Liontrust Special Situations, LF Woodford Equity Income, LF Livingbridge UK Micro Cap and GAM Star Continental European Equity are among four contrarian fund picks for investors who are less bearish on the Brexit negotiations, according to Chelsea Financial Services’ Darius McDermott.
One year since Theresa May triggered Article 50 and halfway through the UK's divorce from the EU, UK equities have proved more resilient than some investors had first feared.
Indeed, Chelsea managing director McDermott said for investors willing to look there are still many domestic opportunities for investors.
He said: "Despite being half-way through the allotted time period, it seems there is little clarity about what our departure from the bloc will mean for the value of sterling, the UK market and the broader economy as a whole.
"This is perhaps why the UK equity index, the FTSE 100, has struggled to keep up with its developed market peers over the past year.
"However, just because a stock market underperforms it doesn't mean there aren't opportunities for investors. The UK's smallest companies, in particular, are looking good value.”
Performance of index over 1yr
Source: FE Analytics
As such, McDermott has highlighted LF Livingbridge UK Micro Cap, Liontrust Special Situations, LF Woodford Equity Income and GAM Star Continental European Equity as strategies for investors who are more contrarian in nature.
LF Livingbridge UK Micro Cap
Four FE Crown-rated LF Livingbridge UK Micro Cap is the first contrarian fund highlighted by McDermott, noting its small-cap focus.
He said UK smaller companies saw huge outflows after the referendum with investors failing to return significantly to the “unloved” sector.
“In terms of valuations, they are also at their widest discount to UK large caps since 2001,” added McDermott.
"We like this fund as it is high conviction, is managed by a specialist team and invests in largely unexplored ideas.”
The £108.6m fund has been overseen by FE Alpha Manager Ken Wotton since launch in May 2009.
Wotton targets capital growth through investment in a portfolio of smaller companies traded on the Alternative Investment Market and other indices.
It is overweight financials and business services with main holdings including environmental kitchen solutions Filta Group, energy procurement consultancy Inspired Energy and actuarial consultancy firm Xafinity.
Over five years Livingbridge UK Micro Cap has delivered a total return of 144.52 per cent compared with an 88.40 per cent gain for the average IA UK Smaller companies fund, as the below chart shows.
LF Livingbridge UK Micro Cap has an ongoing charges figure (OCF) of 1.02 per cent.
Liontrust Special Situations
Next up is the £3.3bn, five FE Crown-rated Liontrust Special Situations, overseen by FE Alpha managers Anthony Cross and Julian Fosh.
Although a multi-cap strategy, the fund has a bias towards small and medium-sized companies and uses its proprietary 'Economic Advantage' process, which focuses on companies with unique competitive advantages relative to their peers such as intellectual property, strong distribution channels or recurring revenue streams.
Performance of fund over 10yrs
Source: FE Analytics
According to McDermott, another important factor the managers consider when investing is “how key employees are motivated”, with Cross and Fosh’s preference being for “direct ownership of the company’s equity”.
"This means the resulting portfolio consists of businesses which can grow their earnings independently of the wider economy," McDermott noted.
The fund has been a top performer in the IA UK All Companies Sector over the last decade, delivering a total return of 287. 94 per cent compared with a gain of 101.15 per cent for the average sector fund and a 95.86 per cent gain for the FTSE All Share index.
Liontrust Special Situation has an OCF of 0.86 per cent.
LF Woodford Equity Income
McDermott's third contrarian fund pick is FE Alpha Manager Neil Woodford's LF Woodford Equity Income fund.
Despite being one of the worst performer in its sector over the last three years, some argue the slump in Woodford´s fund may be a buying opportunity, and McDermott is one of them.
“Woodford has had a torrid time of it lately, but he is a very good manager with a strong long-term track record,” he explained.
“If you want a real contrarian fund today, this is certainly one to hold. It is heavily invested in UK domestic stock ideas, as Neil believes Brexit fears have been overdone by the broader market.
“If you want a real contrarian fund today, this is certainly one to hold. It is heavily invested in UK domestic stock ideas, as Neil believes Brexit fears have been overdone by the broader market.”
The fund is overweight financials, healthcare, consumer goods and industrials sectors, with tobacco company Imperial Brands and financial companies Legal & General, Lloyds and Burford Capital among its top holdings.
Performance of fund vs sector and benchmark since launch
Source: FE Analytics
Since launch in 2014, the fund has delivered a 16.65 per cent total return, compared with a 21.02 per cent gain for the average peer in the IA UK Equity Income sector and a gain of 21.23 per cent for the FTSE All Share index.
LF Woodford Equity Income has an OCF of 0.75 and has a yield of 3.76 per cent.
GAM Star Continental European Equity
The final fund on McDermott’s list is the five FE Crown-rated, £1.9bn GAM Star Continental European Equity managed by FE Alpha Manager Niall Gallagher which unlike the other UK-focused funds invests in a broader portfolio of European equities.
Inclusion of the fund on the list is due to its exposure to Ireland, another country set to be directly impacted by the Brexit negotiations.
"The Irish economy is in rude health too, as it is forecast to grow by some 3.9 per cent this year,” said McDermott.
"One manager who is taking advantage of the opportunities presenting themselves on the ‘Emerald Isle’ is Niall Gallagher, who has an overweight in the country if compared with the index.”
Indeed, while the MSCI Europe ex UK benchmark has just a 1.02 per cent weighting to Irish stocks, Gallagher’s exposure stands at 13.5 per cent.
Since Gallagher joined the fund in December 2009 it has delivered a 131.17 per cent total return, compared with a 97.72 per cent gain for the average IA Europe excluding UK sector fund and a gain of 77.64 per cent for the MSCI Europe excluding UK benchmark index.
GAM Star Continental European Equity has an OCF of 1.06 per cent.