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Henry Dixon: Why I’m buying into this crashing market

18 October 2014

Housebuilder Taylor Wimpey, student accommodation specialist Unite Group and online gaming company Playtech are among the companies that the deep value manager has been snapping up in recent days.

ALT_TAG Cheaper valuations and an unprecedented rise in the spending power of the UK consumer has created a significant buying opportunity for investors, according to FE Alpha Manager Henry Dixon, who is putting his cash to work and buying into the falling market.

Dixon (pictured) has built up a significant cash position in his GLG UK Income fund in recent months, believing that only a third of the UK equity market was attractive on an absolute basis.

However, the recent shake up in the FTSE All Share – which has seen the index fall just shy of 10 per cent since early September – has made closer to two-thirds of the market attractive, according to Dixon, who has taken his cash position down from 13.5 per cent to 5 per cent.

“There’s been a transition from relative to absolute value,” he said. “Equities certainly had relative value compared to bonds, but on an absolute basis were unenticing.”

“There’s two ways this can happen – either prices fall, which we can categorically say has happened, or earnings grow, which is a little more subjective. What I would say though is that now two-thirds of the market represents value.”

Dixon says equities “have never been more attractive compared to bonds” from an income perspective, pointing out that the relative value between the FTSE 100 yield and the 10 year gilt yield is now higher than it was during the second world war in favour of the former, when risk-aversion was at an unprecedented high.

Relative value between FTSE 100 and 10 year gilt yields since 1920

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Source: Man Group

He adds that more than 90 per cent of the FTSE 100 is now yielding more than a 10 year gilt – again, a historic high.

Crucially, however, Dixon says absolute value is now in abundance. The manager and his team have a deep value approach to investing, and typically see market crashes as a good time to snap up quality companies that have fallen further than they deserved to.

It’s not only value that’s enticing Dixon. He believes sterling weakness after many months of strength will be a big benefit to companies that derive much of their profits from overseas, but more importantly he says few industry experts are highlighting the strength of the UK consumer’s spending power, in light of recent price falls.

Many commentators view the recent fall in inflation to 1.2 per cent, driven by plummeting energy prices, as a sign of possible deflation. FE data shows that the price of brent oil has fallen by almost 20 per cent this year.

Performance of index in 2014

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Source: FE Analytics

Dixon doesn’t think disinflation should be seen as a warning sign; on the contrary, he says falling food and energy prices will strengthen the discretionary spending power of individuals, thus boosting the economy and a number of corporate sectors.

“This ‘deflationary’ data isn’t damaging deflation. Economists seem to think that people paying less money at the pumps is a bad thing. I can’t agree,” he said.


“It’s very unusual that you are actually going to spend less when going to the supermarket than you were. If it falls by 2 per cent, you’re looking at £4bn less being spent on food, which will therefore be spent on other things.”

“Some people call this deflation. I call it an incredible boost to the disposable income of the consumer.”

Research from Man Group suggests that the average post tax income of the average household in the UK – which includes not only wages but also income from investments – will be £39,111 in 2014.

With many food and energy prices on the decline, Dixon says the income available for discretionary spending is likely to increase from £15,174 in 2013 to £15,874 in 2014 – a rise of 4.61 per cent – and up to £16,719 in 2015, which represents a rise of 45.32 per cent.

While the manager stresses these are only estimates, he believes that he’s been modest in his expectations, expecting the increase in disposable income to be closer to 7 per cent.

Only disinflation as a result of negative growth, falling wages and mass unemployment should get investors worried, Dixon says, pointing out that neither are currently a threat.

Dixon acknowledges that the end of quantitative easing in the US is making some people nervous, though says that the stimulus coming from Japan and most likely Europe next year will ensure that markets will be boosted by increased liquidity.

Though he doesn’t see the recent fall in inflation as a negative factor, Dixon believes it will most probably postpone planned interest rate rises, again providing a boost for risk assets.

“Some people see falling fuel prices as a sign of deflation. I don’t, but I do think it has reset interest rate expectations,” he said.

“This will particularly boost the housebuilders, which I see as one of the most attractive areas in the UK market at the moment.”

Dixon has increased his stake in FTSE 250 company Taylor Wimpey, which now has a 2.5 per cent weighting in the fund.

“It’s on a P/E of 7.8 times and has a perspective yield of 8 per cent next year. With rates low and with generally a lack of yield on offer, that’s very attractive,” he said. “It’s been hit in the recent downturn and we’ve bought some more.”

“Another interesting company in the real estate market that we like, especially with rate expectations reset, is Unite Group, which deals with student accommodation.”

“It’s trading on 0.8 of its book value. It’s at the stage in its lifecycle where it’s done a lot of heavy lifting in building a lot of real estate, and can now start sweating the assets.”

“It’s yielding 2.5 per cent but we expect dividend growth of 20 per cent over the next couple of years.”

Unite Group now has a 2.2 per cent weighting in the GLG UK Income fund, and like Taylor Wimpey has sold off in the recent downturn.

Performance of stocks in 2014

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Source: FE Analytics

Dixon has also been buying into FTSE 250 gaming company Playtech, which has suffered a share price fall of almost 10 per cent since early September. He has taken his position up to 1.2 per cent in recent days, and says this is likely to rise.


“It gets a lot of its earnings from overseas so will be boosted by a weaker sterling, and is sitting on net cash,” the manager said.

“Top line is growing at 10 per cent, it’s trading on 13 times earnings and has 20 per cent of its market cap in cash. The starting yield is 3 per cent but we expect that to grow in excess of the market rate – certainly double digit returns,” he added.

GLG UK Income has made a decent start since Dixon took it over – on a relative basis at least. It has lost 3 per cent over the period, compared to -4.25 per cent from the FTSE All Share and -5.74 per cent from the IMA UK All Companies sector average.

This is an improvement compared to the fund’s performance prior to Dixon’s appointment, with FE data showing it was a third quartile performer in 2011, 2012, and the first three quarters of 2013. Dixon initially performed very well with strong stockpicking in the small and mid-cap market contributing to performance, but the fund has suffered more than most in the recent sell-off – in spite of its above average cash position.

Performance of fund, sector and index since Nov 2013

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Source: FE Analytics

The manager made his name at Matterley, running the top-performing Undervalued Assets portfolio with Miton’s George Godber. Dixon has a very strong longer-term record; FE data shows that he has returned 189.6 per cent since he started running retail money in 2005, compared to 105.45 per cent from his peer group composite.

GLG UK Income is yielding 3.75 per cent and has ongoing charges of 0.97 per cent. Dixon also runs the growth-focused GLG Undervalued Assets portfolio.

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Henry Dixon

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