The surge of ‘global’ energy companies into the UK market has nudged a number of highly established businesses into the FTSE 250, which these managers believe has made the FTSE 100 more risky.
“Valuations of the UK stock market, at least on a myopic forward PE basis, look reasonable at 9 times,” explained Lyon, who heads up the FE five crown rated Trojan fund.
“We believe these valuations are distorted by the constituents of the index that have changed dramatically in recent years. We are also very concerned that the quality of the market has declined in recent years with the loss of Allied Domecq, Cadbury, Gallaher, Reuters and Scottish & Newcastle.”
“These companies have been replaced by the likes of Fresnillo, Glencore International, Eurasian Natural Resources, Evraz, Kazakhmys, Polymetal International and Vedanta, none of which pass our business quality or governance thresholds.”
“Our instinct is that UK equities are not as cheap as they appear at first glance. The median PE, as opposed to an index weighted average PE, explains the aberration. While not excessive, at 14 times this is hardly a bargain.”
The view reflects Lyon’s defensive stance, which has seen his fund surge to the top of the league tables during a difficult ten year period for equity investors. According to FE data, Trojan is the best performing funds in its IMA Flexible Investment sector over the last decade, with returns of 151.01 per cent. Its FTSE All Share benchmark has delivered 83.29 per cent in this time.
Performance of fund versus sector and benchmark over 10yrs
Source: FE Analytics
It also tops the sector over one and five years, and it’s a top quartile performer over a three year period as well.
As well as being a top performing, the fund is one of the least volatile in its sector, and was one of very few that managed to break even in 2008.
The £2bn fund is soft-closed, but existing investors can still add to their positions.
Gervais Williams, formerly of Gartmore and now manager of the Diverse Income Trust and Acuim UK Multi Cap Income, also feels the relative ‘cheapness’ of the UK market has been exaggerated.
“PE ratios are cheap on a relative basis, but you can’t look at these things in isolation,” he said. “There are companies in there that are cheap for a reason, and extremely volatile – something you wouldn’t normally associated with a FTSE 100 company.”
“People seem to think just because an energy company is trading at six or seven times it will normalise, but this is just fair value. Their quality of earnings isn’t as strong as those they’ve replaced.”
“Formerly we had really great companies like ICI, which has been replaced by something like Essar Energy – a company that came in two years ago and fell by 70 per cent. Any index funds – which are held by a lot of pension investors who assume they’re invested in safe UK large caps – have taken a hammering as a result.”
Williams’ cautious stance is one of the reasons why he opted to leave his purely growth focused investment approach behind him, and launch two equity income products.
“Following my exit from Gartmore, I began writing a book about stockpicking the current climate, which reset my attitude towards investing,” he said. “I realised very quickly that the best way to make money whilst managing volatility is through income paying stocks.”
Performance of manager versus peer group over 10yrs
Source: FE Analytics
Williams has returned 198.38 per cent in the last decade, compared to 119.09 per cent from his peer group composite. Acuim UK Multi Cap Income is up 6.44 per cent since its launch in October 2011, marginally outperforming its sector average with less volatility.