Recession-wise managers get into coffins and condoms

Judging from the few companies in Britain to post positive news in recent weeks, you will be sitting down to a box of KFC as you read this, with Sky TV on in the background and a bar of Cadbury’s and some cheap whisky to follow. You may also have just returned – possibly on your bicycle – from pawning the family silver at Albemarle & Bond.

Trading down and staying in are hardly news in a recession. But as well as relying on traditional non-cyclicals, fund managers are looking to bicycles, condoms and coffins to turn a profit.

Equity managers remain reluctant to call the bottom of the market, but across the sectors they have started to identify companies they hope can eat up ­further market share as recession ­Darwinism kills off the weakest firms. Smaller companies may be especially well positioned to offer growth.

Rosemary Banyard, the manager of Schroder’s UK Smaller Companies fund, favours JD Wetherspoon, which has captured cash-strapped imaginations with its 99p pint; she also holds Gregg’s, the budget bakery chain.

Managers see resilience in companies whose market is unlikely to change. Robert Churchlow, the head of UK equity at Legal & General (L&G) and manager of the Growth Trust, holds Compass Group, a caterer for schools and hospitals – because “obviously people still need to eat” – and Balfour Beatty, an engineering and construction firm that takes on large-scale public projects. But he warns that opportunities are “more company specific than industry specific”.

Justin Jordan, the manager of the Credit Suisse UK Mid 250 fund, likes Halfords because it dominates in-car accessories and will profit from people repairing vehicles instead of buying new ones. As a bicycle retailer it should also gain long-term benefit from the environmental movement. “The green trends are not just economic recession trends,” says Jordan. “They’re with us for many years to come.”

Last year the only retail stock Jordan held was Dignity, Britain’s largest chain of funeral directors. Confirming maxims about death and taxes, it was one of the top-performing retailers.

Perhaps less predictable was the success of SSL, a current Jordan holding, whose chief products are Scholl sandals and Durex condoms and which, he says, is “über defensive”. “The chief executive famously said – and I’m paraphrasing – people don’t stop making love in a recession.”

Like the other businesses he favours, Jordan notes, SSL has strong fundamentals. “It’s a business that, through having a very strong management team, has grown across Europe, Asia, China, Russia, in the condom space.”

Despite the fate of the banking giants, Banyard at Schroders sees opportunities in financials. She is overweight Albemarle & Bond, a pawnbroker, relative to the FTSE Small Cap index: indeed, profiting from people’s need for cash, it is the stock that has had the single most positive impact on the fund’s performance.

Another company she thinks is doing well is Hargreaves Lansdown, attributing the financial adviser’s success to its Vantage platform. “It means clients keep their money in Hargreaves Lansdown even though they might have moved out of equities into cash – and Hargreaves will take a slice. That’s the history, and my sense is that more people are signing up with them for Sipps [Self-Invested Personal Pensions] and other pensions, where there’s growth. That’s to do with the ongoing deterioration in [company] pension schemes.”

Churchlow says the troubles that have hit AIG, an American insurance giant, are benefiting companies listed on the Lloyd’s of London market. Capacity in the insurance industry was reduced by several factors, he says: “It [2008] was the second worst year on record in terms of claims: the industry collectively lost $50 billion. They don’t have that capa­city in place to write business against. And the essence of AIG’s problems is that they had some very toxic assets. Those two problems together took 20% of capacity out of global underwriting assets. Pricing power does come back into the market. Companies like Amlin and Catlin Group can thrive.”

In property, Jordan points to Berkeley Homes, which raised £50m from a rights issue last week to buy land from distressed developers.

Another sector where survivors stand to benefit is music retail, where both Jordan and Banyard see HMV as a winner from the demise of Zavvi and Woolworths. “It may raise money to buy stores from Zavvi,” says Jordan.

Both say HMV will withstand the onslaught from downloads for the time being. But other companies have stood up well precisely because they adapted to the internet fast. Jordan has bought NBrown, a clothing retailer that began by selling to older women but has made “clever use of online marketing to rapidly expand into other demographics”.

Churchlow sees a unique technology opportunity in Inmarsat, a provider of satellite communications. “There are lots of growth opportunities there, with voice and data services on mobile phones on flights, such as Ryanair. Inmarsat is the wholesale provider of access for those services, and all the major airlines are either trialling a service or are planning to introduce it.”

Recession opportunities may emerge from close observation of consumer trends, but ultimately, fundamentals matter. Churchlow sees companies in a “self help” situation as good recovery stocks: both Cadbury and Compass have recently brought in new management. And Jordan says that for companies seeking to pay down debt, rights issues could be the proof of the pudding. Berkeley’s rapid share selling last week, he says, points to its credibility as a debt-free company.

Berkeley’s success means “it is possible that we are at the bottom of the recession for trading activity for house builders,” says Jordan. With rare certainty, he contends the recession will end in the second quarter of 2010. Banyard is more cautious, but says: “There are quite a few silver linings out there.”