The FE Alpha Manager (pictured) has topped up an existing holding in his £1.1bn Invesco Perpetual UK Growth fund, also using the opportunity to invest on his family’s behalf.He says the sell-off has made domestic cyclical stocks look particularly attractive, which he has added to in a number of cases.
“I’m really optimistic,” he said. “Because of the way the market has performed this year, if you look at a basket of defensives and a basket of cyclicals, the relative value is as stretched as it was in 2011 during the eurozone sell-off and not far off what we saw in 2009.”
“I would be delighted to hide in low-risk stocks but the valuations just aren’t supportive.”
Walker significantly increased his exposure to cyclicals in late 2011, following the steep sell-off in August. His Invesco Perpetual UK Growth fund has thrived since then, delivering 61.22 per cent since September 2011 compared to 39.45 per cent from the IMA UK All Companies sector average. In 2013 alone, his fund made more than 37 per cent.
Performance of fund, sector and index since Sept 2011
Source: FE Analytics
Walker doesn’t expect to hit the heights of 2013, but says he is more optimistic about the fortunes for his fund than for some time.
He took profits from some of his best-performing cyclical holdings in early 2014, recycling the money into cheaper mega-cap dividend payers such as HSBC, Shell, BP and Rio Tinto.
However, he has topped up positions in more cyclical companies like Belfour Beatty, N Brown, Dairy Crest and Cable & Wireless in recent weeks, as well as initiating a position in Lloyds.
“I wouldn’t say I’m aggressively cyclical – not everything is rosy. I’m just looking at valuations,” he said.
“I’m not trying to build a portfolio based on paranoia and fear.”
The manager says it wouldn’t surprise him if the FTSE finally punctures through its all-time high of 6,950. Pessimists believe much of the market gains in recent years are as a result of quantitative easing (QE), but Walker rejects this view. He welcomes the end of QE, believing that the UK economy is strong enough to shrug it off.
“The UK market is back to its average of trading on 14 to 15 times earnings. When I look at virtually every other market, they’re above long-term averages,” he said.
“There’s a popular argument that the rising tide of QE has driven the market, but I’m not so sure about this given that valuations don’t look expensive.”
“Ironically, the bits of the market that look expensive are the sectors where investors are hiding – pharmaceuticals and so on. I don’t think you can say it’s all QE when it’s the areas where investors are hiding from risk that are expensive.”
His views are in direct opposition to his colleague and fellow FE Alpha Manager Mark Barnett, who runs the Invesco Perpetual Income, High Income and UK Strategic Income funds.
Barnett has a preference for typically defensive sectors and is significantly overweight healthcare and tobacco.
The latter has suffered a steep sell-off recently, but the defensive focus has held Barnett in good stead, with all three of his Invesco funds achieving top quartile performance this year, as highlighted by a recent FE Trustnet study.
Invesco is keen to point out that all of its managers are free to express their ideas, with no house view implemented by chief investment officer Nick Mustoe.
Walker thinks the worries over the recent slowdown in Europe have been blown out of proportion and like colleague Stephanie Butcher thinks the poor data coming out of Germany is a blip rather than a sign of things to come.
“The bears are concerned about a global slowdown, and there is some evidence of this recently in Germany. Our European team thinks this is a soft patch for Europe rather than a major reversal, and I’m inclined to agree with them,” he said.
“If you look at individual and composite PMI [purchasing managers index] data looking six months ahead, things are looking fine. If anything they’re ticking up.”
“Europe is embarking on an asset repurchasing programme, with monetary supply growing by 5 per cent. This is supportive of a more solid backdrop going forwards.”
Elsewhere, Walker points to the strength of the US economy, believing that the recent pullback was led by a bout of profit taking, and also highlights stronger than expected GDP data from China yesterday.
Like fellow FE Alpha Manager Dixon, he believes that recent worries over falling inflation are well over-stated, arguing that they will provide a boost to the spending power of the UK consumer.
Investors should only start worrying when wages, employment and growth fall, Walker argues.
“We’ve seen good inflation, not bad inflation,” he said. “The bears will point to the lack of wage inflation, but I think we are starting to see that start to materialise. As the labour market continues to expand I think you’ll see the rate go up, and it could happen quite quickly.”
Rob Gleeson and his FE Research team are big fans of Walker and his fund, including it in the FE Select 100.
They see his pragmatic approach as a big draw, pointing out that unlike most Invesco managers he became much more bullish post-financial crisis on a valuation basis.
“He is happy to switch between larger and middle sized companies depending on where he sees the best opportunities,” they said.
“The fund tends to do better when markets are rising. However, it will probably go through periods of underperformance given that the manager often makes bold calls that won’t always come off, and investors need to be prepared for that.”
“Its current preference for riskier sectors means that it could struggle in the short run if the UK market remains sluggish.”
The fund is a top-decile performer since Walker took over in June 2008, with returns of 56.65 per cent.
This compares to 39.26 per cent from the IMA UK All Companies sector average and 38.84 per cent from the All Share.
Performance of fund, sector and index since May 2008
Source: FE Analytics
The fund lost less than its peers in 2008 and actually managed to make money in 2011, thanks to its more defensive positioning.
However, Walker’s more aggressive positioning in 2014 has seen it fall behind its sector average so far. Invesco Perpetual UK Growth has ongoing charges of 0.91 per cent.
Walker also runs the £249m Invesco Perpetual UK Aggressive fund, which is essentially a higher-conviction version of the UK Growth portfolio.
Walker took over the fund from FE Alpha Manager Stephen Anness in January 2013.
FE data shows that the manager’s strong stockpicking has seen UK Aggressive outperform UK Growth over the period with returns of 35.3 per cent, though it has had a tougher time during the recent sell-off.
Performance of funds, sector and index since Jan 2013
Source: FE Analytics
Invesco Perpetual UK Growth is a high conviction portfolio in its own right, with the top-10 holdings accounting for 41.16 per cent of assets. UK Aggressive goes a step further however, with a figure of 48.59 per cent.
Aggressive has ongoing charges of 0.92 per cent.
