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Has a buying opportunity opened up in UK funds?

14 July 2015

SW Mitchell’s Brian Cullen and Ben Willis at Whitechurch tell FE Trustnet why they have used the recent market falls to increase their UK equity weightings.

By Alex Paget,

News Editor, FE Trustnet

A significant buying opportunity has arisen in the UK equity market, according to SW Mitchell’s Brian Cullen, who has halved his UK fund’s cash balance over recent weeks to take advantage of the lower valuations on offer.

It has been a very topsy-turvy year for investors in UK equities as though the FTSE powered through its record high and even surpassed the psychologically important 7,000 barrier, the market fell some 8 per cent between the end of May and last week due to weakness in the commodity sector, the Greek debt negotiations, huge falls in Chinese equities and concerns about a rate rise in the US.

Performance of index in 2015

 

Source: FE Analytics

These factors, along with relative high valuations and the fact the bull market is well into its sixth year, have caused many experts to become more cautious.

In fact, a recent FE Trustnet article highlighted that cash balances across the various fund sectors have been raised as managers attempt to protect their investors from further market falls.

Cullen, who heads up the top-performing SWMC UK fund, was one such manager. However, following the recent sell-off and increased negative sentiment, he has piled back into the market.

“At the end of April, we were 95 per cent net long and we took that back to around 82 per cent at the end of May. However, over recent weeks we have put half of that back into the market so we are now more than 90 per cent net long,” Cullen said.

The major reason why the manager has been using his parked cash is because valuations are now more attractive and many of the fears which had market participants panicking had become overblown.

“We had been selling down certain areas quite opportunistically as we were fortunate that some of our holdings had shot the lights out and we owned a number of oil-related which had a big bounce back.”

“We were also aware of possible risks on the horizon and volatility was picking up, so we were feeling uncomfortable being that long the market. We did get quite lucky with our timing with June being such a disastrous month because of Greece and the big falls in the commodity sector.”

“However, we viewed that as a temporary phenomenon. We have long been of the view that authorities would do whatever it takes to keep Greece in the eurozone and that the wider European recovery was quite strong.”

He added: “We always felt the concerns surrounding Greece were, more likely than not, short-term concerns.”

Cullen’s flexibility with his cash weighting, his bias towards small and mid-caps and his ability to go short within his portfolio have all paid off for his investors.

Our data on the £80m fund (which sits in the offshore universe) goes back to July last year, over which time it has returned 27.42 per cent – meaning it has beaten the FTSE All Share’s gains by more than sevenfold over that time.


 

The only portfolio in either the IA UK All Companies or IA UK Equity Income sectors to have beaten SWMC UK over that time is FE Alpha Manager Richard Watts’ Old Mutual UK Equity fund.

Performance of fund versus sector and index since July 2014

 

Source: FE Analytics

SWMC UK has lost twice as less as the FTSE All Share since the correction began at the end of May.

Cullen has used his spare cash to up his weighting to companies with European exposure (now the situation in Greece has been temporarily resolved) and to more cyclical businesses – an example being financials such as Barclays.

While the next risk to face markets is likely to be the rate rise in the US, the manager says he is likely to up his long exposure to the UK market over the coming months.

“My view over the next couple of years is positive as I think Europe and the UK will continue to have a domestic recovery. Because of that, my natural inclination is to view any sell-off as a buying opportunity,” Cullen said.

There are many who would disagree with Cullen’s view, however.

Though a deal has been reached between Athens and its creditors to set-up a long-term bailout plan, many suggest the problems surrounding its debt and economy have only been saved for a later date. Elsewhere, the Chinese equity market is in free fall (it has lost close to 30 per cent over recent weeks), which could have major ramifications for the global market.

Performance of indices over 3 months

 

Source: FE Analytics

On top of that, a likelihood of tighter monetary policy in the US is seen as a potential source of volatility.

As a result, the likes of Miton’s Anthony Rayner expects to keep his current cash position – which averages around 10 per cent across his portfolios – for the time being.


 

“In general, market stress has picked up, with China, Greece and the worry, at some point, of higher US rates all contributing. We are waiting to see how these events unfold, rather than anticipating,” Rayner said.

“Key is the degree of financial and economic contagion and, importantly, the degree to which the authorities, through the central banks, remain in charge.” 

“Central banks are no longer focused on the world’s economies exiting a global recession in a synchronised fashion: economies are on different growth paths and so central bank policy has diverged.” 

He added: “In terms of deploying any cash therefore, we will want to see calmer markets, which will need some sense of resolution of some of the above. Similarly, the target for the cash will depend on where we see resolution.”  

However, Ben Willis, head of research at Whitechurch, agrees with Cullen and has been upping his exposure to the UK equity market and in particular large-cap funds – which have been hit hardest during the sell-off due to their exposure to international trade.

“Large caps bore the brunt of investor risk aversion over the month caused by a potential Grexit, with the UK’s index of the top 100 companies falling by 6.4 per cent,” Willis said.

“Not only are these companies more liquid in general (easier to trade when risk aversion is high), many have operations overseas, particularly in Europe, and are impacted negatively when sterling strengthens (which it did versus all other major currencies over June).”

“The core of our UK exposure will focus on defensive blue chip income stocks as well as those managers who are investing in dividend stocks in medium and smaller companies. We also maintain a focus towards UK small and medium companies across higher risk, growth-orientated strategies.”

He added: “Given the sell-off in UK large caps towards the end of June and start of July, we have taken the opportunity to use some cash to top-up positions in our UK equity income positions.”

In an article later this morning, we take a closer look at the UK funds that Willis has been upping his exposure to over the last week or so. 

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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.