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Should you be avoiding the UK in your ISA this year?

19 March 2014

Artemis’s Simon Edelsten says investment should move in the opposite direction to sentiment, meaning outside of the UK.

By Thomas McMahon,

News Editor, FE Trustnet

Long-term investors should be looking outside of the UK to boost their returns over the coming years, according to Simon Edelsten, manager of the Artemis Global Select fund.

ALT_TAG IMA UK Smaller Companies and IMA UK All Companies were the two bestselling sectors to retail investors in January according to IMA figures, although institutions were large net sellers of the latter sector and only marginal buyers of the former.

Edelsten warns that the best gains in the UK have already been made and says that he is shifting his portfolio towards better opportunities in the US and emerging markets.

“The UK will be one of the fastest-growing economies in the world this year, which suggests to me you should be selling UK equities,” he said.

“If you are a long-term investor and thinking about where you are going to get growth over the next five years, then this year is one to slowly take profits.”

“There’s no rush, but the direction of travel should be the opposite of where the sentiment is, so we will be trying to take advantage of better opportunities elsewhere.”

The UK equity market has risen strongly over the past five years, with investors making more than double their money in the asset class over this time.

Performance of indices over 5yrs

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Source: FE Analytics

However, it is only really in the past year that retail investors have been bullish on UK stocks as the economic news surrounding the country has improved.

The IMA UK All Companies sector in particular was one of the least-favoured for many months in 2013 and 2012.

The problem is that equity markets are leading indicators, meaning that they tend to rise before economic data improves. Buying into the UK market on good economic news is therefore buying yesterday’s story, to some extent.

Patrick Connolly, head of communications at Chase de Vere, says that retail investors are often guilty of this sin.

“This happens all the time: investors typically buy funds and sectors which have already performed well and avoid sectors that have poor short-term performance and the real danger is they buy in to the top of the market,” he said.

“I’m not trying to pick the top of the market but it does often happen. In a way, strong performance should be seen as a warning.”


Edelsten also warns against trying to call the top of the market. He suggests keeping a keen eye on valuations is the way to avoid this disaster.

“The first thing you know about a recession is you have lost a lot of money in your stocks,” Edelsten said.

“You have to look at valuations, which is why you generally pick a professional fund manager.”

“The UK isn’t an extremely expensive market, although markets have doubled since 2009; four years ago equities looked cheap but it is difficult to argue they are currently cheap.”

“It doesn’t mean you should sell, because where else do you put the money? But you need to find shares with the potential to grow out of the quality of their own business.”

The FTSE All Share's current P/E ratio is 14.43.

Artemis Global Select is a global fund with a thematic approach. The managers look for stocks that fit into certain themes they identify as likely to lead to strong growth in the coming years.

US shale gas, the power of the “grey pound” and growing healthcare spending are the three trends that feature most heavily in the fund.

Edelsten says that the new theme he is adding to his portfolio is the strength of technology companies, particularly in the US.

Google is the largest stock in his portfolio, making up 2.6 per cent. Apple also appears in the top-10 holdings.

Edelsten says that so-called big data and big data analysis are the two areas with the most potential.

These sectors are involved in managing databases of information for private and public clients.

The tech sector is one that has also had a strong run, with the MSCI World Information Technology index up 44.3 per cent over the past three years compared with the 28.87 per cent of the MSCI World.

Performance of indices over 3yrs

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Source: FE Analytics

Some analysts and managers have warned that valuations in the sector are too high, with many businesses shooting to high share prices despite not yet having turned a profit, in a repeat of the exuberance prior to the dotcom bust of the early 2000s.

Edelsten says that he is concerned about valuations in some areas, but that this sort of speculation is integral to markets in new tech companies.

“They involve more assumptions about future margins and profitability than they usually make, therefore we buy smaller positions,” Edelsten said.

“We tend to avoid the more speculative businesses which have a plan to make profits 'one day', Twitter being an example,” he added.

“I was involved in the TMT bubble of the 1990s, and the evidence of the last 20 years is that when you get a profitable business, they are very profitable indeed.”


Edelsten gives Google as an example. He keeps 80 per cent of his tech position in safer companies that are already profitable and the remaining 20 per cent in the more speculative end of the market.

The manager says that he also sees decent opportunities in China on valuation grounds, and has recently bought a bank, ICB, in the country.

IVB is trading on 80 per cent of book value and yields 6.5 per cent in Honk Kong dollars, linked to the US dollar.

Fears of a banking crisis are wide of the mark, he says, as the government is willing and able to keep things under control.

“There has been aggressive pessimism about China since 2002, but the last 12 or 13 years have been pretty good,” he said.

The manager has also maintained a weighting towards the emerging market consumer although it has been trimmed over the past 18 months.

He was concerned about valuations on the relevant sectors last year and reduced his holdings, he says, although was surprised by the ferocity of the currency movements.

In a coming article this weekend, FE Trustnet will be looking at other areas of the market that have had a good run but may be too risky to put your ISA money in right now.

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