Investors need to stop chasing after UK companies selling into emerging markets and look for the real opportunities in domestic-focused recovery stocks, according to Clive Beagles, co-manager of the £1.2bn JOHCM UK Equity Income fund.

Many UK-focussed managers have been looking for companies that sell into the emerging markets as a way to escape a recessionary economy at home, but Beagles (pictured) says this is misguided and counterproductive.

“There’s no evidence that GDP growth leads to stock market growth, because GDP growth leads to increased capacity,” he said.

“Not to be dismissive of macro asset allocation strategies, but we think you can make more money from recovery stocks,” he added.

Beagles’ portfolio has the third-best record over five years out of the 80 in the sector with a history that long, and has a yield above the sector average at 4.6 per cent.

Performance of fund versus sector and benchmark over 5yrs
 
Source: FE Analytics

In the year-to-date the fund is up 19.05 per cent, well ahead of the IMA UK Equity Income sector, which has made 11.44 per cent, and of its FTSE All Share benchmark, which has made 9.42 per cent.

Beagles says his focus on UK stocks with domestic exposure is the reason for this outperformance, and a uses a comparison of two stocks to back up his claim.

Last year Burberry was seen as company with huge growth potential in emerging markets, as selling luxury goods into China was seen as a way to beat the recession.

The company had seen like-for-like sales in China grow by 35 per cent and was trading on an expensive price-to-earnings (p/e) ratio of 22 times.

However, the share price is down 20 per cent so far this year, after a profits warning over the summer which surprised investors, and the p/e ratio now nearer 17.

Debenhams, on the other hand, was thought of as a no hoper at the end of last year, with like-for-like sales growth in the UK flat and shares trading at six times earnings.

However, in 2012 the share price has risen 90 per cent, despite it being a domestic-focussed stock with no emerging market exposure; its p/e ratio has now risen to 10 times earnings.

Performance of stocks year-to-date

 
Source: FE Analytics

Beagles says that the UK economy is in much better shape than people realise, and the current figures showing the UK to still be in recession will probably be revised upwards.

He says that not only is employment rising much faster than it is in the US, but new car sales growth of 9 per cent in September suggest that the economy is still growing strongly.

The fund invests in mid-cap stocks as well as the large caps of the FTSE 100.

Beagles said: “We think there is more scope to add value in the mid and small cap space. We have had 40 to 45 per cent in the small or mid cap space fairly consistently over the past three years.”

“Today we have become more mid cap cap, but in 2008 when the world was more uncertain we were far more large cap, more or less at the same level as the market.”

“We keep an eye on it, but now we see no reason to go back. We are not struggling for new ideas.”

Data from FE Analytics shows the fund has the tenth highest volatility of portfolios in the sector over the past five years, with a score of 19.69 per cent, which may reflect this strong mid-cap focus.

Our research has previously shown that funds with a bias to the middle of the scale of cap size tend to overperform over longer timeframes. 

The fund is available with a minimum investment of £1,000, and has a total expense ratio (TER) of 1.28 per cent.

Like on all JO Hambro funds, there is a performance fee, and the house will take 15 per cent of any gains the portfolio makes in excess of its benchmark.