In a recent FE Trustnet article, Hawksmoor’s Ben Conway said a buying opportunity had opened up in UK funds thanks to Brexit-induced sterling weakness.
Conway, who co-manages the MI Hawksmoor Distribution and Vanbrugh funds with Daniel Lockyer and Richard Scott, says the fact that sterling has fallen some 10 per cent relative to other major currencies means UK equities are now far more attractive to overseas investors.
In particular, he has been upping his exposure to smaller companies given that not only has the FTSE 250 fallen some 10 per cent since the EU referendum due to its inherent ties to the UK economy, but with sterling weakness, the index is some 20 per cent cheaper to the likes of a US investor.
Performance of FTSE 250 in sterling and US dollars since Brexit Friday
Source: FE Analytics
“What we have done is to reduce our overseas exposure, basically because overseas assets have just become 10 per cent more expensive for sterling investors. We have just shaved our overseas fund holdings across the board and it makes an awful lot of sense,” Conway explained.
“On the other hand, what else do we want to do? Well, we want to buy UK equities because not only has sterling gone down a lot, but the prices of the underlying assets have gone down a lot as well.”
“In particular, we are focusing on UK-listed stocks below the FTSE 100 as they are the ones which have been hit the hardest and are therefore clearly more attractive to overseas investors than before.”
He added: “I would recommend that investors, when the sterling moves so significantly, start to look for opportunities in the UK.”
While Conway says he hasn’t made any drastic asset allocation decisions, here he highlights the three UK funds he has been topping up thanks to the plummeting pound.
For his MI Hawksmoor Vanbrugh fund, Conway has been adding exposure to Man GLG Undervalued Assets.
The £480m fund was launched by FE Alpha Manager Henry Dixon, who has a distinct deep value process and will look across the market cap spectrum for opportunities. Currently, Dixon holds 35.9 per cent in FTSE 250 stocks, 16.95 per cent in small caps and 31.17 per cent in FTSE 100 companies.
Man GLG Undervalued Assets had been one of the best performers in the IA UK All Companies sector, however its track record has almost been wiped out by the outcome of the Brexit vote.
Performance of fund versus sector and index since launch
Source: FE Analytics
According to FE Analytics, the fund has returned 8.9 per cent since its launch in November 2013, putting it in the sector’s second quartile and 3 percentage points ahead of the peer group average. However, when looking at its performance from launch to 23 June, it was top quartile with returns of 18.1 per cent meaning it had doubled the gains of its average peer.
The fund’s high weighting to mid-caps hasn’t helped performance, but its 7.79 per cent loss over the past week has also been generated by Dixon’s high weightings to financials thanks to his value approach: Aviva, HSBC and Admiral Group all feature in his top 10.
Over the longer term, Dixon – who has previously managed the New Star Global British Lion and FP Matterley Undervalued Assets funds – has beaten his peer group composite considerably.
Man GLG Undervalued Assets has an ongoing charges figure (OCF) of 0.98 per cent.
MI Downing UK Micro-Cap Growth
Next on the list is the five-crown rated MI Downing UK Micro-Cap Growth fund, which Conway has also been buying for his MI Hawksmoor Vanbrugh fund.
The £20m fund, which is managed by Judith MacKenzie, is a concentrated portfolio of just 30 stocks and will only invest in stocks with a market cap below £150m. MacKenzie takes a private equity-like approach in the fund, often sitting on the board of the companies she owns to try and help improve performance.
She took over the portfolio in February 2011 and while the fund has largely struggled to beat the IA UK All Companies sector average on a calendar year basis, it is worth noting it is highly differentiated from nearly every member of the peer group.
Nevertheless, given its 24.45 per cent return in 2014 which placed it at the top of the sector (the average fund lost 1.65 per cent), MI Downing UK Micro-Cap Growth has comfortably outperformed the peer group under MacKenzie’s tenure.
Performance of fund versus sector under MacKenzie
Source: FE Analytics
Its focus on the index’s smallest constituents has also helped MI Downing UK Micro-Cap Growth during the Brexit turbulence. Potentially due to her fund’s less liquid nature, McKenzie has lost roughly half the amount of the sector since Brexit Friday.
She counts Universe Group, Redhall Group and Conviviality Retail as her top three holdings. MI Downing UK Micro-Cap Growth has an OCF of 1.42 per cent.
Standard Life Investments UK Equity Income Unconstrained
The final fund on the list is Thomas Moore’s £1.3bn Standard Life Investments UK Equity Income Unconstrained fund, which Conway has bought for MI Hawksmoor Distribution given it has a yield tilt.
Though Moore’s five crown-rated fund is one of the darlings of the sector thanks to the manager’s benchmark agnostic approach, his value focus, preference for dividend growth over high starting yield and strong long term returns, it has struggled in 2016 so far.
Indeed, FE data shows the fund has been the worst performing member of the IA UK Equity Income sector so far this year with losses of 14.32 per cent thanks to its high weighting to mid-caps (44.4 per cent) and big positions in financials.
While that sort of portfolio didn’t suit the first half of this year, it was punished even harder when the UK voted to leave the EU.
Performance of fund versus sector and index under Moore
Source: FE Analytics
Nevertheless, thanks to top decile numbers in 2009, 2010, 2012, 2013, 2014 and 2015, Standard Life Investments UK Equity Income Unconstrained is still the third best performer in the sector under Moore and has beaten the FTSE All Share by some 80 percentage points with its gains of 185.08 per cent.
The fund, which yields 4.06 per cent, has also increased its dividend in every year over that time.
Standard Life Investments UK Equity Income Unconstrained has an OCF of 1.15 per cent.
