Hugh Sergeant is the manager of the £294 million River & Mercantile UK Equity High Alpha fund.
The fund aims to achieve long-term capital growth by investing in a portfolio of around 130 UK companies. It is up 44% over three years against the UK all companies sector average of 45%. The total expense ratio is 1.59%. Cherry Reynard finds out which shares he has recently bought and sold and which one he's holding on to.
BUY: WOLSELEY (WOS)
"Wolseley is the world's largest distributor of building products. The building materials sector has had a difficult time of late, and as a result Wolseley has suffered. But I like to invest in recovery plays. This is where a stock's profits are below where they should normally be and so I invest on the basis that they will return to more normal levels. This, I believe, is what is happening to Wolseley.
"It has a strong global market position and new management came in a couple of years ago and did all the usual things: cut costs, refocused the business, imposed better cash discipline and operational management. This has helped the company, but there are also economic tailwinds for the group. We strongly believe that after six or seven years of recession in the US building sector, it is turning a corner and Wolseley is geared into a recovery.
"It has also addressed many of its original issues - management had become complacent and made too many acquisitions leaving it with too much debt. Of course, we don't like to pay too much for companies. We want to buy a company on a share price of less than 10 times its recovery earnings - i.e. what its earnings would be in a normal environment. We bought Wolseley at six times. It is now trading a little higher, but it still looks like it can do well from here."
HOLD: MONITISE (MONI)
"Monitise is the biggest provider of technology platforms to banks and credit card companies such as Visa. It is increasingly clear that in future we will all have a kind of mobile wallet - where we transfer money using our mobile phones, rather than in a branch or at home.
"Monitise has developed a secure, successful method for handling mobile money transactions that the hugely cautious retail banking majors are adopting. For example, in the UK it has relationships with Visa, plus around 50% of the banking population including Lloyds and NatWest.
"It also has a joint retail venture with Carphone Warehouse. It is now taking its technology to the US and Asia and is building some good partnerships there, such as with Standard Chartered in India.
"The company is not just a good 'concept'. Revenues rose more than 300% over 2010 and a fast-growing order book suggests further growth lies ahead. With strategic shareholders such as Visa, Norges Bank and Standard Chartered and existing clients such as HSBC rolling out services in 2012, future growth prospects look well supported."
SELL: BRITISH AMERICAN TOBACCO (BATS)
"We don't like expensive defensive stocks in general, but in particular, we don't like British American Tobacco. The company has a very high valuation but the opportunities to improve performance are limited. It now has very high margins, which may come under pressure and it trades at 15 times earnings.
"BAT has benefited from sales into less-regulated developing economies; however, governments in these areas could easily start to address the rise in smoking in order to avoid the huge medical costs that smoking-related diseases impose on society in the longer term.
"While BAT has managed to avoid any major litigation cases hitting the headlines for many years, a major case is beginning in Canada and developed market regulation continues to tighten.
"I'm not against these large cap defensive companies in all conditions and have held significant amounts in tobacco when running funds in the past. But that was when everyone was chasing risky growth stocks and BAT was on a price/earnings ratio of five times.
"We tend to sell companies when the valuation is no longer attractive, or when the timing is no longer supportive or when there is a negative catalyst, such as an expensive acquisition or earnings revisions moving negative. BAT definitely fits into the first category."
This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.