He certainly isn’t alone. Apollo multi-asset manager Ryan Hughes also told us that he is adopting a similar approach due to a number of impending headwinds on the horizon, while Neptune’s Robin Geffen has also sold down the UK.
With fears that UK equities could be held back because of political uncertainty and the prospect of an eventual interest rate rise, it is unsurprising that investors are abandoning loyalty for their home turf.
However, it’s not all doom and gloom, according to several FE Alpha managers. In the below article, we put under the spotlight the UK sectors that are making star investors feel a little more bullish towards Britain.
Domestic UK banks
Schroder’s Nick Kirrage (pictured) believes that, despite the vilification of UK banks by the press, they have the potential to grow and sustain dividends in the coming years.
He said: “Much has changed in the seven years since Northern Rock went under, most importantly their resilience to future negative events. The best way to assess the strength of a bank’s balance sheet is through its tier-one capital ratios, which are effectively a shield against bad debts and other unknowns.”
“UK banks’ ratios are now among the highest in the world and the highest since Bank of England records began in 1987, having raised significant capital in the seven years since the crisis hit.”
Kirrage points out that one of the ironies of the credit bubble was that, despite banks making extremely high returns, they were driven by taking on more balance sheet risk and not by high profit margins.
He said: “Today, new lending is highly profitable and much better reflects the risks of the borrowers involved. For the time being, these robust profit margins remain masked by losses on legacy assets and exceptional charges. Over the longer term, however, we believe the ongoing improvement in their core businesses will warrant significant share price increases.”
The star manager, who holds HSBC, Barclays, RBS and Lloyds in the Schroder Income fund he runs with fellow FE Alpha Manager Kevin Murphy, believes that more banks will return to paying dividends following a continuation in the growth of profits and the subsiding of legacy issues.
“Bank stocks generally have only been cheaper in early 2009 and late 2011 – at the height of systemic risk – and profitable new business is helping them build significant excess capital,” he said.
“Our focus on ‘normalised’ profits allows us to consider a ‘normalised’ dividend, which we see as being very substantial when considered against today’s share prices.”
UK challenger banks
On the other side of the coin, Slater Investments co-founder Mark Slater believes that challenger banks are the ones to watch out for.
“In the financial sector, I think that life is really tough for the average bank,” he said.
“Governments all over the world quite like fining banks now and I think it’s gone beyond whether or not they behave well – they’re just a source of revenue that all governments will miss, so in my view, they’re going to keep doing it.”
However, Slater currently owns Close Brothers, which has a banking division that provides specialist lending to small and medium-sized businesses across a range of asset classes.
He said: “It’s a challenger bank in a much better part of the market where I would say there’s more of a tailwind. In their business, clients are better able to repay their loans because interest rates are low, and also because the economy is improving, so bad debts are extremely low and they’ve been low for some time.”
“[Close Brothers] are getting a lot of business because the high street banks are having to shed business due to all of the new rules, so for challenger banks, it’s actually an optimum environment.”
Slater doesn’t set out to invest in sectors and instead screens for companies with certain characteristics. This can mean that he sometimes finds heavier weightings in some sectors of his portfolio, but this tends to be coincidental.
“In the same broad sector, you’ve got some people who are struggling and you’ve got some people who are doing really well,” he said. “I think Close Brothers is in the ‘doing really well’ category.”
“In our Income fund we also own Arbuthnot, which we like for similar reasons. It’s thriving for precisely the reasons that big banks are struggling. The challenger banks are able to pick up some very attractive business which the big banks just aren’t able to service anymore.”
Fund over eight years compared with sector and benchmark
Source: FE Analytics
UK university spin-outs
One of James Henderson’s favoured areas of growth for his Henderson UK Equity Income & Growth fund at the moment is the university spin-out space.
Henderson said: “These companies, while often early-stage, are at the forefront of new technologies in areas such as gene sequencing, personalised medicine and solid state batteries.”
“We like these companies because they have the potential to be highly disruptive technologies with large potential end markets. IP Group, for example, has an early-stage nuclear fusion technology, which if it works, and it is an ‘if’, will have a huge potential end market.”
As well as IP Group, Henderson’s UK Equity Income & Growth fund holds Horizon Discovery, Velocys, Ilika, Retroscreen, Oxford Pharmascience and Modern Water.
Fund over eight years compared with sector and benchmark
Source: FE Analytics
“We also like university spin-outs in a wider portfolio sense as they follow a different cycle, adding diversity,” Henderson said.
“For IP Group, what matters is whether Oxford Nanopore’s DNA sequencer becomes widely commercialised, not GDP figures, etc. In this sense, it follows a completely different cycle to, for example, the industrial companies held.”
UK technology
Liontrust’s Anthony Cross (pictured) and Julian Fosh believe that the technology sector has been a fertile hunting ground for companies that fulfil their ‘economic advantage’ investment philosophy.
Cross said: “Technology companies are, as you would expect, typically very rich in intellectual property. Many of them also have a good level of repeat revenue – software companies in particular often have a high level of recurring income due to the licensing and post-sale support proportion of their fees.”
The industry veterans, who have co-managed the Liontrust UK Growth fund since 2009 and Liontrust UK Smaller Companies since 1998, also favour the technology sector because companies often have good distribution networks.
Fund over eight years compared with sector and benchmark
Source: FE Analytics
Fosh said: “While some companies have physical networks, such as the international distribution network built up by an engineer, a software company might have a strong electronically embedded distribution network.”
“The software companies we hold in [Liontrust UK Growth] sell their products into a diverse range of end markets. Information technology is playing a key role in improving the efficiency of organisations such as the NHS and local government; it is an important part of the ongoing push for greater regulation in financial services; it has been deployed to improve logistics and transport efficiency and it will undoubtedly play a role in protecting consumers and businesses against the security risks that technological innovation has itself given rise to recent years.”
Within the sector, the Liontrust UK Growth fund holds NNC Group, an internet security and escrow software provider, Gamma Communications, an emerging telecoms service provider, and Fidessa Group, which produces software for the financial services industry.
“One of our largest sector positions is in EMIS Group, a provider of software as a service to the GP market,” Cross added. “The company has strong intellectual property and sells its software via recurring contracts, giving it a high visibility of repeat revenue.”
