Deciding where to put your money right now isn't easy.
The stock market is erratic, real estate prices are falling and inflation has been decimating people's savings for more than two years.
You might think that those in the investment management industry have a better understanding of how to thrive under current conditions, but their opinions will differ.
Every month This is Money asks a senior fund or investment manager about ten questions that will push him to his limits.
Coming up: Every month we ask a fund manager some tough questions
We want to know what they would invest in over the next ten years and what they would avoid.
We will poll our willing professional investors about the future of inflation, interest rates and the real estate market.
We will ask them about their views on gold, Tesla and bitcoin, among other things.
This week we spoke to Ken Wotton, managing director, public equity at Gresham House and fund manager of WS Gresham House UK Micro Cap Fund, WS Gresham House UK Multi Cap Income Fund, Strategic Equity Capital plc and he also manages AIM-listed portfolios on behalf the Baronmead Venture Capital Trusts (VCTs).
1. If you could invest in only one company over the next ten years, what would it be?
Ken Wotton replies: XPS Pensions Group – pension advisor and executor. XPS is a leading player in a non-cyclical market with growth driven by consolidation and regulation.
The company has inflation-linked, multi-year recurring contracted revenues and improving margins, making profits highly visible.
It has deep expertise in a specialized area, creating strong barriers to entry. Attractive profit margins and free cash generation support a generous and growing dividend.
Ken Wotton, managing director, public equity at Gresham House and fund manager of WS Gresham House UK Micro Cap Fund, WS Gresham House UK Multi Cap Income Fund
The market is consolidating and offers opportunities to increase growth through selective acquisitions.
The valuation is undemanding compared to the strong fundamentals and prospects.
What would be the stock you would buy in the next twelve months? (not a fund or investment trust) And explain why?
2. What about the next twelve months?
Angling Direct is the UK's largest retailer of angling equipment and consumables.
It operates as an omnichannel platform with a combination of online sales and physical stores, strategically located in the United Kingdom.
The economics of the business are attractive due to the high return on marketing spend, with loyal, repeat hobby customers offering high lifetime value.
Reduced risk appetite for microcap stocks, uncertain consumer spending environment, supply chain challenges, rising online customer acquisition costs and inflationary cost pressures in the retail sector have dampened sentiment.
For this reason, the stock appears exceptionally valuable and could revalue significantly as trading improves over the next twelve months.
3. Which sector are you most excited about?
The general financial sector is one sector that has seen significant downgrades as investors have become concerned about the impact of rising interest rates on asset values and investable wealth.
This is broad-based and has resulted in higher quality, better positioned companies now trading at significant discounts to private market M&A valuations, which are likely to be reversed by a positive market revaluation or acquisitions, or both.
4. Which sector would you avoid?
We avoid the oil and gas and mining sectors due to the inherent cyclicality and volatility of earnings.
We prefer companies where more of the value creation potential is in the hands of management and their strategy, rather than commodity price fluctuations that are inherently beyond the company's control.
Ken Wotton says he is avoiding the oil and gas and mining sectors due to the inherent cyclicality and volatility of earnings
5. Which country offers the best value for investors?
We believe that the UK stock market currently offers exceptional value as it trades at a multi-decade discount to other developed markets, particularly the US.
We believe that the increased takeover activity is evidence that valuations are attractive and could be the catalyst for a positive revaluation in 2024.
6. Should Investors Focus on Growth or Value Stocks?
The great thing about the current market environment, especially in the UK, is that investors have access to high-quality growth stocks at good prices, especially at the small and mid-cap sides of the market.
Pure value may prove illusory given the uncertainty surrounding corporate profits.
We prefer high quality companies with sustainable growth engines and robust balance sheets that currently offer real value due to the negative top-down consensus view of the UK market and economy.
Wotton says the UK stock market currently offers exceptional value as it trades at a decades-discount to other developed markets, particularly the US.
7. Tesla – Will it ultimately be a boom or bust?
The failure is due to management overload and focus, governance concerns and the increasing competitive threat from more established players focusing on EV.
8. Scottish Mortgage – Should You Buy, Hold or Sell?
I would sell due to concerns about the valuations of US equities and private growth assets, which are an increasingly large part of the equation. From here the value of UK listed shares improves.
Bust: Wotton doesn't think the future is bright for Tesla due to management overload and focus, governance concerns and increasing competitive threat from EV-focused players
9. Is the real estate market 'as safe as houses' or is it on the verge of a crash?
I expect a soft landing for house prices in nominal terms from this point on, as much of the pain in real terms has already been absorbed once inflation is taken into account.
This has been felt less acutely by most as people have become accustomed to not taking inflation into account when benchmarking asset values.
10. Gold: Should it be in everyone's portfolio?
No – it is an asset for protection, but with a negative effective return due to storage costs. Not suitable for long-term investors who believe that the markets will rise in the long term.
11. What about bitcoin?
No – the same reasons as gold, but more volatile and prone to bubbles.
No gold bug: Wotton says gold not needed for long-term investors who believe markets will rise in the long term
12. Do you think Brexit has cost the average British investor a lot of money?
Yes, it has had a materially negative impact, as evidenced by the large and prolonged discount applied to UK assets, especially listed shares, since the 2016 Brexit referendum.
13. Will interest rates return to rock bottom?
I think we are in the new normal of 4-6 percent, consistent with pre-global financial crisis.
I don't expect interest rates to rise materially from now on due to the impact on growth, but given the wider environment the era of free money is also likely to be over.
Wotton expects a soft landing for house prices in nominal terms from this point, as much of the pain in real terms has already been absorbed once inflation is taken into account.
14. Do you think inflation will continue?
We want to stay at a higher but manageable level – we are in a different world now and living with the consequences of printing too much money for too long before inflation falls back to the low levels of recent years.
15. Has the Bank of England done a good job?
Balancing the aftershocks of Covid, geopolitical turmoil and rampant domestic and global inflation, while trying not to torpedo economic growth, has been a tough job.
Ken Wotton says Britain won't go back to the era of ultra-low interest rates we've just emerged from, which was artificial and ultimately unsustainable
I'm not sure I would have done anything dramatically different in the last two years.
Going forward, I would look to lower rates gradually as inflation decreases, but nothing dramatic and not a return to the ultra-low interest rate era we just emerged from, which was artificial and ultimately unsustainable.
16. You will inherit £100,000 tomorrow. What would you do with the money?
A nice family holiday to an exotic place and the rest to Strategic Equity Capital plc which I manage.
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