This fund should perform well whatever the outcome of Brexit

Garraway UK Equity Market fund manager David Urch talks Brexit and reveals what he's done with a host of big name stocks including Lloyds Bank, Vodafone and Tesco.

What are the big risks investing in the UK market right now, and is buying large-cap stocks a hedge against Brexit?

Many of the risks of investing in the UK market are similar for other equity markets, namely that of a global slow down related to trader tariff wars, and a resurgence of issues within the EU.  That said, I think the UK has suffered a double discount, because of the perceived fears around Brexit.  And therefore actually looks relatively very good value, and therefore is arguably less risky.

I think when it comes to hedging Brexit risk, people need to be very careful about how they're trying to achieve that.  There's a big difference between different mega-cap stocks for example, some are actually domestically focussed, whereas others are obviously overseas focussed.  And the difference in sterling's behaviour will have a big impact on how that hedge plays out.

I think people also probably need to consider hedging on the upside as well.  We think that because the market's so cheap, and positioning seems to be very underweight, that there's a real chance the UK market could be a strong performer going into next year, once we have more clarity on Brexit.  So I think people need to look at hedging on upside terms as well as downside terms.

We've deliberately tried to keep a balanced portfolio that should perform well in either perceived outcome of Brexit.

Talk us through some of your recent trades.  What's in and out of the portfolio?

We haven't been particularly active this year in the portfolio.  So the broad shape of it is similar to how it was at the beginning of the year.  That said, we've added some interesting companies like Draper Esprit, one of Europe's leading capital businesses exploiting opportunities in a digital economy.  We've also beefed up our exposure to UK food retail, through Tesco and Sainsbury. And we've switched a bit of our Lloyds Banking Group exposure into a smaller company operating in the same sectors, Secure Trust Bank.

Earlier in the year we took profits and some of our resources names, selling out of KAZ Minerals in particular, but otherwise we've not been overly active this year.

What are your favourite holdings currently and why?

We think Secure Trust Bank is particularly attractive having repositioned their business model towards higher quality lending. The business is really seeing the fruits of that transition coming through in much higher returns, driving higher earnings growth and ultimately higher cash flow. 

We're also really excited about some businesses we've held for a long time, things like Ashtead look very good value following the recent pullback, as does Wizz, the Eastern European low-cost airline.  And at the larger end of the scale, we're still positive about companies like BP and Anglo American, their strong results recently and very strong cash flow profiles suggest there's lots of upside still to come in the equity.

Lloyds Bank shares are worth less than 60p for the first time in nearly two years.  A buy opportunity, or red flag?

We think the performance of Lloyds shares is really symptomatic of the wider UK market.  The company’s performing well operationally, and that's been reflected in strong earnings revisions coming thorough.  But the market is choosing not to reward that with share price outperformance.  We think that disconnect will break in favour of the shares moving up, and probably when we have clarity around Brexit.

We're starting to see some evidence of people pre-empting that, but expect certainly over the next six months that we’ll look back and see this as a good buying opportunity.

Do you still believe in the Tesco and Vodafone stories?

Still very optimistic about Tesco's ability to recover its margins and it's UK business.  When it comes to Vodafone, we've seen their earnings momentum, which we were trying to capture at the beginning of the year, meet a number of headwinds that we weren't anticipating at the time.  And we subsequently reduced that position.

This is the transcript of a video filmed on 2 November 2018. To watch the original video, please click here.