Ketan Patel is fund manager of the EdenTree Amity UK fund at EdenTree Investment Management.
The upcoming UK referendum on EU membership has created a perfect storm for investors – an uncertain outcome, foreboding economic predication, and the potential for Pandora’s Box of unintended consequences.
Nothing is certain, but a ‘Brexit’ vote could send shockwaves across UK and global markets.
While it is impossible for UK equity investors to entirely insulate their portfolios against this risk, they can look to increase their level of Brexit-proofing.
This can be achieved by exposure to stocks that will be relatively unaffected by the referendum, regardless of the outcome.
These are UK companies that have sustainable business models and share a number of commonalities.
Firstly, they have pricing power with the ability to pass on price increases to customers. They also have dominant market share, and high levels of recurring revenues that create earnings visibility.
Finally, they all have significant barriers to entry.
We believe the following companies, all held in the EdenTree Amity UK fund, have the right attributes to navigate any short-term Brexit-related pain and are well-positioned for long-term growth.
• Mears – market leading provider of social housing services in the UK, which has built up a strong forward order book, growing margins and a track record of delivering long-term returns to shareholders.
Management have tackled the issue of wage inflation – the living wage, by engaging with clients at an early stage and only taking on profitable business.
This augurs well for the business, given the significant long-term business opportunity that an aging population brings. The company’s excellent earnings visibility – all UK – is supported by a robust balance sheet.
• Porvair – has become a leading filtration company which operates in strong end markets – aerospace, food & beverage, printing, water treatment and healthcare.
The high levels of recurring revenues are built on designing and manufacturing bespoke products which are essential to the safe and reliable operations of systems.
High barriers to entry have led to increased market share and greater sales to international customers.
The commitment to R&D programme to identify new materials and products is a key differentiator in a highly complex and technical industry
• Victrex – is the world’s leading producer of PEEK, a high performance thermoplastic with a series of ultra-performance attributes such as high melting points, high strength to weight ratios and resistance to harsh chemicals.
Its key characteristics lend themselves as a substitute to metals and other plastics to a number of high growth markets.
With over 95% of sales to international markets, a strong balance sheet – with net cash and growing margins leaves the company well positioned. The company has delivering strong returns delivering both capital and dividend growth for shareholders.
• Trifast – manufactures and distributes a variety of industrial fastening to assembly industries.
The company has a high quality customer base in the automotive, electronics and domestic appliances sectors.
It is one of the very few operators with the ability to deliver a full solution for clients on a global basis. Management have built up a strong balance sheet which has delivered strong returns for shareholders over a long period.
• Horizon Discovery – a leading player in Life Sciences sector, the company specialises in providing products and services for personalised medicines – diagnostics and clinical sequencing. Management has been able to build a high quality business in an attractive niche, with the scale to take advantage of fast growing structurally attractive end-markets.
The company enjoys strong barriers to entry and very high margins, which augur well for shareholders.