Discipline has always been important for fund managers, but this is particularly true for UK managers today, as sentiment remains subdued despite signs that household finances are in better shape than widely assumed.
Many UK funds have had a poor run as a consequence, but it’s important to stick to the process even if that’s not paying out at the moment, according to Martin Walker, co-manager of the Invesco UK Opportunities fund.
“If someone asked me what makes a good fund manager, I’d say it’s someone who is consistent with their strategy and executes well. Executing well is all about the process – you’ve got to have a good process and then trust it. Over time that will compound,” he said.
This doesn’t mean that the process is set in stone, however. In fact, the opposite is true: it should evolve with the industry and, as new tools and technology become available, it should harness them (or at least trial them to decide if they are useful).
“We use an external tool that is very valuable for us – not so much in identifying where things have gone badly wrong (we’re viscerally aware of those situations), but where things have quietly started underperforming, but because it’s in the background, you haven’t noticed.”
This doesn’t necessarily mean you have to sell that idea, but it’s important to get to the bottom of why it isn’t working and be prepared to move on if the thesis has changed.
This is where sell discipline becomes important.
“Don’t fall in love with stocks because they won’t love you back”, he said, repeating advice given to him early in his career.
Managing risk and letting go of stocks when needed, recognising when an investment thesis has changed, is one of the main lessons he learnt as a fund manager.
“It’s important to be sceptical and to have a strong sell discipline. One of the biggest leaps a fund manager needs to make in their career is to understand that they’re not always right. Once you’ve liberated yourself from your own ego, everything becomes much easier.”
Invesco UK Opportunities is a £1.8bn, bottom-up, high-conviction, valuation-focused strategy, underpinned by the belief that the valuation of a stock at the point of purchase is a key determinant in later success.
However, Walker interprets valuations “quite flexibly” and not too dogmatically.
“We don’t want a portfolio entirely made up of low-P/E [price-to-earnings], high dividend-yield stocks, because that would be limiting.”
Value can express itself in a number of ways, he continued.
“A stock could be undervalued versus its own history, it could be undervalued versus peers, it could be undervalued from an absolute perspective, or it could be undervalued because it’s a unique or idiosyncratic asset.”
In terms of value, the fund hasn’t been short of opportunities recently. Walker pointed to National Grid, a company that owns energy transmission assets in the UK and in the US.
He was particularly excited by its “significant pipeline of capital expenditure opportunities”, in the US to hook up data centres, and in the UK in relation to net-zero goals.
“In the next five years it plans to invest $60bn as a business across the group. The business is fully funded and can grow its asset base on an annualised basis between 8% and 10%,” the manager said.
“In addition to that, it will grow its earnings base and therefore it can grow its dividend base. Dividend yield is around 4% and we would expect that on average to grow at maybe between 6% and 8%. As a highly defensive, economically insensitive asset, that feels like a pretty good stack up in terms of potential risk/reward.”
The pockets of opportunity and value available in the market are being tampered with by a lack of momentum, but the manager remained optimistic.
“There’s a lot of negativity around the UK economy at the moment, but it’s important to put it into perspective, as the issues we have – public spending, fiscal indebtedness et cetera – are broadly shared by most Western economies,” he said.
“UK consumers are also in robust shape. Their ‘net-cash position’ is the strongest it’s been since before the financial crisis in 2008 and savings ratios continue to remain high.”
As we move towards the Budget next week, rising taxes mean “there is scope for interest rates to come down, and that in and of itself could be a positive for the UK economy”.
“It could stimulate the housing market, because mortgage rates will start to fall, and stimulate consumer spending. Look at the sectors to play this, the housebuilding sector would be a good place and associated sectors such as construction and real estate, but also consumption,” he concluded.