The UK’s popularity among international investors has plumbed such depths that Merian’s chief executive Richard Buxton (pictured) says he is beginning to understand what supporting Millwall must feel like
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However, he said that just like a Millwall fan, he doesn’t care that “no one likes us” as sentiment towards the UK has fallen so far, it can only go one way from here: up.
Buxton, who runs the Merian UK Alpha fund, pointed to the results of a Bank of America Merrill Lynch (BofA ML) Global Fund Manager Survey from earlier this year showing that 46 per cent of respondents are underweight the UK, compared with just 10 per cent who are overweight.
And these stats mirror what he is seeing on the ground.
“A stockbroker chap I have known for 25 years told me: ‘I have just talked to this New York-based fund manager that just sold their last UK equity’,” said Buxton.
“I said: ‘Sorry, there is not a single UK company listed in London they think is worthy of holding in a global portfolio?’ No.”
“So we are unloved. A colleague of mine is a lifelong Millwall supporter and their chant was always ‘no one likes us, we don’t care’. As a UK equity fund manager, I feel I now know how the Millwall crowd feels.”
Performance of indices since 23 June 2016
Source: FE Analytics
However, despite the fund management community’s aversion to the UK, Buxton noted that M&A activity paints a different picture. He pointed out this year has seen a number of high-profile takeovers by foreign firms of UK companies, including Michelin’s acquisition of Fenner, Comcast’s purchase of Sky and Coca-Cola’s acquisition of Costa Coffee from Whitbread.
David Smith, manager of the Henderson High Income Trust, made a similar point in an FE Trustnet article earlier this year, saying: “Now if that isn’t a ringing endorsement for how cheap the UK is and how in the longer term things will be better after Brexit, I don’t know what is.”
Referring back to the New-York fund manager that sold completely out of the UK, Buxton said: “This has to be some sort of bell-ringing moment. It can only go one way from here.
“People have got to start investing in UK companies when you can see companies themselves are feeling confident enough to do it.
“There is a freak disconnect and I’m more behind the companies than the global fund management community.”
Buxton added that the market also appears to be ignoring “an unbelievably strong entrepreneurial dynamic” in the UK. He pointed out net new business formation is running at double-digit rates and has done for the past five years, while business confidence remains buoyant and companies are continuing to grow and invest for the future.
This is a view echoed by Colin McLean, co-manager of the SVM UK Growth fund, who described the distressed levels that the UK is trading at as “surreal”.
“Someone was saying yesterday that if you think SMEs are treated badly by banks here, you ought to see what they are treated like in Germany,” he said.
“I think the UK has a vibrancy to its economy. Look at what is going on with fintech in Shoreditch. It is the same thing with credit cards: you wouldn’t get things like Revolut or Monzo in France or Germany.
“Last time I was in London, an Irish administrator was talking about how difficult it was going to be for the UK and he said: ‘I think Britain’s best days are behind it’. I said: ‘We have heard that for the last 1,000 years’.”
“My vision is that however Brexit gets sorted out, the UK will still be a major economy.”
While the equity market appears to be pricing in a worst-case Brexit scenario, Buxton pointed out the currency market, where “sterling is judge and jury on this”, is telling a different story. He said he has been watching the pound like a hawk since it plummeted in the wake of the referendum result and at the moment it does not appear to be implying a mass fallout if Theresa May’s deal is voted down.
“In portfolio terms, if sterling does fall, that to some extent protects the multi-caps at the larger end of the market,” the manager continued.
“Conversely, if we do get a soft deal passed, a modest rally in sterling will represent a headwind and a boost to domestic stocks. But I think we will be drowned in overall relief that we have finally got this thing behind us. And that remains my central scenario.”
Buxton and McLean join a growing number of managers who are finding value in UK stocks, whether that is in large-caps which derive the majority of earnings from overseas – as the head of Janus Henderson’s UK-based multi-asset team Paul O’Connor is doing – or in heavily out-of-favour domestically focused stocks, as favoured by Alastair Mundy.
Data from FE Analytics shows Merian UK Alpha has made 113.73 per cent since Buxton joined in December 2009, compared with 104 per cent from the IA UK All Companies sector and 96.07 per cent from the FTSE All Share.
Performance of fund vs sector and index under manager tenure
Source: FE Analytics
The £1.9bn fund has ongoing charges of 0.85 per cent.