long time to hold a position in a metal, “if you’re really looking for a story about a contrarian opportunity, platinum would be it”.

Which Stocks Did Managers Buy in October's Sell-Off?

By David Brenchley - Morningstar

20 November, 2018

Black Friday may be slated for the last working day of this week, but it seems to get longer and earlier each year, as retailers desperately battle for consumers’ business. But for some stock pickers, the time to pick up bargains came even earlier than November.

After an indifferent start to the year where the US was the only market to deliver meaningful gains, global stock markets were hit for six once the notoriously tricky to navigate October begun.

The Morningstar US Market returned 9.1% in US dollar terms in the first nine months of 2018, but has given up almost all of those gains in the quarter to 19 November, losing -8.14%.

While Morningstar Emerging Markets in USD terms have performed better in Q4, with a loss of 5%, than in the first three quarters (-10%), all other major markets have struggled recently. Morningstar UK is down 7% so far, compared with -2.06% January to the end of September, and Europe down 7.3%, compared with -1.6% in the first nine months of the year.

On Europe in general – but these comments apply across most regions, too – Chris Hiorns, manager of the EdenTree European Amity fund, says the sell-off was caused by a combination of weak economic data from Europe and China and escalating geopolitical concerns surrounding Trump’s trade wars, Italy’s budget stand-off with the EU and ongoing Brexit negotiations.

As a result, growth sectors sold off sharply. Within this universe, Hiorns thinks the IT sell-off, particularly in semi-conductors, was justified given they were trading on very high multiples.

“However, the sell-off in industrials and consumer discretionary sectors was too indiscriminate, pricing in a severe economic slowdown on many value companies which were already trading on low multiples.”

Below, we highlight some companies that professional investors believe fell to attractive valuations during the sell-off and have either initiated a new position in or topped up their exposure.

Starbucks (SBUX)

While many managers just topped up holdings, for others the correction was a chance to snap up shares in companies they had been watching for a long time. For Freddie Lait, for example, it gave him an opportunity to make Starbucks the first new position in his Latitude Horizon fund in two years.

After a big run up back in 2015, when it appreciated almost 50%, the coffee chain’s share price had gone sideways for the past two-and-a-half years. That was until Q4 numbers disappointed in June and the stock fell 15%.

By early October, it had slightly recovered to $58 – still a four-month high – before falling another 5%. That’s when Lait took the plunge and bought.

For a stock to become better value, the share price does not have to fall dramatically, explains Lait. In the case of Starbucks, “the operating performance was improving dramatically, and the stock was falling slightly. That’s as good as a stock falling a lot and the business staying the same”.

In fact, the manager says he prefers the former, “because it gives you momentum when you buy into it”. In Q4 to date, Starbucks is up 20% to trade at a record high $67.

Facebook (FB)

Facebook has been a divisive stock for fund managers, with many selling out in the past year but others continuing to be positive on the prospects of growth.

Simon Edelsten, manager of the Mid Wynd International Investment Trust (MWY), was in the former camp. He sold the stock in December 2017 at around $182 and watched it fall to as low as $152 by March.

After that, it climbed back to an all-time high of $217 before plunging 40% to $130 today. And Edelsten has taken advantage and added Facebook back to his portfolio.

“We think the company has further to go in making its site more customer friendly, but while Facebook matures, Instagram and WhatsApp continue to grow,” he explains.

Smurfit Kappa (SKG)

Hiorns has been busy topping up his exposure to companies servicing the automotive sector, but looking throughout the value chain rather than at the obvious – chip makers and car manufacturers.

“There is a current soft patch in the European economy, mostly driven by the short-term impact of new emissions standards on the automotive industry, which should give way to a recovery in economic growth, business and consumer confidence,” he explains.

One UK company he likes on this theme is FTSE 100 firm Smurfit Kappa, which is a paper packaging manufacturer. Since the start of September, shares are down a third to an 18-month low of £21.31. They now trade on a forward price/earnings multiple of 9.4 times and yield 3.6%.

“Smurfit Kappa is well placed to benefit from the rise in e-commerce driving parcel volumes,” says Hiorns.

Diversified Oil & Gas (DGOC)

Many of the larger names were predictably vulnerable in the sell-off due to rising US Treasury yields prompting investors to reassess their risk-free rate assumptions and demand more for riskier assets.

But, as Jon Hudson, co-manager of the Premier UK Growth fund, notes, “babies always get thrown out with the bathwater in a stock market correction”, meaning opportunities crop up in parts of the market they maybe shouldn’t.

Hudson’s fund bought into AIM-listed Diversified Oil & Gas after the stock fell 15% from 124.5p in early October to what turned out to be a bottom midway through the month at 105.5p. They have bounced since to trade today at 111p, but still offer a compelling forward yield of 9%.

The firm floated on the junior market in February 2017 with an offer price of 65p. DGOC is predominantly a conventional gas producer in America’s Appalachian basin with operations in Pennsylvania, Ohio and West Virginia.

Hudson says it’s grown rapidly by acquiring assets from shale operators keen to focus on fracking. “US gas prices are on the rise due to storage levels being at a 15-year low as we enter the key winter heating season,” he adds.

Michelin (ML)

French tyre manufacturer Michelin, meanwhile, has been under pressure all year. After shares hit an all-time high of €130 in early January, they had sunk a third to as low as €85 by late October.

At around this point, the stock was trading on a forward PE of 9.1 times and offering a dividend yield of over 4%.

Continuing his theme, Hiorns says the firm “provides a relatively defensive exposure to the automotive sector, with the majority of sales coming from replacement tyres”.

Schneider Electric (SU)

Schneider makes industrial machinery and produces power distribution and automation systems for a number of industries. One of those is the automotive sector, where it provides electric car charging points, starter motors and other products.

It’s another that hit an all-time high share price earlier this year – €78 in late May – but has been under pressure since. The share price slipped a quarter to €58 a month ago, providing an entry point at 14.3 times forward earnings with a 3.6% yield.

“Schneider Electric is well positioned to benefit from increased spending on the green grid as we move more towards renewable generation and electric vehicles,” adds Hiorns.