Shares to buy, hold and sell: Kevin Murphy
The starting point for any investment is the price you pay for it, according to Kevin Murphy. With a low portfolio turnover, the fund looks for out-of-favour companies that have the potential for a big upswing in the share price. Valuation is key.
Interdealer broker iCap has been purchased by the fund over the past six months, even though it has come under a significant amount of market pressure recently and its short-term outlook isn't great, says Murphy.
Concerns about market liquidity, its implication in the Libor scandal and worries about future regulatory changes mean "the market has turned away from the company", he says.
But on a long-term basis the company looks attractive. It is trading at a lower multiple than the market average (a price/earnings ratio of eight versus an average of 12) and it has a high dividend yield, currently 7.5%, as well as a strong balance sheet.
Investors may be concerned about looming regulation, but Murphy argues that the two-thirds of the business that makes its profits on electronic platforms will not even be affected.
iCap shares have fallen from a 52-week high of 386p to stand currently at 284p.
Drug company AstraZeneca has been held by the fund for nearly five years and is the largest holding, accounting for 6.5% of the portfolio.
Pharmaceuticals is an industry that has come under a lot of pressure, says Murphy, and companies are having to look for new ways to make profits.
AstraZeneca was very successful in the late 1990s, discovering some "big, blockbuster" drugs, such as Crestor, Nexium and Seroquel. Murphy says this is a hugely profitable enterprise but only as long as the patents on the drugs are in place; Seroquel came off patent in 2012, Nexium follows in 2014 and Crestor in 2016.These three drugs alone account for a third of the company's sales, presenting a real challenge to revenue prospects.
Murphy admits the company has been somewhat "left behind" by the rest of the industry when it comes to finding other routes to profit, but argues that even if you take away its main drugs "you still can't make the share price look expensive". He calls it a strong, defensive company with good cash flow and dividends.
AstraZeneca has no net debt and makes between £5 billion and £6 billion a year, which helps to buy the company time and options, such as finding new drugs and buying back shares.
The share price has risen from £18 to £33 in the time the fund has been holding it. The share price has "not done much" since mid-2010 but a good dividend of 5.5% still makes it attractive, adds Murphy.
Nervous about the future, investors have turned to defensive shares that are less cyclical, such as Unilever.
As its share price has risen, explains Murphy, "the value comes down". As a result, the fund has been gradually selling the shares for around two years. It initially bought into the business "when it was having a wobble after an acquisition" back in 2000, and topped up the holding after another wobble in 2004.The price was around £8 back then; it is now selling for £28.
Even though the management team has changed and the business has been "reinvigorated", Murphy is adamant that little else has changed at the company and believes those buying the shares have merely "bought into the idea".
Without wanting to take away from the achievements of the business, Murphy insists its success has been largely one of changing perceptions. "It is a nimble, agile, defensive business that competes on a global scale," he says. However, Murphy points out sales today are $51 billion (£33.5 billion), exactly what they were in 2001.
The general term for the rate of income from an investment expressed as an annual percentage and based on its current market value. For example, if a corporate bond or gilt originally sold at £100 par value with a coupon of 10% is bought for £100 then the coupon and the yield are the same at 10%, or £10. But if an investor buys the bond for £125, its coupon is still 10% (or £10) and the investor receives £10 but as the investor bought the bond for £125 (not £100) the yield on the investment is 8%.
A catch-all phrase that can range from assessing the price of a property or vehicle before offering it for sale or the net worth of assets in an investment portfolio to the prices of shares on a stock exchange.
The London Inter-Bank Offer Rate is the rate at which banks lend to each other over the short term from overnight to five years. The LIBOR market enables banks to cover temporary shortages of capital by borrowing from banks with surpluses and vice versa and reduces the need for each bank to hold large quantities of liquid assets (cash), enabling it to release funds for more profitable lending. LIBOR rates are used to determine interest rates on many types of loan and credit products such as credit cards, adjustable rate mortgages and business loans.
If you own shares in a company, you’re entitled to a slice of the profits and these are paid as dividends on top of any capital growth in the shares’ value. The amount of the dividend is down to the board of directors (who can decide not to pay a dividend and reinvest any profits in the company) and they will be paid twice yearly (announced at the AGM and six months later as an interim). Dividends are always declared as a sum of money rather than a percentage of the share’s price. Although dividends automatically receive a 10% tax credit from HM Revenue & Customs (HMRC), which takes the company having already paid corporation tax on its profits into account. Dividends are classed as income and, as such, are liable for personal taxation and so shareholders have to declare them to HMRC.