The UK equity market has performed strongly since the losses sustained in the aftermath of the global financial crisis, with the FTSE All Share up over 100 per cent since March 2009. However, with debt-to-GDP still at an all-time high and further austerity on the horizon, many experts question the sustainability of this run.
Felton (pictured), manager of the £650m M&G UK Growth fund, accepts that there are still headwinds facing the UK economy, but says encouraging signs have prompted him to increase his exposure to domestically focused stocks. "At the margin, the economy is looking a lot healthier," he said. "The major help has come from early comments from the incoming Bank of England governor Mark Carney, who is not only targeting inflation, but growth in nominal GDP as well."
"This has had the desired impact already on consumer and corporate confidence, and we’re seeing more spending across the board."
"Equities in isolation aren’t cheap, but they’re a better investment than pretty much everything else. However, we’re still finding opportunities and have recently sold out of a lot of expensive defensives in favour of some interesting cyclical stocks."
Felton says the recent recovery in UK house prices is supportive of his more optimistic view, which Gunn, manager of the four-crown rated Jupiter Distribution fund, agrees with.
"We’ve seen [the recent fall in market] as a buying opportunity, as we remain optimistic about the economy," he said.
Performance of index over 3yrs
Source: FE Analytics
"If anything, the outlook for the UK is getting better. If you strip out the QE effects, real money supply growth is going up, and the most obvious sign of this is that the housing market has been improving."
"The US economy has been doing very well, and the housing-based recovery has been a big help. I’m optimistic the UK is in a good place as well."
Gunn (pictured) says he has been rotating out of expensive defensives, many of which are proxies for the bond market according to the manager, in favour of more economically sensitive names. He says the fact that defensives have in many cases fallen harder than cyclicals in the recent sell-off implies that sentiment could be beginning to change.
Felton agrees, and believes that domestically focused UK equities are particularly cheap compared with those with indirect exposure to emerging markets.
"It wasn’t so long ago that everything emerging market was on a discount to the market, because of worries over currencies and corporate governance, but in the 2000s we saw a big move to emerging markets," he said.
"These stocks are now on big premiums. With the benefit of a more supportive backdrop, I think the trend will begin to reverse back in to the domestically focused market."
Felton is heavily underweight the consumer goods sector, which has significant exposure to emerging markets. He points to SAB Miller, Unilever and Reckitt Benckiser as particularly expensive companies.
Instead, he has major bets in the UK banking sector, with overweight positions in Lloyds and RBS.
Felton is also optimistic about the outlook for the battered mining sector, which has been one of the few areas that has not participated in the UK equity rally in recent months.
"The mining sector is struggling because of concerns over China, but if you’d just arrived from Mars and looked at the valuations of the four major mining stocks, they look attractive," he explained.
"Three of the four have had changes in management recently, and are all saying the right things. They’re looking to reduce capex and return more value to shareholders."
Felton holds Rio Tinto in his top-10, and has also recently added to positions in Glencore and BHP Billiton. He does not hold anything in Anglo American.
He took charge of the M&G Growth fund late last year, after spending nine years heading up the now closed M&G UK Select fund.
The manager says he has aimed to make the fund more high conviction in its approach, which should distinguish it from the average UK All Companies fund.
"My consensus generally is not to follow the herd," he said. "I think it’s important to be high conviction and to stick to a plan."
"I’ve reduced the number of holdings in the fund from 70 down to 57 and increased the mid cap overweight slightly as well."
M&G UK Growth is a third-quartile performer in its sector over one and three years, and second quartile over five and 10. Since taking charge of the fund in December last year, Felton has performed largely in line with sector, with returns of 10.44 per cent.
The fund requires a minimum investment of £500 and has an ongoing charges figure (OCF) of 1.66 per cent.
Gunn has headed up the equity portion of the Jupiter Distribution fund since July 2010. Since then, the fund has returned 27.09 per cent, beating its Mixed Investment 0%-35% sector average by around 10 percentage points.
Performance of fund vs sector since July 2010
Source: FE Analytics
Gunn can only invest a maximum of 35 per cent in equities. His biggest positions include HSBC, BP and Vodafone.
The fund pays out a dividend monthly and is currently yielding 3.5 per cent.
Jupiter Distribution requires a minimum investment of £500 and has an OCF of 1.39 per cent. Gunn co-manages it with Rhys Petheram.
He is set to take over the equity portion of the Jupiter High Income fund from Anthony Nutt later this summer. He will co-manage the five crown-rated fund with co-manager Ariel Bezalel.
