Somel is looking to miners having this month bought a 3% holding in BHP, which the £4.2bn fund has not held for three years. At cheap valuations (1x book), he sees the sector as having been its own “worst enemy” with senior management obsessed by growth.
He said: “From 2007 to 2013, all previous BHP CEO Marius Kloppers wanted to do was grow the business. He bid for Rio Tinto, and when that wasn’t successful he bid for Potash Corp, then paid a high valuation for Petrohawk – oil and gas assets in the US – but all he was constantly thinking about was growing the business.
Wrong mindset
“Not once did I hear him say he was there for the shareholder and that, with commodity prices high, he was going to return capital to them. He just wanted to spend and the whole industry got itself into that mindset.”
With the selling of its mineral sands and diamond division, and non-core oil & gas assets, new BHP CEO Andrew MacKenzie was praised by Somel for increasing the firm’s dividend and share buybacks.
He adds: “MacKenzie understands that the share price is depressed because what management have done in the past. A new chairman and new CEO are changing the way that company operates and that’s what gives us the confidence to go back down the curve and buy these companies at what are incredibly cheap valuations.”
The fund has bought a 2.7% share in Microsoft in recent weeks, its first software holding. With an increasing proportion of its growth coming from emerging markets, Somel believes the firm is now on its way to putting its problems with software piracy in China behind it with its investments in cloud computing and software servers.
Revenue boom
“90% of people in China that haven’t been paying for Microsoft software will have to either sign up for a subscription or lose it, and that’s a huge revenue boom,” Somel noted, pointing the finger at outgoing CEO Steve Ballmer for spending too much on mobile technology rather than rewarding shareholders.
He added: “ValuAct, the activist investor has taken a board seat and George Soros has bought shares. Already there have been changes – a 22% increase in dividends this year, and a $40bn share buyback. The shares are cheap and for once we can now see how revenue is going to grow, and how the company is going to return it.”
Making way for these “core” new ideas is likely to be holdings in food & agriculture, consumer goods and consumer services sectors. With M&G having announced yesterday that Somel has taken on leadership of M&G Global Basics Fund from retiring Graham French, the new manager is not overly concerned about outflows.
He concluded: “Our largest holdings are the likes of United Technologies, UPS, Kirin, and Unilever, which are highly liquid companies. We manage a portfolio considering at any time that we may see flows going out. The illiquid holdings are the much smaller stocks held at more manageable levels.”
