Fund Manager Identifies Key Investment Opportunities in UK Market

Mark Costar, senior fund manager of the JOHCM UK Growth Strategy, has highlighted significant investment potential within the UK market, citing a recent success with Rolls Royce shares as an example of the opportunities available.

Costar's fund purchased Rolls Royce shares at 70 pence each, with the stock reaching £14 last month. He manages the £156 million fund, which primarily invests in the UK and aims to achieve long-term capital growth exceeding the FTSE All Share Total Return Index. The fund's portfolio includes a diverse range of companies, from large FTSE 100 constituents to smaller firms.

Investment Outlook

For long-term investment, Costar favors SigmaRoc, describing it as a "high-quality compounder" with strong management, market entry barriers, pricing power, and structural growth prospects. He notes its attractive valuation, especially when compared to a peer recently acquired at a significantly higher multiple.

For the next 12 months, Costar identifies Gooch & Housego as a promising investment. The company, a leader in precision optical components, has growth opportunities in sectors such as advanced semiconductors, anti-drone warfare, and undersea data cables. The company recently reported a record order book, suggesting strong performance ahead.

Market Analysis and Diversification

Costar believes that investors often overlook the UK market due to a "toxic political narrative," leading them to underestimate its structural attractions and potential returns. He points to the UK's strengths in artificial intelligence, a vibrant startup ecosystem, world-class biotechnology and science capabilities, and underestimated potential in creative industries and education.

He suggests that investors may be overly concentrated in the U.S. market due to its dominance in global indices and its large tech sector. Costar recommends diversifying into the UK and selective non-tech dominated Asian markets. While acknowledging gold's historical role as a diversifier, particularly during geopolitical uncertainty, he expresses skepticism about Bitcoin and other cryptocurrencies, viewing them as speculative instruments rather than investments.

Sector Opportunities and Avoidances

Costar sees significant opportunities in sectors perceived to be threatened by AI, such as advertising agencies and education. He argues that AI can increase complexity in marketing and drive demand for training and accreditation in education. Conversely, he advises caution regarding utilities, citing their typical lack of growth, underinvestment, and heightened political risk in the UK.

Portfolio Holdings

AstraZeneca is a significant holding, with Costar praising CEO Pascal Soriot for transforming the company through a focus on therapeutic categories with unmet medical needs and strong R&D. He expects continued above-average sales growth and shareholder returns from the company.

JOHCM UK Growth Strategy also holds substantial positions in HSBC and Barclays. While profits have been taken on these, Costar believes their prospects remain strong and their valuations reasonable. The fund also invests in smaller financial companies like Vanquis and Funding Circle.

Investment Philosophy

Costar advocates for active management over passive investing, citing the potential for passive funds to lead to market concentrations and price discontinuities. He highlights his fund's 25-year track record of consistently outperforming its benchmark. He also suggests that a combination of low-cost index trackers and carefully selected active funds is a prudent approach for younger investors looking to compound wealth over the long term.