MitonOptimal’s Peter Geikie-Cobb is using UK REITs to generate income across his three multi-asset portfolios, pointing out they currently trade at about a 45 per cent discount to their carrying value.
Geikie-Cobb – who manages Optimal Multi Asset Balanced, Optimal Multi Asset Defensive and Optimal Multi Asset Opportunities – is upbeat about global equities in general, saying that the macroeconomic picture is improving with the threat of a trade war declining and China adding liquidity to its system.
“After the big sell-off in the fourth quarter of last year, our process, which involves screening all the markets on various valuation metrics, all came up green,” he said.
“That being said, we have had such a good run in the first two and half months of the year that if you are starting from a position of 100 per cent cash, you might be a bit cautious about getting in.
Performance of index in 2019
Source: FE Analytics
“Had you been pretty long in the first few months of this year you might want to be taking some risk off the table. But on a more strategic time horizon, we think the market looks reasonable.”
One region Geikie-Cobb is particularly keen on is the UK.
The manager said that while the media has focused on Brexit, the UK economy has surprised to the upside and the budget deficit has improved. He added that this has led to a lot of pent-up demand, with many businesses waiting for clarity on Brexit before they commit to any major investment.
“James [Sullivan, managing director at MitonOptimal] and I liken it to a roundabout that works better when the traffic lights aren’t working,” he continued.
“There has been so much political energy focused into the whole Brexit argument that the rest of the economy and policy has been left to get on [by] itself, so there is a certain irony that actually the UK is doing OK.”
The manager said the UK’s progress is not without its downside to a multi-asset portfolio, pointing out that while UK investors have been major beneficiaries of sterling’s collapse since the June 2016 referendum, a rebound could deliver a short-term shock. As a result, he has taken exposure to foreign currencies across his three portfolios down to their lowest rate for some time.
However, he is mainly optimistic about the opportunities created by the Brexit fallout, adding: “If you are not going to buy the UK market on 10 times [earnings], when are you?”
The MitonOptimal manager thinks the UK REIT (real estate investment trust) market looks like an ideal way to play this theme.
“We have got reasonably sized positions in British Land, Land Securities and Hammerson,” he explained.
“The thinking behind that is that it would be fair enough to have a cautious view on property, but these REITs are massively discounted, at about 45 per cent to their carrying value [purchase price rather than market value], which have been proved to be correct because they sold assets along the way.
“LTVs [loan-to-value ratios] are significantly lower than they were going into the financial crisis and of course you are picking up a 5 per cent coupon along the way.
“So, we think REITs are a reasonably solid way to generate some income. And if the whole Brexit thing is ultimately resolved one way or another and sterling rallies and interest rates begin to edge up a bit, then the REITs should actually do very well.”
Betting on a binary event such as a positive Brexit outcome is, of course, not without risks.
While the EU referendum in June 2016 had a negligible impact on the underlying assets owned by British Land, Land Securities and Hammerson, each REIT’s share price fell by at least 20 per cent in the next two trading days.
Post-referendum performance of REITs
Source: FE Analytics
Geikie-Cobb said he intends to use further volatility of this type as a buying opportunity for his Optimal multi-asset range, adding that there are numerous tactical features in the investment company market aside from playing discounts that he can take advantage of.
And, in any case, the MitonOptimal manager believes the UK market is unlikely to fall much further in the event of a hard Brexit.
“I think Brexit is certainly a risk that can’t be dismissed,” he continued. “It could be really horrible.
“But I think a bad outcome has been pretty much priced in. You look at equity valuations relative to other parts of the world, sterling, if you look at London as a city in terms of how it ranks on the global most expensive cities, you know it has dropped from number two to 22 in the last two years. Central London property has repriced.
“There is a lot to worry about on the macro side and I am not suggesting it is a bed of roses. But at the end of the day there is a price for everything.”
Data from FE Analytics shows that Geikie-Cobb has made 50.09 per cent since he started running money in October 2003, compared with 72.81 per cent from his peer group composite.
Performance of manager vs peers over career
Source: FE Analytics
He is the latest in a long line of managers to highlight the value in the UK market.
In December last year, Jean Roche of the Schroder UK Mid Cap trust noted that UK equities were at the cheapest level relative to gilts since the second world war.
Schroder Income Growth’s Sue Noffke said the FTSE was pricing in dividend cuts far worse than the financial crisis at the start of 2019.
And, in February, Lowland’s Laura Foll pointed out the Bank of America Merrill Lynch (BofAML) Fund Manager Survey had had to adjust the scale on its chart to show just how out of favour the UK was among international investors.