UK equity managers split on domestics

Aegon’s Adams and Gartmore’s Himsworth differ on domestic stocks but both aim to avoid crowded trades

Aegon’s head of UK equities Stephen Adams has increased his exposure to unloved domestic stocks amid concerns of increasingly crowded trades in overseas earners.

Adams, who manages the £184m UK Equity fund, says he still favours stocks with overseas exposure but believes their growing popularity among investors has created good opportunities among more UK-centric names.

In recent weeks Adams has taken advantage of volatility surrounding both Royal Bank of Scotland and British Airways to build his holdings in these companies. The moves were part of an overall 2.5% sell-off of FTSE 250 stocks in the portfolio in favour of FTSE 100 names.

“We had the tilt towards overseas earners but felt it had become a bit of a crowded trade and began looking for companies offering better value,” Adams says.

“We bought RBS a few weeks ago but added to it amid the recent falls and it is now 1.7% of the fund. It is trading on extremely low valuations – about 0.9 times book value. We don’t think it will ever return to the price it hit in the past but we could see it going to 1.2 or 1.3 time book, so there is still plenty of upside there.

“It is a similar story with BA. There are a lot of negatives surrounding it, such as strikes and volcanic ash disruption but we believe the underlying business is improving and that has been disguised and not properly recognised by the market.”

Meanwhile Gartmore’s head of UK equities Leigh Himsworth says uncertainty in the aftermath of the election has driven him to limit domestic exposure.

“We cannot rule out another election in six months time, and the markets hate uncertainty,” he says. “My view is to step back, and take a stance on what is likely to happen.”

Himsworth says there are signs the UK is in recovery, although it is muted. “You need to take positions in companies that will benefit from the recovery whether they are small, mid or large cap,” he says.

Reducing domestics in favour of overseas earners does not necessarily mean piling into FTSE 100 miners, Himsworth says. He points to opportunities within FTSE 250 companies in sub-sectors such as software.

However, stocks that rely heavily on public sector spending will be hit as the new Government tries to cut costs and rein in the Budget deficit.

“Anything in support services will suffer because it is dependent on public spending. Cobham will be affected by the hiatus in spending, and Capita and RM Group will not be a good place to be in the long term,” he adds.