Out-of-Favour UK Creating Investment Opportunities

How do you manage a UK income fund when you’re bearish on the UK? Robin Geffen, founder of Neptune Investment Management reveals his strategy

David Brenchley 16 May, 2018 | 3:08PM
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Bank of England

The UK equity market continues to split opinion. Retail investors are voting with their feet and dumping funds that invest in home-listed firms in their droves. Some £19 billion has been withdrawn from funds in the Investment Association’s UK equity-related sectors over the past 30 months.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 which is mandated to invest in the country.

Robin Geffen, manager of the Neptune Income fund, is taking advantage of the Investment Association rule, which states that only 80% 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, among the top holdings in the £215 million fund, you’ll find big US names such as CME Group (CME), Microsoft (MSFT) and Apple (AAPL).

Across the 33 stocks in the portfolio just 15.5% 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 Neptune, shares this bearish outlook. He points out that 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 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 (BA.) and GlaxoSmithKline (GSK).

Certainly, the strategy seems to be paying off. The fund has returned 10.7% over the past year – almost double the sector average of 5.7%.

M&A a Vote of Confidence in the UK

But other managers are more bullish on the prospect for domestic stocks; veteran investor Richard Buxton, for example, is backing select banks and retailers in his Old Mutual UK Alpha fund.

It’s also been pointed out that overseas corporates have been giving the UK a vote of confidence, with many foreign firms snapping up the bargains that are on offer in the UK.

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, manager of the Neptune UK Mid Cap fund, also toes the party line, preferring 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.

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.

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David Brenchley

David Brenchley  is a Reporter for Morningstar.co.uk