Two leading fund managers are backing UK companies and here’s why.
Brexit Shmexit! now is the time to invest in the UK!
- We are increasing UK weighting as a result of upside potential against a backdrop of pessimism.
- Investing in UK companies provides exposure to overseas opportunities and current valuations continuing to make the UK a ripe hunting ground for overseas predators.
- Richard Penny launches CRUX UK Special Situations Fund focussing on high conviction concentrated portfolio of UK stocks.
Early September, Crux Asset Management announced that it would be launching a new fund, the CRUX UK Special Situations Fund, which would be managed by established manager Richard Penny. Penny, who joined the company in June following a 15 year stint at Legal and General, is a UK asset manager that has proved in his previous tenure that he has what matters and the expertise for investing in mid and small cap equities.
Indeed, his approach to investing has a value bias to seeking out businesses that are under-researched and under-priced, that are in recovery mode, which may have valuation anomalies or previously fallen short of expectations. Richard seeks to identify a catalyst or some meaningful exogenous event that may cause the market to re-evaluate the fundamentals of a company, whether that be refinancing, M&A activity, secular growth opportunities or event driven strategies. All which I believe provide ideal characteristics for picking winners in this market.
Is now the right time to invest in the UK?
You think of the UK, you think of Brexit and the debate that is dominating agendas is therefore hard to ignore. Combined with UK politics in general, the impact had on the country’s position on the world stage is one of great significance. This has seen sentiment towards investing in UK equities sink with outflows from active UK managers reaching into billions over the course of the last few years. The UK has become the most unloved developed market to invest in but sentiment towards the UK has become so bad that I am now of the view that the upside potential outweighs the pessimism. This view is aligned with Penny’s who stated that ‘now is the ideal time to be bringing this new offering as the UK remains out of favour and the uncertain environment creates numerous attractive opportunities for experienced stock-pickers.
Yes, Brexit is likely to continue to be a drag on investor confidence in the interim however, the economic situation has been better and more resilient than many expected - the wheels haven’t come off! Indeed, in the Spring Statement the chancellor raised the UK growth forecast to 1.5% up from 1.4%, borrowing expectations were revised down and a small current surplus is expected in 2018/19. A surplus which should leave some room to borrow to fund capital investment rather than meet day to day spending needs. All the while, the forward P/E on the All Share index is around 13 to 14 times earnings well below the long-run average and rates are still likely to remain below historical norms for some time to come.
In addition, not all UK companies are domestically focused. Investing in UK companies provides investors with great exposure to overseas opportunities; the FTSE 100 for example generates around 75% of its revenues from overseas operations. Current valuations also make the UK a ripe hunting ground for overseas predators. The mid-cap FTSE 250, over the longer-term, provides better growth opportunities and not only gives investors great exposure to the domestic economy but like the FTSE 100 generates a significant proportion of its revenues from overseas, approximately 50%. My point is that UK investing can still give investors a significant exposure to overseas opportunities.
So while the underdog, in this case the UK economy, is not likely to grow as fast as other economies in the near future, it is still expected to grow and be pulled up by the rest of the world. Unlike some other economies equity markets, UK valuations look a lot less toppy at this stage in the cycle. Given the competing factors, as laid out above, at this point in time active management should have an edge, in the right hands, over a passive approach.
MiFID II has also been having an impact on asset managers with many cutting their research budgets to focus on more large liquid companies. While this has meant a pullback in coverage in small and mid-cap stocks, this should benefit Richard who is adept at picking winners that are under-researched.