Simon Gergel, who runs the £686m Merchants Investment Trust, is turning towards shares exposed to the UK economy as he pursues a 36th year of dividend growth for the trust.
The Merchants Investment Trust has increased its dividend for each of the past 35 years. The current yield is 5.1 per cent.
Mr Gergel said he is “slowly, very carefully”, starting to look at investments in the UK.
This is not because the fund manager is particularly positive on the outlook for the UK economy, but rather he feels there are some share prices that have fallen to a point where the potential rewards outweigh the risks.
One such share is Lloyds Banking Group. He has been buying more of the shares as they have fallen in value in light of the uncertainty that followed the EU referendum vote.
Lloyds is the FTSE 100-listed bank with the greatest level of exposure to the UK domestic economy, as it does not have significant overseas businesses.
Mr Gergel said: “When looking at potential investments with exposure to the UK domestic economy, one of the questions we have to ask ourselves is, ‘what happens if the economy gets really bad’.
This prompted the fund manager to focus on companies where the management are able to improve returns almost regardless of the wider economy.
Mr Gergel said: “We would compare Lloyds with HSBC, a more international bank. A lot of recent good performance from us came from owning HSBC, with the share up substantially over the past year, but we have been reducing the position a little as the valuation starts to reflect a lot of good news.”
He recently began an investment in Bovis Homes, a UK housebuilder.
Mr Gergel said: “This investment isn’t about us being bullish on housebuilders as a sector. Bovis Homes is a good investment because the management are repairing the mistakes of the past, when the company expanded too quickly.”
He added that the shares of the company trade at a much lower multiple to the rest of the sector due to those past mistakes.
So when the fund manager asks himself the question, what would happen if the economy took a severe downturn, he believes the presently very low share price offers protection for investors.
Mr Gergel is keen to buy shares that offer an element of protection from inflation, and cited the pub company Greene King as an investment he has made recently for this purpose.
The recently announced merger of Aberdeen and Standard Life Investments created a company named Aberdeen Standard Investments, in which Gergel has been investing.
He said: “This is described as a merger, but really it is a takeover of Aberdeen by Standard Life, with no premium paid. The asset management industry is moving to a point you have to be either very big or very niche to compete, the guys in the middle are going to struggle.