UKFeb 12 2019

UK funds to recommend as Brexit beckons

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UK funds to recommend as Brexit beckons

As a result several investment advisers have revealed to FTAdviser they are now telling clients UK focussed funds represent a very attractive proposition for investors with a longer term view.

Jason Hollands, managing director of Tilney Investment Management Services, said UK equities are the standout value opportunity among developed markets at the moment.

On a 12-month forward price/earnings basis Mr Hollands said the UK market is currently trading on a multiple of 12.2 times earnings, well below longer-term trend and at a discount to both the US on 16 times earnings and the MSCI Europe excluding UK on 13.1 times where the economic picture has been deteriorating at a faster pace than in the UK.

Many domestically facing stocks are now priced at levels typically seen during recessions.

Mr Hollands said: "Of course the reason for this is sentiment driven. Currently UK political uncertainties have resulted in the market being shunned by both many international investors but also UK retail investors, who have collectively been net sellers of UK equity funds in each of the last 20 months.

"While nervousness is perhaps understandable given the relentless news flow around Brexit, avoidance of UK equities is to a large degree unwarranted as the UK equity market is very international in nature."

But, which UK focussed funds are top investment advisers recommending?

Mr Hollands said UK funds he favours include Liontrust Special Situations, TB Evenlode Income and Jupiter Income, for a more value-tilted approach. 

Jupiter Income seeks to produce a high income, increasing at least in line with inflation, from a managed portfolio chiefly invested in UK equities and fixed interest stocks, although with some overseas exposure.

Darius McDermott, managing director of Chelsea Financial Services, said he prefers UK equity income at the moment as the stock market is yielding close to 4.8 per cent, so even if price returns are zero, investors are still getting a decent income return.

Funds he is recommending in this space include Marlborough UK Multi-Cap Growth, which invests more in larger companies than most other Marlborough funds.

Mr McDermott said this is a deliberate move in order to pick up on the growth opportunities across the whole market spectrum.

He said: "The make-up of the UK stock market is very varied: many larger and medium-sized companies get a lot of their revenues from overseas, so if the pound falls, it is not all bad news."

Another fund Mr McDermott is recommending is Threadneedle UK Equity Income, which is a contrarian value fund managed by the highly experienced Richard Colwell, who looks for unloved companies with the ability to sustainably grow their dividends.

The current yield on this fund is 4.3 per cent.

Like Tilney’s Mr Hollands, Chelsea’s Mr McDermott is also looking to Liontrust but he recommends the Liontrust UK Micro Cap fund.

Managed by the same team that is behind Liontrust Special Situations this fund employs the same investment strategy but with the UK's smallest companies.

The managers focus on firms with strong positions within their industries and Mr McDermott said they have a great track record.

He said: "We have a lot of small exciting businesses that should continue to grow even in difficult economic environments."

Both Tilney's Mr Hollands and Adrian Lowcock, head of personal investments at Willis Owen, flagged Lindsell Train UK Equity, as a fund that should warrant advisers' attention.

Manager Nick Train's process is different and Mr Lowcock noted it has proved successful across a variety of market conditions.

Mr Train looks for unique and high-quality companies that offer a high and sustainable return on investment, show low capital intensity, and are cash-generative.

The result of this approach is a concentrated portfolio plus turnover is low, reflecting Mr Train's long-term approach and his buy-and-hold style.

Mr Lowcock said: "He sells out only if he no longer considers a company to be of sufficient quality.

"This process has led to strong performance and, given the strategy has clear biases and risks, unusually consistent relative returns over the medium to longer term."

Another fund identified as one that advisers should consider is Man GLG Undervalued Assets.

Willis Owen's Mr Lowcock said Henry Dixon and co-manager Jack Barrett believe they can add value through thorough analysis of company balance sheets to understand a business' true real-world assets and liabilities.

Mr Lowcock said: "They seek to identify two types of stock: those trading below their view of the company’s value and those where the company’s profit stream is being undervalued relative to the cost of capital.

"The portfolio has a value bias, but it does include elements of quality and positive earnings momentum. Dixon has demonstrated his ability to consistently execute the investment process with discipline."

Willis Owen's Mr Lowcock said Merian UK Smaller Companies, is a fund that should be on advisers’ radars as Merian has one of the most highly regarded small and mid-cap teams, headed by Dan Nickols who is the manager of this fund.

To feature in Merian's fund, companies must demonstrate one or more of the following characteristics: the ability to grow earnings faster than the market average for an extended period of time; the scope to generate a positive surprise; or the potential to be re-rated relative to the market.

Mr Lowcock said a pragmatic approach is taken by Merian to valuation, with various ratios and timescales used depending upon the situation.

He said: "This flexible approach allows growth, value, and recovery companies to be held, but the portfolio has tended to show a growth bias."

Both Tilney's Mr Hollands and Ben Willis, head of portfolio management at Chase de Vere, said they liked JOHCM UK Dynamic, which is managed by Alex Savvides and seeks UK recovery and contrarian stock opportunities within large and mid-cap stocks.

Mr Savvides will actively look for companies that have experienced difficulties but where there is management change, as this is often a catalyst for recovery.

He will also only invest in dividend paying companies, seeking out total returns from his portfolio.

Another fund that has captured the attention of Chase de Vere's Mr Willis is RCW UK Equity Income, which was launched recently with two old hands at the helm in Nick Purves and Ian Lance.

The pair, who have been investing in UK equity income stocks for more than 20 years, seek dividend paying companies predominantly in the large cap space.

Mr Willis said: "They have a value approach to investing, looking for cheap, high yielding areas of the UK market that are either unloved or being overlooked by investors."

emma.hughes@ft.com