Fund managers reveal high-conviction share ideas

It is becoming increasing clear that the real value in global stock markets may lie outside the technology giants, which have dominated for many years.

Since the start of this year, investors have been seeking out alternatives, with overlooked areas finally starting to revive. For active fund managers, this is a more fertile environment, as more of their higher conviction ideas come to fruition.  

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Against this backdrop, we asked a variety of fund managers to give their best ideas for the current environment. We start in the UK, where valuations still look compelling, with golden opportunities routinely overlooked because investors are still a little wobbly on the economic outlook. For Gregor Paterson, analyst on the WS Amati UK Listed Smaller Companies fund, this makes for rich pickings.

He says: “Mobile payments group Boku Inc Ordinary Shares (LSE:BOKU) is a great example of what the UK equity market is for. A disruptive, global technology developed, listed and funded on the AIM exchange, which now boasts a customer roster that includes some of the largest global tech companies across 60 countries.

“Boku’s platform allows its customers, which include the world’s largest digital vendors (Google, Microsoft, Amazon, Meta, Netflix, Spotify) to access digitized Local Payment Methods (LPMs) all over the world and to effect payments cheaply and swiftly. Boku has proven to be tremendously fleet of foot; as this emerging technology evolves and grows, so does their solution.” He says the market is only just beginning to sense the potential.

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It has become commonplace to deride the UK’s technology ability, but Trainline (LSE:TRN) has been one of its most visible success stories. The rail ticketing app and website has a 65% market share in e-ticketing, which is 52% of the train ticket market. “The company invested heavily in its early years to develop and establish its direct-to-consumer brand. It then began offering white-label solutions to rail operators and expanded its geographic reach into mainland Europe,” says Paterson.

He says the European expansion has cost a lot, but the prize of becoming the dominant European train-ticketing platform would be a big one. Trainline estimates the total addressable markets in Spain, France and Italy on high-speed routes only, at €4.5 billion (£4 billion). The shares have fallen recently over concerns that the newly created Great British Railways, which will oversee the rail network and train operating companies, could seek to undermine the competitive market in ticketing.

“We think Trainline will prove more resilient than the market fears, given that it has 18 million active users in the UK, and that the lower rating of the shares provides an interesting opportunity.” 

FTSE 100 plays

The FTSE 100 has had a strong run since the start of the year, leaving the small and mid caps in its wake. However, Alan Dobbie from the Rathbone Income Fund, says there are still some great companies at low valuations to be found among the large caps. Tesco (LSE:TSCO) is one of his favourite ideas in the portfolio.

He says the company is, “executing exceptionally well in a difficult environment”. Its latest half-year results were strong across the board, “despite heightened competition, particularly from ASDA’s price reset earlier in the year, Tesco still delivered like-for-like sales growth of 4.3% and gained another 0.77 percentage points of UK market share, taking it to 28.4%. That marks 28 consecutive four-week periods of share gains, which says a lot about the strength of the brand and the effectiveness of its strategy.”

Dobbie says the management team has navigated consumer nervousness ahead of the Budget, invested in price, and still managed to grow operating profit. This led to a full-year guidance upgrade. “Even so, management remains cautious, which suggests there could still be room for upside if current trends continue.”

He is also encouraged by Tesco’s move into higher-margin areas such as retail media and marketplace. While these are still in the early stages, the signs are promising. “Tesco is a high-quality operator in a relatively low-quality sector. That is a tricky combination, but one we believe can work.”

Rail ticketing app and website Trainline has a 65% market share in e-ticketing, which is 52% of the train ticket market. Credit: monkeybusinessimages.

Job Curtis, portfolio manager of City of London Ord (LSE:CTY) Investment Trust, spots another opportunity in the UK market – the commercial property sector. “Currently, there is a dislocation between the stock market values of real estate investment trusts (REITs) and the underlying value of their assets. Two ways of taking advantage are by investing in British Land Co (LSE:BLND) and Land Securities Group (LSE:LAND).” Curtis points out that both are trading on big discounts to the value of their underlying investments.

The two REITs have a similar split between retail and London offices. Within retail, British Land is mainly invested in retail warehouses, while Land Securities is in leading shopping centres. Both have some prize assets - within London offices, British Land’s biggest asset is its 50% stake in Broadgate in the City, while Land Securities’ main focus is Victoria.

Curtis adds: “The discounts are despite rising rents and values but may reflect the stock market’s concern about gilt yields. However, it is interesting to note that there have been seven takeovers of UK REITs by private equity firms over the last 12 months and this trend, in my view, is set to continue while large discounts persist.”

In the meantime, investors benefit from a dividend yield of around 6% for British Land and 5% for Land Securities.

International ideas

Looking outside the UK, some investors have been diversifying away from the US, recognising that technology companies look increasingly highly valued.

NVIDIA Corp (NASDAQ:NVDA) may have a strong pathway of growth, but its $5 trillion (£3.8 trillion) valuation – more than 2x the entire FTSE 100 – is making some investors nervous. Although, Stephen Yiu, fund manager of WS Blue Whale Growth I Sterling Acc, is not in this camp.

In a recent interview with interactive investor, Yiu said: “The valuation for Nvidia has actually got a lot cheaper over the last two years. If you think about 2022, Nvidia [was] probably trading about 60 times earnings and today it is trading about 30 times earnings one year forward. And 30 times earnings would put Nvidia alongside Microsoft Corp (NASDAQ:MSFT), Apple Inc (NASDAQ:AAPL), Mastercard Inc Class A (NYSE:MA), or even similar to Walmart Inc (NYSE:WMT).

“In a way, when you look at the earnings power, or how much money Nvidia is making today versus a few years ago, it has gone up a lot more than the share price increases.”

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Following its success with DeepSeek, China has been a natural home for investors looking for alternative options.

Dale Nicholls, portfolio manager of Fidelity China Special Situations Ord (LSE:FCSS), says: “Chinese equities have advanced strongly despite ongoing US-China trade tensions and a subdued property market, supported by low starting valuations and sentiment, along with improving sentiment towards innovation-driven sectors, following DeepSeek’s breakthrough AI model. This again, underscores the vitality of China’s innovation ecosystem.”

The trust is investing in companies such as Hesai Group ADR (NASDAQ:HSAI),the largest global automotive LiDAR (light detection and ranging) provider. LiDAR is an essential component in advanced driver assistance systems (ADAS). “Hesai is set to benefit from a strong demand in increasingly sophisticated ADAS, creating a visible path to substantial volume growth. While the automotive industry will drive growth for many years ahead, there is also strong potential in other forms of mobility and robotics in the longer term.”

He also highlights companies such as Full Truck Alliance Co Ltd ADR (NYSE:YMM), which are clear beneficiaries of digitisation. This isChina’s dominant digital freight matching platform. He says: “It leverages powerful network effects to match shippers with truckers more efficiently than traditional offline brokers. Its scale advantage creates a strong moat, with network effects set to further its lead, with greater efficiencies and lower costs. It has durable growth potential as China’s logistics industry continues its structural shift online.”

Global managers are also finding opportunities in China. Claire Shaw, portfolio director on Scottish Mortgage Ord (LSE:SMT), says innovation in clean energy also presents some attractive opportunities in China: “Over the past year we’ve initiated positions in electric vehicle company BYD Co Ltd Class H (SEHK:1211) and the world’s largest battery manufacturer CATL, or Contemporary Amperex Technology Co Ltd Ordinary Shares - Class H (SEHK:3750). Both companies are not just domestic Chinese players, but have evolved into global champions.” CATL, for example, powers electric vehicles for Tesla Inc (NASDAQ:TSLA), Volkswagen AG (XETRA:VOW) and Bayerische Motoren Werke AG (XETRA:BMW).

A Hermes store in Tokyo. Credit: t_kimura.

There are also options to play the AI theme in Europe. Marcel Stötzel, co-portfolio manager of the Fidelity European Trust Ord (LSE:FEV), continues to hold ASML Holding NV (EURONEXT:ASML) and Legrand SA (EURONEXT:LR), whichprovide “picks and shovels” exposure to AI infrastructure. “ASML dominates the global photolithography market, holding a near-monopoly in advanced chip-making equipment. Rising digitalisation and AI demand continue to drive semiconductor growth, supporting strong, sustained spending by major clients such as Intel Corp (NASDAQ:INTC), Samsung Electronics Co Ltd DR (LSE:SMSN) and Taiwan Semiconductor Manufacturing Co Ltd ADR (NYSE:TSM).

“Legrand is a leading supplier of low voltage electrical components and has 80% of its revenues are exposed to construction. Additionally, data centres are likely to be a resilient end market, increasing the relative attractiveness of the stock compared to its peers.”

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However, there are also opportunities outside AI. Stötzel has been finding opportunities among the luxury goods makers. Having sold out of LVMH, he has reinvested the proceeds into Hermes International SA (EURONEXT:RMS) and Compagnie Financiere Richemont SA Class A (SIX:CFR): “Hermès remains our preferred name in the sector, given its exceptional brand strength and resilient resale value of products, which provides some insulation against market volatility. While the broader luxury industry has seen aggressive price increases of 20–30% over recent years, leading even high-net-worth consumers to moderate spending, Hermès has maintained pricing discipline and brand integrity.”

Yiu has also been turning his attention to this part of the market, increasing exposure to Moncler SpA (MTA:MONC) and Burberry Group (LSE:BRBY). He said: “Of course, it could still be early days just because the macro environment has not improved significantly. But there’s some potential that the valuation has bottomed out in a way that [suggests] maybe now is the time to increase your exposure.”

While everyone is fretting about whether AI is in a bubble, there are plenty of other opportunities across global stock markets that are well valued and offer equally exciting growth prospects. Fund managers will be hoping that the appetite to look beyond the US technology sector can be sustained.