Richard Hallett is cutting exposure to the UK in his five crown-rated Marlborough UK Multi-Cap Growth fund, warning that economic risks at home have risen above the global average in the past five years. 
However, the FE Alpha Manager said this move is as much about the increased opportunities elsewhere as it is a move away from UK-specific risks, with the US and Europe offering particularly healthy prospects.
“I have not been geared to the UK economic growth cycle very much over the last five years, which has been very strong, and I haven’t benefited from this massive growth in UK cyclicals which has perhaps been a mistake in hindsight,” he admitted.
“I’ve been watching them and the last thing I want to do is buy them now, or indeed a year ago, because they were getting quite expensive and now we’re near the tail-end of that cycle. So I wasn’t particularly big on the UK anyway.”
“But Brexit has further cemented my belief that risks are higher in the UK. It doesn’t necessarily mean I wholly believe the UK is going to struggle, but it could have problems going forwards with inflation rising, falling currency and the impact this will have on consumers.”
Following heightened expectations for fiscal loosening and global inflation, the UK market experienced a mass style-shift during the second half of last year from growth stocks into value. While this has indeed pulled back year-to-date, the FTSE World Value United Kingdom index has comfortably doubled the gains of its growth counterpart over the last 12 months.
Despite having very little exposure to cyclicals, Hallett’s fund has still managed to beat the FTSE World Value United Kingdom index – and indeed the FTSE All Share – over the last year, with a total return of 28.47 per cent.
Performance of fund vs sector and indices over 1yr
Source: FE Analytics
This outperformance is far from a fluke. The £162m fund has found itself in the top decile for its total return relative to its average peer over the last three, five and 10 years as well as over the last three and six months.
Hallett attributed this to his rigorous stock-selection process, which focuses on companies with sustainable compounded earnings growth, annuity-type cash-flows, the ability to continually reinvest and expand the business and a non-replicable competitive edge.
Every stock the manager buys into (he will hold between 45 and 65 at any one time) is also chosen taking into account the macroeconomic backdrop, as well as long-term themes such as the rise of the Asian middle-class, the use of technology as a disrupter and ageing demographics in developed markets.
Today, for instance, he described himself as “modestly bullish” on the global environment which he is favouring over UK-facing stocks.
“The ECB [European Central Bank] and the IMF [International Monetary Fund] have been putting up their forecasts around the world,” the manager pointed out. “China has stabilised – everyone was very worried about the credit boom and property markets a year and a half ago but the figures seem to have improved. The argument now is that they’re engineering a stabilisation there.
“Europe in particular has been much stronger than people anticipated. France, Germany, Italy, Spain; these big powerhouses of central Europe are all coming out with pretty buoyant consumer surveys and economic growth.
“While some of these countries are still struggling with youth unemployment, it is improving. The political risks are alleviated as well with Macron’s huge majority.
“In the US, we have to avoid the noise of Donald Trump but actually the US Federal Reserve is increasing rates, so it obviously has some confidence that economic growth is relatively resilient.”
Given these views, investors may jump to the conclusion that Hallett favours stocks residing in the global-facing FTSE 100 index. Despite holding British American Tobacco (which he favours for its secular growth ability) in his top 10, more than half of his stocks are mid-caps.
What’s more, only 37 per cent of his mid-cap exposure is held in FTSE 250 stocks – the remainder are larger, global-facing FTSE AIM constituents.
“In the last few years, the percentage in AIM within the fund has increased but that doesn’t mean we have more smaller companies,” the manager explained. “Some of these AIM-listed stocks we like include Abcam, which is a global retailer of enzymes and proteins and is a £2bn stock. We have Boohoo which is £1.5bn, ASOS is £5bn. Purple Bricks is over £1bn.”
The FTSE 250 stocks Hallett holds in his portfolio are also-global facing, with 80 per cent of the fund’s underlying revenue exposure coming from overseas markets.
Examples of global mid-caps the manager invests in include BBA Aviation, global veterinary pharma firm Dechra and home insurance provider Homeserve.
“I look to find companies within the portfolio that have secular drivers for growth rather than being economically-sensitive – invariably most businesses are geared towards growth one way or another,” Hallett said.
“So when I look at stocks, if they’re geared towards more of a global franchise across markets then that is definitely a more positive factor than finding a decent secular growth business in the UK, for instance.”
Over the manager’s tenure, Marlborough UK Multi-Cap Growth has outperformed its average peer and the FTSE All Share index by 149.6 and 147.41 percentage points respectively, with a total return of 279.44 per cent.
Performance of fund vs sector and benchmark under Hallett
Source: FE Analytics
The fund has a clean ongoing charges figure of 0.85 per cent.