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Seneca: we see lots of value in oversold UK, Asia and gold

24 March 2020

Seneca Investment Managers’ Tom Delic says there is reason to feel ‘bullish’ about the value-driven strategies of their multi-assets funds despite their big falls in the past month.

Seneca Investment Managers’ Tom Delic says there is reason to feel ‘bullish’ about the value-driven strategies of their two multi-assets funds, despite both having tumbled more than 26% in a month, and the Seneca Global Income & Growth (SIGT ) investment trust, whose shares have plunged by 35%.

The managers have been selling assets, like short duration bonds, that have held up relatively better during the coronavirus-driven sell-off so they can add to existing positions in stocks, especially in Asia and the UK. 

‘Things have got so cheap that we already own,’ said Delic, who manages the emerging markets (EM) portions of the £119m VT Seneca Diversified Growth and £131m VT Seneca Diversified Income funds, as well the £55m trust.

The manager finds particularly attractive opportunities in smaller company value stocks in China and Japan, many of which he said had seen their value wiped in half ‘for just no reason basically other than market panic’.

All three Seneca funds invest in overseas equities via other funds and those managers’ emphasis on strong balance sheets means many of the underlying companies have no debt, making the downturn less of a worry.

Delic picked out two boutique investee funds where he sees limited downside despite ‘multiple tailwinds that can happen’, including the possibility of a quicker recovery in China.

CIM Dividend Income , the top overseas equity fund in the trust and diversified growth fund, focuses on mid- and small-cap stocks yielding over 6%. The crash has meant its ‘investable universe has increased dramatically’ and Delic argues market conditions now play into manager James Morton’s hands. He can buy those high-yielding companies, whose ‘price-to-book’ ratio, or value of their assets compared to their share price, may have fallen to 1 times from 1.5 or 2 and rely on ‘mean reversion’ to deliver capital gains.

HMG Global Emerging Markets Equity Fund, run by a Paris-based firm, invests mostly in subsidiaries of western companies listed in emerging markets. These are ‘strong resilient businesses which are going to be around for years to come’ and enjoy support from parent companies, again limiting the downside.

In Japan, as well as in other Asian countries including Vietnam and Malaysia, the sell-off has exacerbated the issue of smaller and mid-cap companies trading at valuations below the level of net cash on their balance sheets.

With buyers having dried up, and their size precluding the interest of larger players, the smaller funds they invest in can take advantage of these ‘irrationally cheap’ opportunities.

‘That’s not to say that things can’t get even more extreme,’ said Delic, saying they were ready for further short-term downside.

Other places where they find value ‘across the board’ are the UK and gold. All the funds had over 6% of their assets in gold and gold miners at the end of February.

Although gold has fallen in the sell-off, Delic said the precious metal was akin to a currency whose fixed supply means it will hold its purchasing power at a time when central banks were printing money.  

If the ‘massive’ level of monetary and fiscal stimulus around the world leads to an uptick in inflation, that would be another positive for companies with real assets like gold miners themselves and many value stocks.

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