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Ketan Patel: Why the Brexit “fear factor” is overdone

Patel, who co-runs the EdenTree Amity UK fund alongside Sue Round, tells FE Trustnet why there are plenty of attractive investment ideas in the UK despite an overall sense of bearishness.

Lauren Mason

By Lauren Mason, Senior reporter, FE Tru...
Tuesday May 16, 2017

The fear factor when it comes to Brexit has been overdone, according to EdenTree’s Ketan Patel, who says markets tend to be far more resilient to political change than investors give them credit for.

The co-manager of the EdenTree Amity UK fund also warns investors against falling into a lapse of short-termism and urges them to look through macroeconomic noise.

Despite uncertainty historically spelling bad news for equity markets, he says there are a number of UK stocks which are set to weather any impending storms to produce solid returns over the long term.

“People tend to just get on with it once most elections or macro events happen,” Patel said. “Donald Trump was elected in November, for instance, suddenly we’re here now in May and the US is carrying on.

“Brexit unfortunately is going to be so prolonged and I think on June 8 [the date of the UK general election], markets want certainty. If May does get in and she gets enough of the mandate, the rest of it will just be political posturing.

“In the end, I think a lot of people don’t realise how difficult it is to remove yourself from the EU; it’s not a gym membership or a phone contract. There are obligations we have to fill and some of the obligations are beyond two years. That’s the hardest part.”

Despite this uncertainty, he says there are plenty of quality businesses which will carry on regardless of which path negotiations take. The manager adopts a bottom-up stock selection process which focuses on companies further down the cap spectrum, which he believes gives him an advantage when it comes to finding new opportunities amid the current market backdrop.

“Often you get very exciting companies come to market and we just have to stand back and ask whether it will be around in the next three years, that is the hardest part,” Patel explained. “It is much easier to buy holdings, holding back is where it gets difficult.”

UK equities across the board have performed well since last year’s EU referendum, although the FTSE Small Cap index has led the way with a return of 25.67 per cent to-date.

Performance of indices since EU referendum


Source: FE Analytics

Just yesterday, in fact, the global-facing FTSE 100 index closed on an all-time high of 7,435 as a surge in oil price bolstered large market constituents such as BP and Royal Dutch Shell.

However, the behaviour of markets seems to be at odds with overarching investor sentiment. In an article published last week, Troy’s Sebastian Lyon explained that a lack of options for both income and growth-seeking investors has led to a reluctant market bubble.

“Elevator melodies rather than heavy metal is today’s market mood music,” he said. “Most investors I meet and talk to are not thinking bullishly, but they are acting bullishly.”

However, Patel says there are both individual stocks and even whole sectors of the UK market that are set to perform consistently well despite ongoing geopolitical uncertainty.

“Macro matters massively of course but we have no control over what will happen on June 8 and how people will vote. For us, we’re running money for the longer term, not based on political cycles,” he reasoned.

“A good example is our love of UK industrials. UK engineering is phenomenal and investors tend to forget that because we don’t have a manufacturing base in the UK. We do manufacture elsewhere around the world but it’s our technology and our intellectual property.”

One such stock that Patel holds is Porvair, which is the international leader in producing filtration systems commonly used on aeroplanes.

Another example is Lancashire-based firm Victrex, which creates polymer materials used in components of smartphones, cars, aeroplanes and even hip replacements.

“Some 97 per cent of all its earnings are from overseas and 100 per cent of manufacturing is in the UK,” the manager explained. “It’s mission-critical and manufacturers won’t skimp on materials for any of the products that are created from it.”

Elsewhere, he says there are opportunities relating to the UK’s undersupply of housing and is therefore favourable towards home construction companies.

He is also indirectly exposed to this theme through Mears Group, which provides repair and maintenance services to housing associations.

In contrast, the manager has no exposure to oil and gas, mining or utilities because of the fund’s ESG overlay. He has also chosen not to have direct exposure to airlines or autos because of the carbon footprint these companies often produce.

A significant portfolio underweight is UK banks, despite the fact they have fallen back into favour over recent months due to expectations for rate rises.

Performance of index over 1yr


Source: FE Analytics

“We have always been underweight banks in the fund full-stop,” Patel continued. “There is no RBS, there is a tiny position in Lloyds and Barclays. But we favour HSBC and Standard Chartered because they are more outward-looking.

“Lloyds is probably the cleanest bank now, but every season you see an extra provision for PPI. It will one day end but it seems to be a death by a thousand cuts, I think.

“Over £50bn has been paid out on PPI alone by UK banks, we have issues surrounding LIBOR and endowment mortgage sales, FX, all these things are continually being worked through. RBS is still majority-owned by the government.”

While he says challenger banks look interesting, he says track records are still too short to determine the quality of the businesses.

The area within financials that Patel favours is financial services, such as wealth management, which he is currently exposed to through holdings in Close Brothers and St James’s Place.

“When I first joined the City, there was not enough information. Now there is a huge amount and in between we have things like fake news, so it’s incredibly difficult at times,” the manager said. “In many ways you are better off turning off the news and focusing on what you care about and what will do well.

“What we like about companies is high recurring revenues – either it has a unique product or service, underlying intellectual property, it has to have a decent or dominant market share because that means it can maintain margins or it can grow margins.

“It also has to have quality management. We’re very strong on the governance aspect. How much do management have in the company? It’s not a tick box, but these are what you want to see first before you decide whether a stock is a credible proposition.”


Over five years, EdenTree Amity UK has returned 82.83 per cent, outperforming its sector average and benchmark by 4.65 and 10.56 percentage points respectively.

Performance of fund vs sector and benchmark over 5yrs


Source: FE Analytics

It has a clean ongoing charges figure (OCF) of 0.8 per cent and yields 2.08 per cent.

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Managers mentioned in this article

Data provided by FE. Care has been taken to ensure that the information is correct, but FE 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.

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