The recent slump in UK equity, inflationary concerns and news of a 17-year unemployment high seem to present a grim outlook for domestic investment. However, Trustnet Alpha Manager Julian Fosh’s bottom-up strategy has unearthed some encouraging UK stocks.
UK All Companies managers have been highlighting for a while the benefits of investing in UK-domiciled companies that make most of their money overseas. While Fosh acknowledges the difficulties facing domestic growth, he says there are a surprising number of UK companies that satisfy his investment criteria.
Fosh’s strategy is to identify companies that own intellectual property, have strong distribution and a high degree of recurring revenue, with a focus on multi-year contracts.
"Given this approach, we are able to cater for different market conditions," he said.
"On the one hand we have defensive stocks, the big multi-nationals that have historic low valuations at the moment, and on the other we also have some stocks that would be surprising to a top-downer."
The manager identified three companies that he believes are leading the way for domestically focused growth.
"Paypoint is entirely UK-focused and has come out from under a cloud recently, having been under threat from Camelot. It offers an attractive yield on its cash flow," he continued.
"Rightmove is also surprising people following the market crash. Its returns are approaching something near pre-recession levels. Domino’s is another one where investors are getting high returns on capital."
Graham Toone, who is head of research at AFH Wealth Management, says that a bottom-up approach presents opportunities in the UK market.
"There’s so much focus on companies with overseas weightings that domestic companies are getting overlooked. This can affect their share price and make valuations very attractive to investors," he said.
"Anyone thinking of looking for opportunities domestically is likely to have their stock-picking skills severely tested."
Fosh co-manages three funds with Anthony Cross – Liontrust Special Situations, Liontrust UK Smaller Companies and Liontrust UK Growth. Each has outperformed IMA UK All Companies over one, three and five years, with Liontrust Special Situations being the standout performer over three years, returning 49 per cent compared with 11 per cent from the sector average.
Performance of funds vs sector over 3-yrs
Source: Financial Express Analytics
The Alpha Manager still acknowledges there are many threats to the UK recovery and has adjusted his position in response to concerns that the Libya crisis could impact UK markets by pushing oil prices higher.
The fund has scaled back its position to Petrofac as a risk of a rating downgrade in the Middle East increases.
"It’s important to have companies that are financially strong during this economic correction," added Fosh.
"In the context of ongoing sovereign debt, issues in the Middle East, the Japan crisis and inflation, then we are trying to focus on companies with good positive balance sheets."