Neil Birrell
Neil Birrell, Premier Miton’s Chief Investment Officer and manager of the Diversified Fund range explains why UK equities can provide exciting growth opportunities, even when the economic backdrop may not be that exciting!
The economic data coming out in the UK recently has not made great reading; growth is slowing, inflation is rampant and the Bank of England are struggling to balance the equation. You would think that would mean that the UK equity market would be one to avoid as a result. A large part of my job as the fund manager of the Diversified funds is to talk to the managers of the underlying asset classes on their views and about the portfolios they are managing.
In conversations with Benji Dawes and Jon Hudson, who manage the UK equity portfolio, it was clear that their view of the prospects for the companies they hold was quite different to what you would think just looking at the macro environment.
It’s worth remembering we don’t hold any UK equity index. We invest in their carefully selected range of companies. Rather than me expanding on our positive view for that element of the funds, I have included wording from Benji Dawes below.
In favour; UK equities, well, the ones we hold anyway
It is not news to anyone that follows financial markets that the current macroeconomic climate is showing signals, much like Europe’s summer, of having over-heated. The deterioration in forward indicators such as global Purchasing Manager’s Index (PMIs), along with declining book to bill ratios, is creating angst among investment managers already burnt by persistent inflation and unstable geo-politics. Just as they may be applying their sun tan lotion (liberally) to protect from the intensity of the situation on their beach-side loungers in the Mediterranean, they have been increasing portfolio risk management, by increasing levels of cash.
The times they are a changin’. After a decade of low inflation and benign central bank policy, market forecasters now anticipate something in the range of a moderate recession to Armageddon. The UK economy, according to the Bank of England’s latest prognosis, is not immune. It duly reduced expectations for the country’s growth outlook.
Two things strike me about the current market malaise. Firstly, haven’t we (investors) been complaining for a decade that we’ve not had a golden opportunity to “be greedy when others are fearful”, as the sage of Omaha put it in his 1986 Berkshire Hathaway Chairman’s letter? Well then… Secondly, the fortunate thing about an actively managed equity portfolio is that its outlook need not be wedded to the economy. Happily, that is the case for us.
The summer has not heralded much to celebrate in terms of the economic outlook, but our portfolio of UK companies has delivered an upgraded set of financial results, and a strong outlook to boot. Whether it be consumer health and household products giant Reckitt Benckiser, renewable energy provider Drax or data and information services firm Euromoney, our companies have confounded lowly expectations to positively surprise the “market”. The latter is the subject of a bid, which resulted in a sharp jump in the share price.
IG Group, the largest of our UK holdings, delivered solid growth above expectations and guided to double digit top line growth as it sees opportunities to leverage its market leading investment platform internationally and capitalise on the trend towards more self-directed investing. As with all our companies, IG Group has a strong financial position – in fact it is using excess cash for a value accretive share buyback – and will therefore be able to invest ahead of peers, further reinforcing its market share growth prospects.
Out of favour; less
If you have read these notes over the past few months, you will have noted their negative tone. In fact, it has been possible to provide reasons not to invest in any asset class! This has influenced the positioning of the funds.
Whilst the outlook still provides plenty of reasons to be cautious, we are moving through the cycle and there is, in my view anyway, increasing room for optimism. However, it is not having an impact on asset allocation …. yet.