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F&C: We're Selling UK Stocks

Foreign & Colonial Investment Trust manager Paul Niven is upping his exposure to emerging markets while colleague Peter Hewitt dumps UK stocks post-Brexit

Emma Wall 27 October, 2016 | 9:32AM

The manager of the UK’s oldest investment trust, Foreign & Colonial (FRCL) is buying up emerging market stocks, as the growth outlook brightens.

Paul Niven, who runs the Bronze Rated fund, says that many concerns he had at the beginning of the year regarding global growth have been assuaged.

“Global equities have had a very disparate performance in 2016, but on the whole have not gone far in aggregate. The trust has done well, up 27% over the past year but that is mostly down to the fall in sterling,” he said.

“At the beginning of 2016 we were concerned about the sharp decline in oil prices, the outlook for China and the prospect of the Fed raising rates in the US. But growth prospects look better today – all three risk factors have some stability now.”

At the beginning of the year however, the likelihood of Britain voting to leave the European Union looked slim, but now a new Prime Minister is working with a new Cabinet to trigger Article 50 and make Brexit a reality. Luckily, as the outlook for UK stock clouded, things have looked better elsewhere.

“Both Brazil and Russia are pulling out of recession,” said Niven. “Both Europe and emerging markets have improved this year.”

Niven warned that it was very early days in the Brexit journey, predicting a much bigger impact on both the economy and the stock market in 2017. Although he expects manufacturing to receive a boost from the weakened pound, other sectors may struggle.

“The value of sterling is very low – as low as the crisis in 1976 – but I expect it will get worse before things get better,” he said. “On a long-term basis the pound is at an attractive level.”

In the three months to the end of June this year, Niven sold out of developed market stocks to buy into emerging markets, compelled by attractive valuations. Although he admits earnings have been declining, he believes these are troughing and that there are better growth prospects in emerging market stocks than those in the UK and US.

“Emerging markets face near term challenges, but over the medium term we expect better relative performance,” he said.

Selling Out of UK Stocks

Peter Hewitt, who runs the F&C Managed Portfolio Growth Trust (FMPG) and Managed Portfolio Income Trust (FMPI) is taking a similar stance – selling out of UK stocks in favour of emerging market and infrastructure holdings. Hewitt invest in other closed-end funds and has seen discounts widen significantly on UK equity trusts since the Brexit vote.

“I view discounts as a measure of risk,” he said. “Some of the trusts I am selling are good quality, with good managers but I am cautious about UK trusts at the moment. I don’t believe the discount will close for some time, unless we can execute a smooth Brexit resolved in the next year.”

Among the UK equity trust shares that Hewitt has sold are Merchants Trust (MRCH), Perpetual Income & Growth (PLI) and Schroder Mid Cap (SCP).

Hewitt has used the cash to buy emerging market, infrastructure and commodity trusts – including among others; Fidelity Asian Values (FAS), Murray International (MYI) and BlackRock Commodities Income (BRCI).

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

Securities Mentioned in Article
Security NamePriceChange (%)Morningstar
Rating
BlackRock Commodities Income Ord74.68 GBX-1.09
F&C Managed Portfolio Growth Ord200.00 GBX0.00
F&C Managed Portfolio Income Ord139.50 GBX0.00
Fidelity Asian Values Ord389.25 GBX0.32
Foreign & Colonial Investment Trust Ord636.50 GBX-0.47
Merchants Trust Ord487.25 GBX0.10
Murray International Ord1,242.43 GBX-1.16
Perpetual Income & Growth Ord375.10 GBX0.24
Schroder UK Mid Cap Ord534.00 GBX0.00
About Author Emma Wall

Emma Wall  is Senior Editor for Morningstar.co.uk