The UK stocks we bought in the market sell-off

Man Income manager Henry Dixon outlines what he has been up to during the market volatility of March, including a move into the oil sector and related areas.

He also discusses his exposure to mid-cap shares, why his outlook for this part of the market has grown rosier, and what he has been buying in the space. Dixon also looks at what might finally trigger a period of better performance for mid-cap shares.

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Dave Baxter, senior fund content specialist at interactive investor: Hello and welcome back to our Insider Interview series. I’m Dave Baxter and joining me today is Henry Dixon, lead manager on the Man Income Professional Acc C Fund. Henry, thank you for joining me for today.

Henry Dixon, lead manager on the Man Income fund: Thank you for having me.

Dave Baxter: Performance has been very strong for the Man Income fund in recent years, but if people are looking at the fund now, what would you think are the biggest opportunities for it and the biggest challenges for performance? 

Henry Dixon: Yeah, absolutely. An obvious place to start, particularly with the new inflationary backdrop that we might be currently facing, is a degradation in aggregate demand, concerns around recession, and we’ve got to be aware that valuations are no longer rock bottom like they were two to three years ago, so I think we need to be conscious of that.

Opportunities would be, while valuations are no longer rock bottom, they’re still low by the context of history and relatively very attractive versus international benchmarks. So, there’s plenty of valuation on offer and that valuation has been corroborated by elevated M&A activity, for example, so I think that’s important.

How the aspects could improve for us would be if ever this very, very poor flow picture, which has been featured in the UK for the last 10 years, if that was ever to normalise, ever to get inflows, then that really could prove quite a powerful driver for sentiment.

Dave Baxter: Do you have any thoughts on what could drive inflows? I suppose we’ve seen some of the performance return.

Henry Dixon: First and foremost, performance has been really important. It’s been really good to see this performance being posted by the UK market in both good times and bad. It’s been very resilient in periods when it’s been difficult out there as well. That’s very heartening to see.

There’s also areas of assetthat are under discussion around uses of pension money. Is it right that they’re so underweight, their domestic asset class? Also it’s the case that investors who do get a tax break for investing into equities, should it be the case that they just invest overseas with that tax break, or should they be spending more of their money domestically to try and stimulate equity demand?

These are all points of discussion but all I would say is the signalling from this could be quite powerful and that could drive that first change in sentiment. I think it could be quite self-fulfilling when we do see that first inflow come into the UK. 

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Dave Baxter: So, obviously there are many eyes on the economy at the minute. Inflation is back, and there’s the prospect, again, of higher interest rates. How do you feel about the UK economy, and how do you feel about the UK consumer? 

Henry Dixon: Quite a bit to unpack there and clearly it’s a very fluid situation at the moment we have in the Strait of Hormuz. I would just make a few points with maybe another point of inflation pain, which was the Ukraine war. What happened there is that before the Ukraine war inflation in the UK was 5% and rising quite rapidly.

What we see today is that inflation is 3% and it was falling as we were entering what has just happened this year. So, the inflation backdrop in general is quite different. The other thing to think about is potential rate rises from here.

With interest rates at 3.75%, you could have two rate rises and rates would still be well below where they were for the bulk of 2025 and all of 2024. So, that’s quite important to say. We aren’t talking about a new high here in interest rates, I just think we might be talking no rate cuts or maybe one or two interest rate hikes.

So, I don’t think that is a level of interest rates that has unduly unsettled the economy historically over the last two to three years. In general, I’d say the UK economy has done an incredible job of weathering what has been a very difficult decade in general. The bedrocks and the reason the building blocks behind why it has managed to weather that is that we’ve got in aggregate a private sector that looks quite under-levered versus history and we’ve also got a very, very strongly capitalised banking sector, which has helped us to, as I say, weather what has been some very awkward periods of time, certainly over the last decade. 

Dave Baxter: How much exposure would you say the fund has to the UK consumer? I note that names like Bellway (LSE:BWY), for example, are in the top 10 list.

Henry Dixon: It is absolutely the case that we really like those asset plays within house building. I’ve continued to bang on about it, but where we can find valuations that stack up against the global financial crisis, I think that will be a risk/reward that is certainly worth taking.

Other areas of retail as a consumer for us is actually quite thin on the ground. We don’t have exposure to food retail. We don’t have exposure to general retail. We have in the past, but those are namesthat have actually done quite well. We clearly have to be conscious of maybe a slightly tougher consumer outlook because one thing we have [consider] is that the employment data is just starting to show the first signs of creaking and that for us is definitely driving some sector thoughts at a time when some sectors that are exposed to the consumer have done very well. 

Dave Baxter: In that context, are there more defensive areas that you’ve identified you’ve been attracted to? 

Henry Dixon: So, you can find a lot of comfort from looking at some of the asset values that are in place in the market and the price that you’re being asked to pay for those assets, so that gives us a lot.

Some other areas of defensive value that we might see would certainly be within tobacco, for example, so you’ll see Imperial Brands (LSE:IMB), for example, has been a situation that has been lowly valued and has behaved exactly as you’d hope from a defensive. Then, other areas that I think have also been defensive by nature but also showing some quite good earnings momentum at this time would be the utility sector. 

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Dave Baxter: What have you been doing in the recent market volatility? 

Henry Dixon: We’ve been quite active. I think it’s really important as active managers we use that to our advantage and we must adapt where we see new information. So, certainly quite quickly at the outset of the hostilities in the Middle East we felt that we had an opportunity to buy more exposure within the oil sector.

Further to good value, we just saw the introduction of earnings momentum given the move that we saw in the oil price and so having done that at the outset that’s actually been really quite well rewarded.

They’re second derivatives to the oil price as well, so you can think of things in terms of the coal price, for example, so that again encourages us to up our weighting within Glencore (LSE:GLEN), for an example.

Looking at the other end of the spectrum, areas of the market that have really fallen, really tough areas that have fallen under tough times. Some of the domestic opportunities have got even more stark, so we’ve been happy to add to areas that we liked there before that have fallen further, and, as I say, the valuations start to stack up against some previous crises on a very attractive basis indeed. 

Dave Baxter: Speaking of domestic names, this might be a slightly simple way to view it, but I imagine some viewers will be interested in the fund’s exposure to areas like the FTSE 250 and mid and small caps. Are there any specific names there that have been standing out? 

Henry Dixon: Names that stand out against long-run averages, I’ll give you two. I mentioned real estate, for example, I might single out something like Derwent London (LSE:DLN), which trades at about a 50% discount to asset value. That’s a price that you can only find at points of real acute discomfort in the market. So, I’m talking about Covid and the global financial crisis.

Other areas that I would mention as we moved out of maybe large-cap financials into mid-cap financial is we went into something called TP ICAP GROUP (LSE:TCAP), which is an interdealer broker, but the valuation is very undemanding at seven to eight times earnings with net cash on balance sheet. So, that’s been an opportunity that we’ve been able to harvest profits out of banks that have done very well, into this that has really lagged behind. 

Dave Baxter: How do you feel about the performance gap we’ve seen between large caps and smaller mid-caps in the UK? Do you see any catalysts for that gap to actually narrow? 

Henry Dixon: Yes, so the best lead indicator that we would have for future outperformance would be valuation, particularly if it’s backed up by cash flow. We have to be very honest that this astonishing run that the large caps have been on over the last three years - and we’ve been able to harness it in certain places quite well within the fund - did come from the bedrock of very modest valuation.

Vast swathes of the FTSE 100 were trading on six, seven times earnings three years ago, and that was actually the discount to the valuation that you had been on within mid cap and small caps.

Now looking at the situation today, I think that’s changed quite a bit and it is the case that some of the best value opportunities reside within mid cap and small cap. So, that’s absolutely where we’ve been trying to tilt the portfolio in the last six to nine months and, as I mentioned, I really do believe that the best lead indicator I can give for you is where these most attractive valuations sit, and they are increasingly down the market cap spectrum. 

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Dave Baxter: Where have you focused in the small and mid-cap space? 

Henry Dixon: Exposures within the fund to that would be certainly overweight, mid and small cap now. That was in slight contrast three years ago where we found ourselves almost equal weighted with the large-cap arena, which puts you at sort of 75% to 80% of the fund in that area. But given the price differential and the valuation differential, we think it’s right that we increase our exposure to these mid and small-size areas of the fund now. 

Dave Baxter: Finally, our usual question, do you have skin in the game? 

Henry Dixon: Absolutely, personally, and also other family members are invested in the fund. 

Dave Baxter: Henry, many thanks for your time. 

Henry Dixon: Thank you. 

Dave Baxter: And thank you everyone for watching. We hope you enjoyed the video. Do let us know what you think in the comments. And as always, if you’re enjoying this series, hit the like button and the subscribe button. Take care.