UK equities: our four fund experts return to the home front

Uncertainty around Brexit has subsided and most of our multi-manager panel have returned to UK equities.

This piece was written before the coronavirus severely impacted markets.

This year began with a brief racheting-up of tensions between the US and Iran, while the coronavirus epidemic continues to impact on China and is affecting a growing number of other countries globally. Nevertheless, many stock markets have been on the rise.

Closer to home, uncertainty around Brexit has subsided and most of our multi-manager panel have returned to UK equities. Below, they reveal their biggest bull and bear points and talk about the new funds they have bought, those they have increased their holdings in and the ones they have trimmed or sold.

Peter Hewitt
BMO

Bull point: Following the UK election, much of the market uncertainty has faded. UK equity markets, particularly domestic-focused and smaller companies, are attractively valued.

Bear point: Ongoing US-China trade dispute remains a headwind. Valuations of US equities remain well above average and need earnings growth over the next year to progress.

New position: Hewitt purchased shares in the Artemis Alpha trust shortly after the UK general election. The trust is mainly invested in UK equities and has been run for the past year by Kartik Kumar within the Artemis group. After a number of years of uninspiring performance, the new manager has set about reducing the number of holdings. They now number around 40, “so there is more focus,” says Hewitt. Kumar has “also cut back the exposure to unlisted investments to just 9%, which had been an area of persistent underperformance,” he adds.

Increased: Hewitt has added to the holding in the Aurora trust, which has a very focused portfolio with less than 20 holdings. It is heavily biased towards UK companies with a majority of its revenues generated domestically, which means it currently trades on a wide discount. Major holdings are Sports Direct, easyJet and Lloyds Bank. Hewitt argues such companies should benefit from a reduction in the uncertainty that has depressed UK valuations for three years.

Trimmed: Alliance Trust is a holding Hewitt chose to trim. The trust is very international in its geographic allocation and has only 12% invested in UK equities. “One of the trends that has benefited the Alliance Trust portfolio has been overseas markets, especially the US market, performing considerably better than the UK,” he says. Returns have been boosted by persistent sterling weakness.

Ayesha Akbar
Fidelity Investments

Bull point: if the US Federal Reserve continues its dovish stance while global growth picks up, the US dollar may weaken. We think emerging Asia would benefit from this.

Bear point: we remain cautious on the richly valued US stock market and are concerned by the fact that the information technology sector is driving wider market returns so strongly.

New position: Relative to developed markets, we see Asia and Asian emerging markets as attractive as we begin 2020,” notes Akbar. The way she implements this view is by allocating to Maple Brown Abbott’s Asia Pacific ex Japan fund. The fund is split roughly equally between emerging Asia and developed Asia, so it could be “an effective way of accessing value stocks in the region without concentrating too much exposure in more volatile emerging markets”.

Increased: as global growth shows signs of stabilisation, the flipside could be an increase in inflation; as a consequence, “after a decade of easy monetary policy we think it prudent to maintain inflation protection,” Akbar says.

The Standard Life Global Index Linked Bond fund may be one way of achieving this portfolio diversification. Standard Life has been involved in the inflation- linked asset class for many years, and governments often ask the firm to advise them on their inflation programmes. Akbar points out this expertise might give the fund manager an “incisive edge” over other fund managers.

Trimmed: “We remain negative on US high yield,” says Akbar. Demand is strong given low yields globally, but valuations are stretched, she explains. “Dovish policy, rather than fundamentals, is driving returns.” She has therefore decided to trim her holdings in Barings Global High Yield Bond despite strong performance in recent months.

David Hambridge
Premier Asset Management

Bull point: relatively strong economic growth, a good representation in the technology sector and shareholder-friendly policies by companies are pushing up US share prices.

Bear point: high starting valuation of the US stock market is likely to result in relatively poor returns over the next decade. Any pickup in inflation would increase the risk in longer-dated fixed income securities given low yields.

Increased: “Although we have been warning our clients that returns from financial markets are likely to be considerably lower over the next decade than those achieved during the 2010s, there will still be some good opportunities,” says Hambidge. He took advantage of pre-election jitters in the UK to add to Evenlode Income. This fund, which is soft-closed and applies a 5% charge for new investments, invests primarily in UK large and mid-sized companies.

New position: Elsewhere, Hambidge added BNY Mellon Global Infrastructure Income to a number of his portfolios. Infrastructure is a theme he believes should perform well in the next few years. “In this fund, we are being rewarded with an attractive level of income, while we would also expect some long-term capital appreciation,” he adds.

Trimmed: At the same time, Hambidge has taken profits in a number of areas over the last few months, including in the Polar Capital Healthcare fund. He says: “We like healthcare as a theme, but feel that valuations in the sector have become unattractive following some strong gains last year.

Jordan Sriharan
Canaccord Genuity

Bull point: US employment data continues to be robust. With global growth reliant on the US, it is a positive that the US consumer appears healthy.

Bear point: Capital expenditure is starting to wane, primarily due to US-China trade war uncertainty.

New position: The Brown Advisory US Sustainable Growth fund runs a high-conviction approach with a 25-stock portfolio “that is pragmatic in nature,” says Sriharan. He believes the concentrated number of names in the portfolio are companies that offer a sustainable competitive advantage and have durable business models driving revenue growth.

Increased: Sriharan chose to increase his position in Fidelity Special Situations. He says the fund manager’s approach is to “seek value names with clear downside protection”. In other words, these are companies that are set to do well even if the economy falters. At the same time, they have “unrecognised growth potential”.

Sold: One position he decided to sell out of was the JOHCM Continental European fund. It has been managed by the same two co-managers since 2001 and has a solid track record, but Sriharan decided to sell as the fund became more value-orientated. “Driven by the macro view, the fund became increasingly defensive in its position, which led it to have greater exposure to utilities, financials and energy names that were trading at cheaper valuations,” he explains.

Multi-manager biographies

Jordan Sriharan is an investment director at Canaccord Genuity Wealth Management. He previously worked at Mercer, Fidelity Investments and the Wellcome Trust.

David Hambidge is head of multi-asset investment at Premier Asset Management. He helped set up the fund-of-funds operation in 1995 and is regarded as one of the UK’s most experienced multi-managers.

Ayesha Akbar is a portfolio manager in Fidelity’s multi-manager team. Prior to joining Fidelity, she worked at Barclays Wealth, where she was instrumental in helping establish the ­firm’s multi-manager business.

Peter Hewitt is a director and investment manager with the BMO global equities team, and fund manager of the BMO Managed Portfolio Trust, where he specialises in investment trusts.