Wealth managers beginning to encourage traders to invest in shares of underdog companies
With increasing volatility in the markets, and stagnant traditional investments, British wealth managers are beginning to look at unusual stock. Could this be the time for retail brokers to add instruments to multi-asset product offerings?
Unusual stock is not often the subject of persuasive advice from some of the world’s plate-glass fund managers, however this year has been an unusual year.
This week, British wealth managers are beginning to look at the stock of some peripheral companies, described in fund management jargon as “moneyball” businesses, referring to firms which are on the up in terms of commercial balance sheet and profitability, yet are undesirable to most share traders.
These companies are being lauded by British wealth manager Brewin Dolphin, a London-based fund management enterprise that has been in business since 1762.
Today, research released by Brewin Dolphin has highlighted businesses that do not appear to have brilliant investment cases at first glance, but could be growth opportunities for investors.
They are considered ‘Moneyball’ companies due to their likeness to the baseball players selected for a Californian sports team back in 2002, which eventually saw them enjoy a surprise winning streak in the American League.
Companies in this unofficial category are perhaps reminiscent of undervalued baseball players hired by Oakland A’s manager in 2002 which used in-depth analysis and eventually shot to glory – a true story as told in the Michael Lewis novel and 2011 movie ‘Moneyball’.
The difference is, would retail investors take such a risky move at this very turbulent time in which hundreds of millions of people around the world have lost their livelihood, and the entire global economy is in unprecedented freefall at the hands of government tyranny which has forced closures on most of the world, its liberties and methods of income?
It is quite likely that risk appetite may be up. Those with any savings will be looking to keep them, rather than risk them, and the traditional banks know that. An ISA for example will not make any return at all these days, and those who use them are simply stashing their nest egg away in the knowledge that methods of earning money via working are running out fast, and that tangible assets like property are likely to nosedive in value for the foreseeable future as nobody can afford them anymore and as the global power revolution takes place, putting everything into the hands of the state.
Those who do want to try to make money, however, may well listen to this research.
Rather than relying on the Oakland scouts’ experience and intuition, the baseball team’s general manager used ‘sabermetrics’ to choose players with his limited budget. He used statistics to look at players’ performance, beyond the usual factors that scouts focus on that don’t necessarily reflect ability.
This method was used to hire undervalued players such as unorthodox submarine pitcher Chad Bradford, aging outfielder David Justice, and injured catcher Scott Hatteberg.
The team went on to play better than ever and won a record-breaking 20 consecutive games.
This events of this story were told in Michael Lewis’ novel Moneyball, which was later turned into a movie biopic of the same name, starring Brad Pitt.
In the same way, Brewin Dolphin has identified companies that are overlooked for reasons that don’t necessarily reflect their fundamentals – such as having ‘boring’ products, operating in esoteric markets, or simply not being well-known.
John Moore, senior investment manager, said: ‘Aside from the rise of technology stocks, areas of growth have been relatively hard to identify for investors.
‘The UK market has not had the rebound that some other indices have enjoyed, largely because of its spread of constituents at the top end of indices – oil and travel companies, for example, remain near the lows of earlier this year.
‘Appearances can be deceiving and looking beyond the surface could help investors spot unlikely opportunities for growth – particularly in the challenging economic environment brought about by the Covid-19 pandemic.’
The manager said he looks for businesses with solid cash generation, profitability, and manageable levels of debt from a financial perspective.
While more difficult to find, he also strives for a driven management team which, when combined with the other factors, could provide the ability and finances to succeed.
He added: ‘There are some UK names that continue to deliver strong results and have seen their share prices grow substantially, despite the investment case sounding a bit dull.
‘While they might not be in the most glamorous sectors or make ground-breaking products, they are still brilliant businesses.’
In his research, Mr Moore compared three ‘Moneyball’ companies – Avon Rubber, Games Workshop and Genus – to a traditional fund, Blackrock Throgmorton.
The results are indeed interesting.
Now, with multi-asset trading on the agenda for many retail FX firms, the time for brokers to begin competing in this market may well be here.
