With the UK market facing a number of challenges, in Brexit and a slower recovery from the Covid-19 pandemic, it might be a strange time to be launching a UK equity strategy.
But the manager behind Schroders’ latest investment trust believes investors could benefit from a “once in a generation” opportunity.
Rory Bateman, head of equities at Schroders, said the Schroders British Opportunities Trust will take advantage of depressed valuations for growth businesses in the UK caused by the pandemic and Brexit uncertainty.
Set to launch on 1 December, the trust will be a 50/50 split between private equity investments and public equities, aiming to provide a net asset value (NAV) return of 10 per cent per year.
The opportunity to buy high-quality growth businesses, inject more capital and to facilitate their potential growth – during and post-pandemic – is ‘very compelling’, said Bateman.
He said the uncertainties that have surrounded the UK equity market until now are beginning to clear, and could re-rate.
“International investors love British companies,” he said. “Historically, we’re a fantastic nation of entrepreneurs, but they’re just shying away from us right now, because of this [uncertainty].”
He added: “This fog has perpetuated the market, really for the last three and a half, four years post-Brexit.”
Bateman believes the UK equity market is much like a ‘coiled spring’, highlighting the jump in UK equities after successful Covid-19 vaccine results were announced.
He explained: “Imagine when you get more clarity about the vaccine being delivered, imagine you start getting clarity around Brexit negotiations – hopefully we do some sort of deal – the pound will strengthen, and domestic businesses in the UK will perform very well.”
He said the relative valuations of the UK relative to the rest of the world struck his team as “anomalous” and described the current market conditions as a “once in a generation opportunity”.
Over the last five years, on a total return basis, the UK FTSE All Share is up 24.98 per cent, lagging behind the MSCI World index which is up 88.78 per cent, in sterling terms.
Performance of FTSE All Share vs MSCI World over 5yrs
Source: FE Analytics
Tim Creed, head of private equities at Schroders, said the trust will invest in two types of companies, the first being ‘high growth’ and the second being ‘mispriced’ growth.
He said: “In both cases, they are companies that have had a super history of fast growth. They’re often market leading companies, either domestically or internationally.
“They’re normally great management teams, highly profitable, or at least near profitable, and are really high-quality businesses. The difference is what's happened this year.”
‘High growth’ companies are British businesses that have been positively impacted by the pandemic, and have seen a big spike in revenues this year, much like the pandemic winners in the US such as Amazon and Zoom.
‘Mispriced growth’ companies are ones that have been negatively impacted by the pandemic, but Creed said by giving them more equity, they can grow faster.
He added: “It is not turnaround, distressed, [or] broken companies, it’s really good companies that either had a slight wobble this year, or have actually even grown faster this year.”
Creed pointed out that in the trends such as digitalisation, the transformation of the health care provision, and the transformation of education provision, have all been accelerated by the pandemic, and are particularly evident in the private equity space.
On the public side, Bateman said there are quite a few businesses that they consider to be ‘mispriced’ growth.
“There are businesses that are in the construction sector, in the consumer sector – it doesn’t matter what sector – [and] they hit a bump in the road,” he explained. “They historically have grown really well. They feel a bump in the road because of the crisis.”
“These businesses are already performing very well, except you’re getting them at really attractive valuations.
“What we're talking about here is investing into 30 to 50 British companies right now that have been impacted or benefiting from the crisis right now.
“Every other trust that’s out there, every other fund out there consists of legacy holdings, they’re not related to what’s going on right here, right now.”
Creed (pictured) said the equal 50/50 split between pirate equity and public equity is one thing that makes the trust unique. %20-%20uncut%20and%20300dpi.jpg)
“There are literally hundreds of investment trusts, there are thousands of investment vehicles out there, and almost all of them focus on public equity,” he said.
“There are a small number that focus on private equity, not too many. But there’s none that focus on public equity and private equity, and we think that’s really important, because we want to build a portfolio of all the best companies that are available now.
“We don't want to limit ourselves on just public or private.”
Schroders is set to push ahead with the IPO despite a number of competitor British smaller companies trusts that have failed to launch.
In October, the Tellworth British Recovery and Growth and the Buffettology Smaller Companies both failed to raise enough support to proceed with IPOs this year.
The new trust also intends to take an ‘ESG integrated approach’ – incorporating environmental, social & governance principles into the investment process –to change the way investee companies behave.
“We’re not talking greenwashing,” Bateman said. “We’re talking about more working with teams and management to try to get them to adopt the best possible policies from an ESG perspective.”
They said it will do this by encouraging the incorporation of the UN Sustainable Development Goals and ESG practices.