I’m still on the prowl for good investment/trading ideas for the New Year and three caught my eye this week. Two are bullish (from Liberum and Killik and Co), one more bearish.

First up is the new Alternatives Portfolio from the funds’ team at Liberum. In the table below, you’ll see 12 relatively well know alternative funds, collectively yielding around 3.8% but with at least three capital gains orientated funds in the list plus one hedge fund. I think this is an excellent starter for ten (or 12) for many investors.

Next up, analysts at Killik and Co stick to the big themes for 2019. They reckon three matter:

“Environment: By 2030, it is estimated that the world will be using 40% more water, 35% more food and 30% more energy. We, therefore, see exciting opportunities in companies serving the $600bn global water market, particularly in critical infrastructure such as water pumps and in companies indirectly improving the environment through technical improvements and chemicals. For example, companies making more efficient electric motors and chemical companies helping customers use less water and energy. Other supporting factors include:

  • Resource scarcity
  • Increased regulation
  • Pollution
  • Extreme weather events
  • Population growth (by 2050, the global population is expected to be 9.6bn)

Stock Ideas? Orsted, E.On, Nidec, Ecolab, Xylem

Healthcare: There are some major structural changes occurring that make this an interesting area. These include:

  • Unsustainable growth in government spending on healthcare
  • The move towards recognizing and rewarding value for the delivery of care, creating an ‘outcomes vs volumes-based’ pricing model, causing both threats and opportunities in the industry
  • Pharmaceutical businesses may see changes to the core business. However, beneficiaries may come from less expected data-driven, technology-enabled parts of the sector
  • Further disruption from healthcare innovation – allowing a more personalized approach on the delivery of care. E.g. advancements in gene sequencing is enabling the ‘third wave’ of disease treatment using cell therapies
  • Rising life expectancy and an ageing demographic provide long-term structural drives

Stock Ideas? United Health Group, Thermo Fisher Scientific

Industry 4.0: The emergence of ‘Industry 4.0’ and ‘smart factories’, in which computers and machines communicate with each other, will likewise offer opportunities

Stock Ideas? Amazon, Microsoft

Time to turn bearish on private equity?

Finally, over at Jefferies, Matt Hose has been turning his (bearish) attention to listed private equity funds. These have been popular amongst many wealth managers over the last few years, with chunky discounts to tempt the investor. Valuations seemed cheap and many of the smarter PE players were making a stack of money off the back of an M&A boom.

Flash forward to 2019 – are these listed PE funds still cheap? Probably not, according to Matt Hose, largely because increased public stock market volatility will feed through into squeezed valuations within the fund portfolios.

Hose looks at the potential for sharply lower NAV valuations in two ways.

The first is directly applying the falls in market indices to the portfolios. We use the Russell 2000 Value Index (down 19.1% over Q4) and the STOXX Europe 600 Index (down 11.9% over Q4) where appropriate as loose proxies to apply to US and European assets respectively. We also apply a beta of 0.5x to reflect the general defensiveness of the underlying portfolio companies. The second is an indirect method, using the sample portfolio EV/EBITDA valuation multiples and taking into account the corresponding net debt/EBITDA leverage multiples. Here we reduce portfolio valuations by a single turn of EV/EBITDA (i.e. 1x), in line with the de-rating of relevant indices, or 1.5x for the more ‘growthy’ portfolios of APAX, HGT, and LTA (Altamir).”

The Jefferies analyst looks at seven funds using this analysis (APAX, HGT, HVPE, ICGT, LTA, NBPE, and PIN), which collectively trade on a simple average discount to NAV of 23.9%. According to the Jefferies’ funds analyst “directly applying the falls in market indices to the portfolios results in the funds trading on an average discount of 17.8%. The indirect reduction in valuation multiples seems a harsher measure though, as the average discount becomes 12.1%.”

The bottom line? According to Hose “the funds are trading at somewhere between the two results – i.e. an average of mid-to-late-teen discounts. Taking the sub-sector, this doesn’t offer particularly compelling value at this stage, bearing in mind the market turmoil could be extended and other, wider, risks at play within private equity”.