Bullishness on UK stocks has been in somewhat short supply of late, with an expectation for lacklustre returns over the next few years apparently the norm and a full-on market meltdown expected by some of the fund management industry’s biggest names.
While the likes of FE Alpha Manager Crispin Odey have a vested interest in predicting plunging markets, as this will give him a fruitful environment for shorting stocks, even the likes of FE Alpha Managers Neil Woodford and Mark Barnett as well as Richard Buxton have become increasingly bearish.
The three stars of UK large cap investing, while not downright bearish, are predicting lower returns this year and all agree the UK election will loom as a risk to markets for the first six months of the year.
Another FE Alpha Manager – Nick Train – is, however, “more bullish than ever”.
Train, who manages the £1bn CF Lindsell Train UK Equity fund and the £500m Finsbury Growth & Income investment trust, says technology will deliver huge boosts to global markets.
“I am bullish because of technology and the implications of technology. The broader impacts of technology change are bullish and are underwriting a secular bull market for equity as an asset class,” he said.
“[For example] the transition from paid text messages to free social messaging, in the case of WhatsApp, means there are some losers. Telephone companies saw £30bn of revenues just obliterated last year, not great for them.”
“But for consumers around the world, something that they value highly has suddenly become free and they have more to spend.”
Train has not added a new holding in Finsbury Growth & Income for more than three years but substantially added to his holding in Burberry, taking it from 2 to 4 per cent, owing to its then chief executive Angela Ahrendts’ goal to make its online store at the heart of its business.
The manager said: “10 or 11 months ago we paid a visit to Burberry to specifically discuss their digital strategy. As a result of that meeting we came to the conclusion that the CEO was being deadly serious and the implications of her claim were radically bullish for Burberry equity.”
“It will also mean bullish implications in another way, because it means they will open fewer stores. The company believes it will be able to maintain its current growth rate, if not accelerate its current growth rate, as a result of the success of its digital strategy.”
“In other words the marginal capital intensity of Burberry business is declining. Almost always when you have this, that is the basis of a great investment.”
Burberry has seen its share price surge more than 28 per cent over the past year, rising at almost three times the rate of the FTSE All Share.
Performance of stock and index over 1yr
Source: FE Analytics
Train says another example of a company in the portfolio benefiting from technology change is Daily Mail and General Trust, which Train added to significantly last year.
“It has an extraordinary online property that they are building in the form of Mail Online. There are now 18 countries where there at least one million visits to Mail Online each month. That includes India, Malaysia, Brazil and – surreally – Finland.”
“It is turning into a truly global phenomenon in way that physical newspaper never could have never aspired to. By digitising its editorial content it is reaching exponentially more customers at lower and lower capital intensity by reaching new readers without the need for dead trees.”
Train says technology is allowing corporations to achieve bigger efficiency gains and cost savings, which is driving a huge wave of bid activity.
“This is validating ever more humongous takeovers. Tech is driving a takeover cycle today. It is no accident that 2014 was the biggest year for merger and acquisition activity since the previous peak back in 2007. Our expectation relative to where we are in this wave, we ain't seen nothing yet. Expect more deals of greater scale,” he said.
“Unilever recently said they will take a €1bn out of their cost base as a result of technology which enabled them to buy an extra 15 per cent of Hindustan Unilever, although they were excoriated for this at the time. However move on another year and the Indian stock market is up 25 per cent as a result of political change and Hindustan Unilever did even better.”
Train has managed the Finsbury Growth & Income trust for more than 14 years, over which time he has built up a reputation as one of the UK’s best stock pickers.
The trust is up 330.84 per cent over this period, more than double the IT UK Equity Income sector average and more than three times the gain in the FTSE All Share.
Performance of trust, sector and index since 2000
Source: FE Analytics
It is on a premium of 1 per cent and has a clean OCF of 0.2 per cent and 4 per cent gearing.
