Threadneedle UK Smaller Companies manager Matt Evans “started again” when it came to portfolio composition in the aftermath of the Brexit vote, having been unable to complete a rotation out of domestic stocks in advance of the referendum.
Mr Evans, who works on the £171m fund with James Thorne, began moving out of domestic stocks in late 2015 because of high valuations, but failed to complete this transition before the EU vote triggered a tumble in their share prices.
“At the end of 2015 we had been quite overweight domestics. We were looking at valuations and that set of opportunities – even at that stage the shift was going in favour of domestics with low interest and positive trading,” the manager explains.
“We started the rotation, which got accelerated with Brexit. For us it was a tough period. We were going through the transition but felt we would have more time – clearly that didn’t turn out to be the case.”
Mr Evans says he had to reconsider his approach in the aftermath of the vote, opting in some cases to tilt towards domestic names that had the potential to expand globally.
He said: “Post-Brexit we had to start again. A lot of domestics were pricing in a significantly tough environment and almost recessionary conditions. We thought the shares were being priced in to the worst-case scenario. We didn’t reduce domestic [exposure] – we looked to broaden out and took to running a bit of a barbell approach.”
Having sold out of consumer-facing stocks Home Retail and Conviviality in early 2016, the managers reduced a position in Pets at Home following the Brexit vote.
“We recycled that into the new issue of Hotel Chocolat [pictured],” Mr Evans said.
“We made a visit to [the firm’s] site and it became clear that this was a very well-invested business. We felt it was well placed to replicate that generally in the premium chocolate space. It has a strong brand and scope to expand globally.”
The manager has also continued to favour “diversified” names such as Ascential, which specialises in exhibitions and was added to the fund upon flotation in early 2016, and healthcare name Vectura, in which he increased his holding last year.
“We thought Ascential looks well placed in the exhibitions marketplace,” he explained.
“It has got a clear strategy on how it continues to monetise its brands. Vectura began to drift last year, but we felt it has a good cash-generative core business, with a pipeline of interesting products for the next few years.”
The manager also “added gently” to specific resources names, such as TP Icap, while upping weightings to housebuilders Crest Nicholson and Countryside Properties.
“We are aware of the headwinds, but on a three to five-year view we felt those business models would be sustainable,” he said on the latter.
The Threadneedle UK Smaller Companies fund has returned 42.5 per cent over three years, compared with 24.1 per cent from the average portfolio in its IA UK Smaller Companies peer group, data from FE Analytics shows.
