A more pessimistic stance on the domestic economy hasn’t stopped GAM investment director Charles Hepworth from backing UK equities fund managers Simon Brazier, Richard Buxton and Jeremy Lang, despite moving to underweight positions across his model portfolios.
Hepworth runs five model portfolios – defensive, cautious, balanced, growth and global equity – for GAM and has moved to an underweight position in UK equities relative to his peers and benchmark in each of them.
The FTSE 100 has underperformed in recent years relative to the MSCI AC World index, returning 67.36 per cent over five years, 37.57 percentage points below the global index.
Performance of indices over 5yrs
Source: FE Analytics
The blue-chip UK index has hit new highs more recently following the EU referendum, however, Hepworth said that index performance may be hiding further challenges for the economy.
“The outlook for the UK economy is perhaps slightly more pessimistic than the indices are pointing to,” Hepworth explained.
He said ongoing Brexit talks were one reason for his UK underweight, adding that the outlook for the UK economy was weaker than some think.
“We’ve had some strong retail sales recently but a lot of that might just be the timing effects of Easter and people expecting slightly warmer weather than we had,” the investment director said.
“We can’t really see that this continued consumer revival is going to materialise given sterling’s position.”
Yet, Hepworth maintains some exposure to the UK market. Below FE Trustnet looks at the three funds that he continues to hold as a core position in all five of his portfolios.
Investec UK Alpha
The first fund is Investec UK Alpha run by Simon Brazier, which he says ranges from a 5 per cent position in the higher risk global equity fund to a 2 per cent holding in the defensive portfolio.
“That fund there has done very well year-to-date and we do hold that across the portfolio ranges because of its style,” he explained.
The fund has returned 9.66 per cent so far this year – above both the IA UK All Companies sector and FTSE All Share – It has been in the top half of the sector in five of the past six years, although Brazier only took over management of the fund in 2015, it should be noted.
“He’s had a very good run post-Brexit and also more recently and he certainly warrants the assets that they are taking into that fund,” said Hepworth. “It obviously demonstrates a lot of broad-based investor confidence in him.”
Performance of fund vs sector and benchmark YTD
Source: FE Analytics
The £1.6bn fund has been run by Brazier since the start of 2015 when he moved from Threadneedle where he was running the Threadneedle UK fund from 2010.
Hepworth said: “Simon Brazier had a very strong track record at his previous firm [Threadneedle] before he moved to Investec and brought across the same process but he has a more expanded team so he is drawing on the value approach that Investec adopt.
“Alastair Mundy contributes into that process and his longer term performance has been strong on that value, mean reversion outperformance. So there’s no doubt that Brazier is including that in his management and stock selection in his portfolio.”
Investec UK Alpha has a yield of 1.73 per cent and a clean ongoing charges figure (OCF) of 0.84 per cent.
Old Mutual UK Alpha
The second fund Hepworth is backing is Richard Buxton’s Old Mutual UK Alpha, which has come under pressure in recent years as his style has gone out of favour.
“We have continued with the fund despite a tricky time last year and he is having an okay year this year,” he said.
The fund has returned 7.46 per cent so far this year, slightly behind the FTSE All Share index and has lagged the benchmark in each of the last two years.
“I’m not saying we’re going to stick with him forever, but over the longer term he tends to demonstrate some level of outperformance, though there will be opportunities to move into other managers in the shorter term,” the director said.
“We have dialled back the exposure that we’ve had to him but I think for a longer term investment – if you’re looking at pension planning – then it probably would be one of the funds that you’d be looking at.
“The stocks come back into fashion they have a little bit of a pop but the thing is he doesn’t turn the portfolio over a lot so things come in and out of fashion unfortunately.”
The £2.2bn fund, which Buxton has run since 2009, has a large-cap bias and is held with a long-term time horizon, making it more susceptible to market volatility. It has a yield of 2.6 per cent and an OCF of 0.85 per cent.
Ardevora UK Income
The final fund Hepworth holds across all his range is the £198m Ardevora UK Income run by FE Alpha Managers Jeremy Lang and William Pattisson.
“Again it is a totally different approach to management – looking at behavioural investment and the psychology of buy-side and sell-side analysts,” he said.
“It does approach investing from a different standpoint and again has particular moments of very strong returns.”
The fund has been a top quartile performer in the IA UK Equity Income sector over the last five years but has struggled more recently and is bottom quartile over one year.
Performance of fund vs sector and benchmark over 5yrs
Source: FE Analytics
Hepworth noted: “The fund has had a pretty tough time over the very short term. I think this is really down to the fact that a lot of the investment opportunity was focused on pure growth styles this year.
“All those companies that are really growing and generating above average market growth they’ve been rewarded well but he’s missed out on some of those sectors.
“Again these investment styles go in and out of fashion and there is no doubt that he will have his moment in the sun again at some point.”
The fund splits the market into three group, ‘investors’, ‘financial analysts’, and ‘company managers’. ‘Investors’ are stocks showing signs of excessive anxiety or over-exuberance; ‘financial analysts’ represent companies with signs of overconfidence and blinkering; and, those in the ‘company management’ sector – which it avoids – with indications of hubris, denial or excessive risk taking.
The fund has a yield of 3.99 per cent and an OCF of 1.36 per cent.