Gosden: Housebuilder Stocks are Too Expensive

Ex-Artemis fund manager Adrian Gosden is building a new UK equity income portfolio at GAM - which means some old favourites are abandoned as overvalued

Emma Wall 10 November, 2017 | 2:19PM
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Emma Wall: Hello, and welcome to the Morningstar series, "Why Should I Invest With You?" I'm Emma Wall and I'm here today with Adrian Gosden, Manager of the GAM UK Equity Income Fund.

Hi, Adrian.

Adrian Gosden: Hi. Good morning.

Wall: So, this is a newly-launched fund. This is not your first foray into UK equity income. You have been running funds of this nature for a very long time. How similar is this portfolio to the one that you were running at Artemis?

Gosden: You are right about that. I've been doing equity income for over 20 years. And so, the chance to put together a brand new fund is very exciting. The process is fairly similar the way we go about looking at investments, trying to find new ideas. But I'd say the portfolio is quite different actually and it's quite different because we are buying a brand new portfolio today. So, it's going to have no historic holdings, no mistakes and no excuses. So, we are buying it as it exists today. So, there are some differences.

I suggest one of the most noticeable differences is the market cap range. So, the previous fund I was running was about 77% in the larger shares in the London market. This portfolio is only about 50% in the larger shares. The rest is the mid and the small area. And that is a noticeable difference between the two portfolios.

Wall: And has valuation forced you to do that? Because of course, with an established portfolio you are not having to put large amounts of money to work in the UK market off the back of quite a considerable bull rally.

Gosden: Valuation is always a key consideration when building an equity income portfolio, probably more so now. The market does, as you say, maybe look full given the uncertainties. So, you search out pockets of interest within that. Perhaps, consumer staples are highly regarded at the moment. They don’t make it in. Mining has had the most tremendous 18 months of performance, they don't make it. Housebuilders, what brilliant investments they have been, they don't make it in. So, we are starting with a portfolio of maybe some areas where there question marks. Brexit, what does it mean? UK currency, sort of decimated some. So, let's have a look there and see if we can find a management team that can plot as a course to better dividends and they are in the fund.

Wall: Does that presumably mean that those sectors you've mentioned, and indeed, others, are on a kind of watchlist for as and when we have this correction that is now being sort of very much a case of when not if, you will then be looking to go back into those stocks that have served you well in the past?

Gosden: So, as you rightly say, we go through the process of looking at the shares and if they can't make it in the portfolio because they are too expensive, it's not their fault. It's the market's fault. So, we put it on our watchlist to the side. I love a regular grower, regular dividend payer just like everyone does. But at 25 times earnings and a yield of 2.5%, it doesn't make it in. If those shares were to be at different price, they could well make it into the portfolio. But I don't necessarily subscribe to there is going to be a dramatic correction. We could start with a rotation where maybe some of the undervalued areas of the market become a bit more popular and some of the popular parts of the market just don't make much more progress.

Wall: And do you think that that rotation will be triggered by interest rates, because we have started to see them rise in the UK now finally?

Gosden: Yes. We've talked about it so many times, someone was telling me there've been 97 Bank of England meetings before the last – well, I think we've seen one, but there was a very clear communication that we won't see that many more going forwards and the market reacted again to that. Currencies went down; international earnings shares went up. You would normally, if you got out Ladybird book of fund management, it would say that rising interest rates, return to value. Life is probably not like that. But I think interest rates have gone back to the 0.5%, will go higher, but don't get too excited about that. I think there will be other things actually.

I was just thinking what could trigger a difference in opinion about our stock market as we stand today? Well, perhaps, a payment to the European Union of £20 billion, £30 billion, whatever it is, and we are in trade talks. That's different from where we are at the moment when everyday a minister is resigning, and it looks like complete chaos. So, it could just be something as simple as that. Just a one-step deviation in how we think about the future and a different set of shares could start to perform.

Wall: Adrian, thank you very much.

Gosden: You're welcome.

Wall: This is Emma Wall for Morningstar. Thank you for watching.

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Emma Wall  is former Senior International Editor for Morningstar

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