The ex-pharmacist turned fund manager tells us about the sectors where he is seeing value today, and some of his favourite individual stocks.
Jayesh Manek is probably best known as the West London pharmacist who won the Sunday Times Fantasy Fund Manager competition for two successive years back in the mid-1990s.
Following on from this success, Manek established the Manek Growth Fund in December 1997.
After a sticky period in the early 2000s, over the past few years, Manek has set about proving his fantasy performance was no fluke. According to Lipper, the Manek Growth Fund is ranked 2nd in the UK All Companies sector over the past 3 years, and 1st over the past 12 months.
Perhaps even more impressively, over the past 12 months, the Manek Growth Fund gained 15.9%, and is the only to deliver positive returns during that period.
In this exclusive Motley Fool interview, I set about finding out the secret to his success.
Bruce Jackson (BJ) – In your most recent report to fund holders, you mention “the renewed focus” for the Fund as you wrote about in 2005. Can you please elaborate?
Jayesh Manek (JM) – My investment strategy is based on identifying individual companies in the UK and abroad, across all sectors, whose share prices have the potential to outperform the indices. The Fund combines growth, value and momentum strategies.
After an exceptionally good start in 1998/9, the Fund performance suffered during the 2000 – 2003 stock market correction, one of the worst downturns for many years.
I carried out an in-depth analysis of all the trades since the Fund’s inception followed by a complete review of the investment process and strategy. Although the basics of the investment process, the strategy and stock picking have not altered significantly, the review allowed me to refine certain aspects of this process, focus on its most positive attributes and introduce additional features, including risk mitigation. The result is a significantly improved performance and lower volatility since its implementation some three and a half years ago.
BJ – Tell us more about your risk mitigation and lower volatility?
JM – Initial purchases for new ideas are limited to 1% of the portfolio and increased gradually when it satisfies certain criteria. Part profits are taken more frequently, especially after a rapid run up in price.
I take the macro economic picture into account for overall sector allocation and generally avoid sectors which could adversely be affected by negative trends, for example tight credit conditions which may lead to fall in house prices and a slowdown in consumer spending. In addition, during uncertain market conditions, I use index futures to provide some cushion against a fall in the market.
Favouring Technology, Oil and Solar
BJ – Which sectors are you seeing value today?
JM – Technology, oil exploration. oil services, alternative energy and some cyclicals.
BJ – Alternative energy is an interesting sector. It is obviously a sector with great potential, yet historically many companies have struggled to make money, and some have gone bust. What do you look for in alternative energy companies, and do you have a favourite company you could share with us?
JM – I generally consider only profitable companies. Solar energy stocks have generally performed well due to the rising oil price.
I have recently increased my holding in Renesola (LSE: SOLA), an AIM listed (also NYSE listed) company based in China, with a market cap of £600m. It is a leading global manufacturer of solar wafers, used in solar panels, and supplies some of the major global manufacturers of solar cells and modules.
Profits have been accelerating, with earnings in the most recent quarter up 280% over the previous year. It is on a price to earnings (P/E) multiple of 14x for 2008 coming down to 8x for 2009, hence leaving considerable upside potential for the shares.
BJ – What valuation metrics do you typically focus on?
JM – A combination of earnings multiple with reference to historic and forecast growth rates, cash earnings, gearing and return on equity (ROE), amongst others.
BJ – With earnings multiples, do you look at price earnings growth ratio (PEG) and/or buying companies on a forward P/E of less than x?
JM – Yes, the PEG is one of the most important measures I take into consideration to establish whether the multiple at which I am investing is reasonable in relation to the potential growth rate.
BJ – The Fund is currently overweight oil exploration and oil services companies. Can we presume you remain bullish on the oil price?
JM – The current valuations are generally based on oil price of around US$70 which leaves room for reasonable appreciation even if the oil price were to drop further to around US$100 dollars. (It currently trades around US$115) There is also the potential for further discoveries. In addition, the oil services companies are experiencing strong demand and have very healthy forward order books.
BJ – As you may be aware, The Motley Fool has a very active Oil & Gas Companies discussion board. I’m sure contributors and readers of that board would be interested to hear what is currently your favourite oil company.
JM – With news of further discoveries this year and strong profit growth, Tullow Oil (LSE: TLW) and Dana Petroleum (LSE: DNX) are currently favoured.
One For Bollywood?
BJ – Tell us more about DQ Entertainment (LSE: DQE), one of your top 10 holdings? Is it a play of the huge Bollywood market?
JM – DQ Entertainment is an AIM listed company. It is India’s leading Animation and Game Art Company with over 3,500 employees. It has a forward order book of over $100m, with growth driven by increasing outsourcing of animation work by global entertainment houses.
It has an impressive list of over 80 international clients including Walt Disney, Marvel, Nickelodeon and BBC, and has worked on popular productions such as IRONMAN and FANTASTIC FOUR. It has recently entered into several joint ventures whereby it also benefits from future royalties.
BJ – How do you assess its current valuation?
JM – With a healthy forward order book, earnings are expected to increase by 100% to March 2009 and 90% to March 2010, putting it on a PE multiple of 19x and 10x respectively.
Still Avoiding Banks
BJ - You’ve managed to successfully avoid financials, banks and home builders, and you remain cautious about the economy. Do you see yourself ever buying into those sectors, and if so, what would be the catalyst?
JM – I personally feel that it is little early to commit to financials and banks without fully knowing the true extent of the underlying problems and their profitability going forward.
Capitulation at some stage could be the potential catalyst to buy into these sectors. There could be trading opportunities with UK home builders from time to time, but it may take much longer for them to stage a sustained recovery and generally remain a high risk investment in the near term.
My Favourite Stock Today
BJ – What is your favourite stock for new money today?
JM – I have been increasing the Fund’s holding in Panceltica (LSE: PANC), a recently listed AIM company with a market cap of over £200m.
It is hoping to benefit from the ongoing building boom in the Gulf States by rolling out a new type of technology that allows it to build light-weight steel-framed structures in much less time than traditional construction techniques. Its biggest contract under way is in Qatar, estimated to be worth more than $320m, to build nearly 2,000 apartments with shopping facilities. It is expected to win other similar contracts.
BJ – How do you assess its current valuation?
JM – Based on the existing order book, Panceltica is attractively valued on a 2007 PE multiple of 17x falling to 8x for 2008. The potential upside could be boosted by news of any major contracts.
BJ – What are the best and worst things about your job?
JM – It’s great to do something you enjoy. Each day is different, interesting and challenging, and you are continually learning. However, I rarely stop thinking about it.
BJ – Finally, are you sick and tired of being referred to as the ex-pharmacist and dual winner of the Sunday Times fantasy investment competition?
JM – Not particularly. In fact, I am quite proud of my pharmacist background.
The Motley Fool would like to thank Jayesh Manek for taking the time to complete this interview.
Go to the Manek Growth Fund website for more information about the Fund.
If you are a fund manager and would like to be interviewed, please send Bruce Jackson an email.
Bruce Jackson doesn’t have an interest in any of the companies mentioned in this article, including the Manek Growth Fund.
