These shares are often expensive, but are now going cheap

Clive Beagles, manager of JOHCM UK Equity Income IP GBP Acc (B8FCHK5) fund, which holds £2 billion of assets, names a handful of shares that have been recent purchases. Beagles says that a common thread is that they are companies the fund has never owned before, or not held for at least 10 years, due to being on much higher ratings. 

He also explains how a focus on real assets meant the fund wasn’t caught up in the artificial intelligence (AI) sell-off for software companies earlier this year. The fund manager, who has been at the helm for 22 years, also gives his thoughts on what needs to happen for fund flows to return to the UK market, and runs through key performance drivers that have led the fund to outperform its sector over different time periods, in particular the past five years.

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Kyle Caldwell, funds and investment education editor at interactive investor: Welcome to our latest Insider Interview. Today in the studio, I have with me Clive Beagles, manager of the JO Hambro UK Equity Income fund. Clive, thanks for joining me today.

Clive Beagles, manager of the JO Hambro UK Equity Income fund: Great to be here.

Kyle Caldwell: So, Clive you’ve managed the fund for over two decades. It has been a consistent performer over five and 10 years. For example, you’ve produced top-quartile returns in your sector, the UK equity income sector. Over the past five years, what have been the key contributors to performance?

Clive Beagles: Well, what’s been interesting the last five years is that there’s been a bit of a renaissance of value investing, which might surprise some people because of all the noise around technology and AI is still being very present in terms of global markets. 

But, actually, value investing just quietly has driven some quite strong performance, and we know that was after that long period of very low interest rates. 

Finally, interest rates went up in 2022 when the Ukraine war started and I think value stocks, stocks that aren’t dependent on valuing earnings a long way out into the future, have actually done better than other stocks in that regard. So, I think that’s been part of it.

We’ve been heavily weighted to financials, particularly banks, which have been a strong deliverer and performer. But we’ve had a number of individual stocks - maybe there are stocks that might surprise people -  that have done very well, even though the economic backdrop has continued to be mixed.

For example, Currys (LSE:CURY) is a company that we own, which people will know, it used to be the Carphone Warehouse and Dixons, which merged in the UK, but it’s also got a very big business in the Nordics. 

Those shares have tripled in the last two years, as we’ve had the beginnings of a recovery of consumer spending in both countries, some new technology, and very strong delivery from the management in terms of gaining share and so forth. So, we’ve had a number of individual stocks that have helped too.

What we haven’t been helped by has been the size factor. If anything, that’s worked against us. Being overweight in mid and small caps has been a hindrance rather than a help. It’s almost been that we’ve been running up a down escalator, but we’ve had enough individual stocks as well as a decent exposure towards financials, which has more than offset that.

Kyle Caldwell: When it comes to investing, there’s always things to worry about. What is on your worry list at the moment? What potential risks could derail the fund’s performance?

Clive Beagles: It’s not just things that are concerning, it’s things that you don’t know about. You look at the last 10 years, we almost seemed to have had a black swan event almost every year kind of coming along. And to some degree, markets are maybe getting a bit more, not immune, but a little bit more kind of used to that.

I guess in the UK we’ve still got a lot of political uncertainty going around, and the biggest concern in a way is the way that just affects people’s behaviour. In the UK, we’re in a very curious position. Savings in the UK are extremely elevated. Consumer balance sheets are the strongest they have ever been in economic history.

That doesn’t mean that each and every single household has the strongest balance sheet, but collectively the UK households are a very strong place. Consumer spending represents two-thirds of UK GDP. This is the thing that’s really going to move the dial for UK economic growth.

But people just don’t have the confidence to put those balance sheets to work, to start spending. Think about how many prime ministers we’ve had over the last five years. [There’s been] a couple of wars, we had Covid prior to that, and the Brexit referendum. So, it is not a tremendous surprise that people have been behaving a bit more cautiously.

Our fund is positioned to expect that at some stage people will begin to spend some of those excess savings. And there’s some obvious areas of consumer discretionary spend in retail or leisure, or to some degree in the housing chain and so forth that would benefit from that.

But if we just keep having uncertainty after uncertainty, that will get in the way and it will continue to be like a paradise postponed-type moment. So, I suppose that’s the dynamic that we’ve been most disappointed by because it hasn’t really arrived yet but the opportunity is still there. But each time you think it’s going to happen, you had a Labour administration elected with a very large majority and yet the political backdrop has been as uncertain in the last two years as it was in the previous five.

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Kyle Caldwell: When you’re examining those potential opportunities, how much are you factoring in the potential disruption that artificial intelligence may cause to certain sectors and industries?

Clive Beagles: I think partly by design and partly by accident…a lot of exposure in our fund is what I would describe as real assets. So, we’ve got decent exposure in areas in commodities, whether that’s mining as well as oil, whether it’s in real estate, and not a lot in professional services, which is where the greatest risks of disruption, particularly in terms of margin and disintermediation comes from.

There’s been a number of stocks in the UK that were in what I described as the ‘halo club’ a couple of years ago. People thought they were beneficiaries of AI change, and now they’re worried they might be victims of it. Think about companies like RELX (LSE:REL) and some of the software companies.

So, partly by design because the valuations there were high and because we felt that was quite a dangerous bet to take to assume that they were going to be winners, and partly by accident because we always tend to have more real asset exposure, I don’t feel hugely exposed. I don’t want to sound complacent. Obviously, we talk to all our companies about what they’re doing about AI. 

I think the hardest bit to try and work out here is, we talk to the banks, for example, about AI. Clearly, there’s a lot of the cost to come out, but ultimately, they’re all going to do it. So, there might be a short-term game from an operating margin point of view, but in the end, that game is likely to get competed away because one of them isn’t doing something which none of the others are capable of doing. So, I think you need to be a little bit conscious and careful about all of that.

In aggregate, it’s probably going to be disinflationary, which is interesting because the market’s still slightly worried about inflation in the UK and that has obvious implications for interest rates and might help us on the consumer-spending unlock at some stage because, probably, as its impact comes through that is probably just disinflationary. So, it’s complex.

Inevitably, there will be some industries that will be more affected than we currently anticipate sitting here today, and I guess we continue to try and keep an open mind.

But this focus on real assets, we’ve got a big exposure, for example, to construction in the UK. By that, a lot of that is infrastructure construction. We own a number of the contracting companies like Costain Group (LSE:COST), Kier Group (LSE:KIE), Galliford Try Holdings (LSE:GFRD), these kind of companies, a lot of the materials companies. Those things don’t feel very likely to get disintermediated by AI.

We still need all that infrastructure to get built. We still need the water sector to spend twice as much in this five-year period as they did in the previous five years. We still need to spend a lot on decarbonisation, on transport, on schools, hospitals, prisons, all that kind of stuff. 

I think focusing on some of those opportunities maybe means we’re less likely to run into the disintermediation worries that are affecting other parts of the market.

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Kyle Caldwell: Sitting here today we’re 10 years on from the Brexit vote. In terms of fund flows, we’ve seen consistent outflows for UK equity funds over the past 10 years. Why has that happened and what needs to happen for that to change?

Clive Beagles: Yeah, and I think it’s been a sort of steady one-way street. Obviously, part of it was driven by Brexit. Part of it was a process that was already in train of people having a more global outlook in terms of where they should think about investing.

As you know, pension funds have gone from having broadly 50% invested in UK equities to having 3% or 4% invested. In that regard, it would suggest that the majority of the outflows have happened because there’s not much left to go in that regard. But it has left itself in an unusual situation where the UK pension industry is the only country that’s underweight its own domestic equity market.

For example, in Italy, France and Australia, there are tax incentives to encourage people to invest domestically. I think politicians should think about that. Time will tell whether they’ve got the gumption to do that or not.

I think for individual investors...clearly, there’s been a lot of excitement about investing globally, but you just need to make sure you remember that you’re taking on a currency risk in doing that. If your future liabilities are going to be in sterling, then maybe you should have some of your assets invested in sterling. 

Also the fact that the UK has already probably performed a bit better than people recognise. Prior to this calendar year, the previous two calendar years, the UK outperformed the US, two years in a row, in sterling terms.

And it’s only really because of this sort of renaissance and euphoria about all things AI that the US has got itself back to the top of the leaderboard so far in 2026.

But just quietly, the UK market’s performed reasonably well and valuations are still the lowest of any developed market in the world, which you can’t say for the US.

The US may be an exciting place to invest, it may have some exciting companies to invest in, but you are being asked to pay a much higher price to do that. So, I think that people just need to think a bit about diversification and not have all of their eggs in one basket and so forth.

What the UK gives you from a diversity point of view is exposure to value as a factor. You don’t get that in all the obvious name stocks in the US that people have been chasing after, and it gives you a much, much lower valuation multiple and a higher dividend yield as a result of that. Consequently, just look at it in the context of what you own more broadly and I think it has a very clear and obvious place in most people’s portfolio.

Kyle Caldwell: Moving back to the fund, how often do you make changes to the portfolio, and how often are you reviewing all the holdings in the fund?

Clive Beagles: Well, the reviewing, we’re constantly reviewing. The good news is we’ve got more ideas than we have space in the fund, so it remains good competitive tension.

We own about 60 stocks, and there’s nothing magical about that number, but the fund is around a £2 billion fund, and that gives us enough diversity, but it equally allows us to enter and exit stocks effectively when we want to.

Our average holding period is about five years. So, that would suggest that each year we need to find something like 12 new stocks, which is one a month. Now, it doesn’t always happen like that. It might be three one month and there might be no new stocks for three months. And the degree to which new stocks arrive might also be driven by how well the stocks that we currently own are performing.

Some stocks might perform their way out of the fund, if you like. The market suddenly recognises that a company’s prospects have improved, the share price moves up very quickly or there’s been a lot of M&A activity in the UK and the stock might get bid for. So, that might drive a bit of action.

But on average, it’s been around five years. We’re not targeting that as a number. That’s an outcome rather than anything else. But we’re constantly thinking, we might be altering different weights more proactively than that. Well, we will be, depending on how much upside we see relative to where the current share price lies.

But we’re constantly thinking, we’ve always got a bench of five or six names that are sort of the next cab off the rank, if you like, if space emerges. It’s always important to have a healthy bench because you never know what’s ahead of you tomorrow.

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Kyle Caldwell: And that bench, is that replacing a company in a certain sector? 

Clive Beagles: Not necessarily, really, because we’re quite contrarian in style and often the ideas on the bench might have quite similar characteristics to what we’ve already got in the fund, in which case there might not be a space for it.

There’s one stock at the moment which undoubtedly looks modestly priced, but it’s very similar to two or three stocks we already own. So, we don’t think it’s necessarily appropriate to put that in at this particular stage.

But we try, where we can, to get breadth of factors and characteristics, but that’s not always possible because often it might be certain types of stocks are currently those that are the most out of favour, and therefore they’re most likely to be appearing on the bench.

Kyle Caldwell: Could you give us a flavour of recent portfolio activity? What have been the newest names to enter the portfolio?

Clive Beagles: If you look in the last year or so, there’s a whole raft of new names that we’ve introduced, many of which the most interesting aspect being that they are stocks that we have either never owned in the fund before or haven’t owned for at least 10 years, and they used to be on much higher ratings and for a variety of reasons, the ratings have come lower.

So, these would include companies like Whitbread (LSE:WTB), Johnson Matthey (LSE:JMAT), GSK (LSE:GSK), Derwent London (LSE:DLN), a property company we’ve never owned before, and Breedon Group (LSE:BREE), a small materials company. Also, Investec (LSE:INVP), a new stock within the banking sector. So, a variety of different sectors.

If there’s a common characteristic, it may be that they might all prefer interest rates to be a bit lower or bond yields to be bit lower. Not all of them, but certainly the ones that have got a real estate angle. So, Whitbread’s also got a real estate angle. People will probably know its business is Premier Inn in the UK, and it owns a lot of its hotels, so, there’s a valuation angle. It’s almost like partly an operating company, partly a property company, but it’s been heavily derated over the last couple of years.

So, those would be some of the names that I would highlight that would have been introduced into the fund. We’ve got a bench of similar kind of stocks, which will probably be the next five or six new additions.

Kyle Caldwell: Finally Clive, a question that we ask all fund managers we interview, do you have skin in the game?

Clive Beagles: Of course, comfortably the largest investment that I have is in our fund. But, equally, I talked about the merits of diversification earlier on and it would be inappropriate not to be diversified myself in terms of geography and style, but it’s easily the largest investment and obviously I’ve owned it for more than two decades.

Kyle Caldwell: Clive, thank you for your time today.

Clive Beagles: Thank you.

Kyle Caldwell: So, that’s it for our latest Insider Interview. For more videos in the series, do hit the like button and also the subscribe button, and hopefully I’ll see you again next time.