UK equity income investors are currently in a win/win situation, according to Laura Foll of the Lowland Investment Company, who says they will be rewarded whatever the outcome of Brexit.
The most recent Schroders Global Adviser Survey found Brexit to be a continuing source of worry for investors, with 46 per cent of respondents naming it as the number-one concern among clients.
Clients’ biggest concerns for the next 12 months
Source: Schroders
However, with the FTSE 100 making approximately 75 per cent of profits from overseas, its dividend yield is expected to receive a boost if there is a disorderly Brexit which leads to a fall in sterling
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Foll (pictured) said that a greater threat to its yield would actually be a soft Brexit, or no Brexit at all.
“A much more difficult dividend scenario, if we are just talking about dividends, would actually be sterling recovering to 1.50 [versus the dollar],” she added.
“In that scenario, if you model it all out, you then get to flat dividend growth for the year rather than [the expected] 8 per cent dividend growth.
“Obviously that would be a very positive period for UK equities and we definitely would not be complaining if sterling went up to 1.50 if we had a good Brexit scenario or whatever, that would be a strong period for performance, but it would be slightly more difficult for dividends.
“But I think that would be a very nice problem to have.”
The reason Foll said that UK equities will do so well in the event of a soft Brexit relates to how out of favour they currently are among international investors.
While she said that every fund manager presentation she has been to recently seems to have featured the same Bank of America Merrill Lynch (BofAML) Fund Manager Survey showing the UK is at its biggest underweight relative to history, the most striking thing about the chart is that the scale has had to be adjusted to show just how out of favour the country is.
Yet, she said that over the next month as we get closer to the 29 March deadline, it could become more unpopular still.
“I was up in Manchester talking about Lowland two weeks ago and people either own the UK and are saying it is good value and are sticking with it, or they don’t own it and feel no inclination to add to it now.
“A few people are doing the work and saying, ‘OK, look if Brexit gets resolved in some way I want to have done the work so that then I can put some money in after the event’. But there are no additions happening.
“[BofAML] also does the movement version of this chart which shows if people are adding or detracting and people are still actually taking money out of the UK even now.
“You would think that, given the referendum was in 2016, most people would have done the work by now and taken the money out they wanted to take out, but actually the money is still drifting out. It’s not been the easiest time to do a UK fund, it’s been a difficult period to run UK money.”
Foll pointed to GlaxoSmithKline as an example of a company that has been unfairly tarnished for no other reason than it is listed in the UK – it sits at a discount to global pharmaceutical stocks even though it serves exactly the same international markets.
The manager added that if the government does sign a Brexit deal with the EU and the market is given a degree of certainty on the direction of the UK, the FTSE is likely to be given a swift reappraisal by international investors, with money flooding back in.
“I actually think it would be across the board,” she continued. “I know that doesn’t sound particularly rational because of the currency aspect, but I think that so much money has been pulled out of UK equities that actually you would see everything go up on that day, the FTSE 100 and the FTSE 250.
“I mean it would take longer to trickle down to small and mid caps, but I think it would be positive across the board.”
Turning specifically to Lowland, Foll said there are other reasons to be upbeat. She noted that the yield of 3.86 per cent is relatively high for the trust and that on the three previous occasions when it has reached a similar level – before the ERM (exchange rate mechanism) crisis in 1992 and after the dotcom bubble in 2002 and the financial crisis in 2008 – its NAV (net asset value) total returns over the next three years have been around 100 per cent.
“Lowland has a heavy weighting in industrials and finance and it is tied into the domestic economy,” she added.
“So when Lowland does well is when the UK domestic economy does well, often when coming out of periods of crisis such as after a recession or after a time when value as a style didn’t work well.
“We obviously can’t say that we expect to see these types of returns, but what we would say is when we have approached a 4 per cent yield before, it has been a good sign for the following three years.”
While Foll said either Brexit scenario will be beneficial for UK equities, Winterflood Investment Trusts recently noted that Lowland will do better in the event of a soft Brexit.
Data from FE Analytics shows Lowland Investment Company has made a 374.12 per cent total return over the past decade compared with 217.93 per cent from the IT UK Equity Income sector and 189.04 per cent from its FTSE All Share benchmark.
Performance of trust vs sector and index over 10yrs
Source: FE Analytics
The trust has ongoing charges of 0.57 per cent and is 14 per cent geared.
It is trading at a discount to NAV of 3.2 per cent compared with 5.93 per cent for both its one and three-year averages.