Even Brits are bearish on UK stocks
Why even the UK-based management of this £215 million fund are exploiting a regulatory loophole to reduce exposure to local companies.
The UK equity market continues to split opinion. Retail investors in the country are voting with their feet and dumping funds that invest in the market's listed firms in their droves. Among domestic investors, some £19 billion has been withdrawn from funds over the past 30 months.
Brexit negotiations are hanging over the economy, creating uncertainty and nervousness among investors. But, while retail investors can choose to ditch the UK, it’s a little more difficult when you manage a fund that is mandated to invest in the country.
The head of one UK-based fund, Robin Geffen from Neptune Income fund, is taking advantage of a local market rule that states only 80 per cent of a fund’s assets needs to be in UK-listed stocks for it to be eligible to sit in the UK Equity Income sector. That’s why large US names such as CME Group, Microsoft and Apple now count among the fund's top holdings.
Across the 33 stocks in the portfolio, just 15.5 per cent of total revenues come from the UK. Driving that bearish allocation is Geffen’s concern around Brexit, a divisive issue which he says is causing uncertainty and is not going away any time soon.
Colleague James Dowey, chief economist at the same fund manager, shares this bearish outlook. He says recent data has shown the UK to be weak relative to other countries, and thinks this underperformance is unlikely to revert despite inflation falling off and wages springing back. Instead, inflation and lack of capital expenditure will likely mean productivity remains stagnant.
Dowey says: “We like global – we like US, we like Japan, we like emerging markets – but we think the UK has continued problems still.”
But the Financial Times Stock Exchange 100 Index (FTSE 100) is a notoriously diverse hunting ground for investors, with around three-quarters of company earnings coming from overseas. Geffen, who manages the Neptune Income fund, says there are opportunities within these international earners. Among his biggest positions, investors will also find UK stocks with international exposure such as BAE Systems and GlaxoSmithKline.
Certainly, the strategy seems to be paying off. The fund has returned 10.7 per cent over the past year – almost double the sector average of 5.7 per cent.
M&A a vote of confidence
But other managers are more bullish on the prospect for domestic stocks; veteran investor Richard Buxton from another prominent domestically-domiciled asset manager, Old Mutual, is backing select banks and retailers.
It’s also been pointed out that overseas corporates have been giving the UK a vote of confidence, with many foreign firms snapping up UK bargains.
Yet, while Geffen concedes that M&A activity is likely to continue while sterling remains weak, he remains unconvinced that corporates are positive on the UK.
"I would suggest that companies from the US and Japan are not interested in UK domestics, particularly not UK domestic cyclicals. If the past is anything to go by – and the present – they’re interested in British companies with significant positions globally," he says.
Elsewhere on the market capitalisation spectrum, Mark Martin, another senior figure within Neptune, also toes the party line. He prefers companies with international exposure to those relying on UK consumers.
But he says bearishness towards the domestic economy is creating "exciting" opportunities. Where historically the small-cap universe tends to trade at a premium to its large-cap counterpart, currently it is at a discount to the FTSE 100, he points out.
Despite, too, being bearish on the UK economy, Martin says this does not restrain him in seeking out companies in which to invest. He also likes companies that are exposed to overseas markets, rather than those serving the UK consumer.
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David Brenchley is a reporter for Morningstar UK.
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