Invesco Perpetual fund manager Mark Barnett has been buying UK property shares as he prepares his portfolios for the world after Brexit.
Mr Barnett runs the £5.4bn Invesco Perpetual Income fund, the £10.9bn Invesco Perpetual High Income fund, and the £1.7bn Edinburgh Investment Trust.
He has previously stated he believes UK investors are being too pessimistic about the outlook for the UK economy, and for sterling.
Mr Barnett said that the recent rise in the value of sterling has lead to relative share price outperformance for some domestically-focused shares, but he still believes that is the part of the market where valuations are most interesting.
His view is that the market remains sufficiently pessimistic around the outlook for the UK economy that even a marginal improvement would trigger significant appreciation in the shares of some UK focused companies.
Mr Barnett said: “My central scenario is for the UK to trade effectively with Europe post-Brexit, supported by specific protocols covering key industries, while anticipating that some volatility in performance will persist."
He said some UK domestic shares at trading at valuations which have not been seen since the financial crisis.
His principal reason for making investments in the UK property sector is his view that it is among the sectors of the market that have been pushed to extremely low valuations. Mr Barnett said there remains “sustained demand” within London office market, yet property companies invested in that area trade at a material discount to their net assets.
Mr Barnett has invested in Derwent London, New River Retail, and Shaftsbury.
Of Derwent he said: “Derwent London’s strong earnings growth, letting activity and strong pipeline enabled the business to increase its final 2016 dividend by 25 per cent. Derwent has continued its strong 2016 performance through the first half of this year, with interim rents up 48 per cent year-on-year.”
Mr. Barnett’s positive stance has proved costly for investors in the Invesco Perpetual High Income fund.
It has returned five per cent over the past year, compared with 12 per cent for the average fund in the IA UK All Companies sector in the same time period.
Other managers are also rotating towards to the UK.
Simon Gergel, who runs the £688m Merchants Investment Trust, is primarily focused on the international companies that comprise the FTSE 100, but has of late been taking profits from those in order to invest in more UK domestic businesses.
He said his generally negative view on the UK economy has not changed, but that some shares have shrunk to a valuation where he feels the risks are worth taking
Among the investments he has made are pubs company Greene King, and Lloyds Banking Group.
Neil Veitch who runs the £154m SVM UK Opportunities fund believes that while uncertainty caused by the UK negotiating to leave the EU will likely detract from economic growth, the same unjcertainty will stop interest rates rising, which may boost UK equities, including domestic equities.
Brian Dennehy, managing director of advisory firm Dennehy Weller, said he believes that in five years Brexit will have been viewed by the market as a whole as a “sideshow.”
He believes Japan is the developed equity market offering the greatest level of opportunity, while the US is, in his view “extraordinarily expensive.”
David.Thorpe@ft.com
