This manager's fund is up almost 20% this year. Here's how he beats the inflation jitters

Published Tue, Oct 12 20217:37 PM EDT

Freddie Lait, founder and CEO of Latitude Investment Management, says his approach is different to other market participants, allowing him to avoid the "greatest risk" in investing right now and giving him an edge. Speaking to CNBC's "Squawk Box Europe" on Thursday, Lait — whose Latitude Global Fund is up 18.3% this year — said he takes a different strategy when it comes to price-to-earnings ratios. These ratios are closely watched by traders, helping them to assess whether a stock is overvalued or undervalued. Lait said that if you look at an "average, good" business, historically, the market had traded on 15, 16 times earnings. "Currently it sits on 22, 24 times earnings. It's seen as normal. We've been conditioned to believe that's normal," he said. "Our [portfolio] trades on 14 and a half." Lait said this is because he feels there's a significant risk of derating — when a company starts trading at a lower PE ratio — as a result of higher interest rates and inflation. "I think that's the greatest risk. A small miss in earnings, or a small stabilization, or a bit more choppiness around earnings from that input cost inflation, could drive a meaningful derating back — just in line with history, that would be a 30% fall at the market level," Lait told CNBC. Lait said he didn't expect to see either a meaningful recession or a meaningful earnings recession — even with rising inflation — but that it was important to focus on valuation. "I think at the moment, it is a blindness to valuation risk within someone's portfolio that is leading them into the higher growth stocks elsewhere, and we just think we've got a competitive advantage doing it our way," he added. Stock to watch Lait said there were still lots of opportunities in equities, naming British grocery chain Tesco as a highly defensive stock he was "very, very excited about." "It's just started to show a little bit of growth that we've been anticipating for a couple of years. It's coming through, it was up 7 or 8% at one point yesterday, it will probably do the same over the next few weeks," he said. Tesco, which is Britain's biggest retailer, beat earnings expectations Wednesday with a hike in profit of over 16%. It also raised its full-year earnings forecast, despite ongoing supply chain issues. "It's not the fastest grower in the portfolio, although we do believe it can probably grow cash supported earnings [in the] double digits for the next five years — especially with its new buyback program," Lait added. "I think it's a fantastic, interesting investment trading on 13 or 14 times earnings, a big dividend yield … [there's] potential for a lot of upside and you've seen the valuation upside from all of the PE bids and what's going on elsewhere."

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