InvestmentsApr 4 2019

Equity managers reveal defensive strategies

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Equity managers reveal defensive strategies

UK equity fund managers have revealed their defensive strategies amid the continuing political and economic uncertainty surrounding Brexit.

Chris Murphy, who jointly runs the £962m Aviva Investors UK Equity Income fund, said: "Markets tend to be driven by fear or greed. And in the UK market right now fear is dominating.

"International investors just won’t touch the UK until the level of certainty increases, the last thing that is needed is constant delay. But in reality, sector by sector, UK shares are cheap relative to other developed markets."

He said the first priority for an investor seeking to be defensive in UK shares was to be diversified, and not take a view on how the political uncertainty will end.

He said: "Some of the shares we have are ‘self help’ stories, improved performance will come as a result of the actions of those companies, rather than because sentiment changes or the economy changes."

Among the shares he nominated are Melrose, which has engineering businesses and BBA Aviation, and generates most of its revenue from outside the UK.

He said those companies have little exposure to the UK economy, yet international investors won’t own them because they are UK listed.

Mr Murphy said: "I went to the US recently, and just speaking with some of the guys there, they were talking about individual companies on the UK market, and how attractive they are, but they just won’t buy UK shares right now."

Indeed, data from trade body the Investment Association showed investors withdrew £10bn from UK equity funds between June 2016, when the Brexit referendum happened, and October 2018.

Nick Train, who runs the £1.6bn Finsbury Growth and Income trust, said companies he has owned for a long time, such as Diageo, and AG Barr, had achieved strong share price growth over the past decade, despite the FTSE All Share index not going up very much at all.

He believes the ability of those companies to continue to grow, regardless of market sentiment, means investors are protected from interest rates rising or political risk.

Mr Train said: "When I became manager of the trust in 2001, AG Barr shares were among the first investments we made. We bought the shares at 77p, and they are now above £8. In that time the market has hardly gone up at all."

The FTSE All Share has risen by about 75 per cent since 2001, compared to the 10 fold increase in the AG Barr share price in that time.

Mark Wright, who runs the UK equity portfolio within the multi-asset investment team at Seneca Investment Managers said he has been cutting UK equity exposure for about two years, and has instead preferred to hold cash.

He said that one route embraced by overseas investors since the Brexit referendum had been to own shares of businesses listed in the UK but that do most of their business overseas.

The idea is that the earnings of those companies are worth more as the value of sterling falls.

But Mr Wright said that while such an approach is logical, the valuations at which many of those companies trade look excessive.

david.thorpe@ft.com