Hear the manager's thoughts from the UK Equity Breakfast
SVM Asset Management
Neil Veitch, Investment Director, manager of the SVM UK Opportunities Fund
1. Can you give a brief overview of your fund and how it may work in a client's portfolio?
In a crowded marketplace, it can be difficult to stand out from the crowd. Our approach is designed to not only outperform in rising markets, but to minimise downside risk during tougher times.This is a stock-picking fund with a value bias, but it has a different view on what constitutes value. We see value and growth as two sides of the same coin, both looking for mispriced situations relative to the growth on offer.
We look for ideas under every stone: meeting management - which almost always tells you something new; screening for firms that have underperformed or noting where trading is picking up; and encouraging our analysts to follow their intellectual curiosity unconstrained by artificial sector considerations.
2. What are some of the key issues you discussed with delegates at the event?
When businesses have a short-term downturn in their fortunes, it can cause the market to lose interest affording an opportunity for patient investors. Taking a longer-term view and buying something out of favour can generate significant returns. Value investors often sell early, due to overly conservative assumptions. We aim to be more realistic. We build our own financial model for each holding help estimate a stock's intrinsic value and generate a price target. This provides discipline so we don't get too greedy.
During the first quarter we added food manufacturer Greencore to the portfolio, following a pullback in its share price. Greencore's core UK business has performed well in recent years, but the group has struggled to replicate this success elsewhere. Having invested around $1bn in the US, the company has thus far proven unable to deliver an adequate return on this invested capital. It has had to address issues of excess capacity and change its route to market in recent years. While uncertainties remain, we believe the risk/reward profile has shifted following the recent update. We have taken a 1% position, which represents half the normal unit size for a new stock in the portfolio. As our confidence increases, we will increase that weighting over time.
BMO Global Asset Management
Morgane Delledonne, ETF Investment Strategist, Systematic Strategies (EMEA)
- Can you give a brief overview of your fund and how it may work in a client's portfolio?
Our covered call strategy, followed by BMO Enhanced Income Equity ETFs, distributes a continuous stream of income from writing call options on the underlying index - S&P 500 Index for US equities, FTSE 100 Index for UK equities and Euro Stoxx 50 Index for eurozone equities. Overall, the strategy provides an option yield, ranging between 2 to 4%, on top of the dividend yield. The defensive nature of the strategy can be utilised as an alternative to ‘low volatility' and ‘high dividend yield' equity factor investing, or as a good complement to ‘riskier' conviction investments, as it can improve the risk-adjusted return of the overall portfolio.
Source: BMO Global Asset Management, Bloomberg, dividend yield as at 29.03.2018
2. What are some of the key issues you discussed with delegates at the event?
The sudden recognition that markets were potentially complacent about inflation has resulted in an abrupt change in the market's expected volatility that has unlocked an opportunity to access increased yields. The revived inflationary threats and the possibility of higher rates, which could erode corporate profitability, have resulted in a burst of volatility. We expect the high volatility to revert back to its long-term average (15%) as the economic backdrop of synchronised economic growth and strong corporate earnings remains supportive for equities. However, we anticipate further bursts of volatility throughout 2018 amid higher market sensitivity to inflation.
Our strategy is likely to benefit further in 2018 as higher volatility implies that writing covered calls will become more lucrative from increased premiums. Market downturns increase the volatility that the market participants are expecting (i.e. implied volatility). As a rule of thumb, when implied volatility increases (decreases), call premium increases (decreases). If the volatility level settles at its long-term average, the annualised option yield will increase from a target of 2% per annum in the previous low volatility (10%) environment, to around 3% per annum in the UK, US and Europe. This presents the ideal conditions where BMO Enhanced Income Equity ETFs could outperform the underlying benchmark, which are when equity markets are slightly improving, falling or directionless.
Capital is at risk and investors may not get back the original amount invested.
Shares purchased on the secondary market cannot usually be sold directly back to the Fund. Secondary market investors must buy and sell ETF Shares with the assistance of an intermediary (e.g. a stockbroker) and may incur fees for doing so. In addition, investors may pay more than the current Net Asset Value per Share when buying ETF Shares and may receive less than the current Net Asset Value per Share when selling them.
Views and opinions have been arrived at by BMO Global Asset Management and should not be considered to be a recommendation or solicitation to buy or sell any products that may be mentioned.
Invesco Perpetual
Martin Walker, UK Equities Fund Manager
1. Can you give a brief overview of your fund and how it may work in a client's portfolio?
The Invesco Perpetual UK Growth Fund aims to achieve capital growth in the UK. The high conviction fund has low portfolio turnover and typically holds stocks for three to five years. Broadly speaking, the portfolio will hold 40-60 companies at any one time. Martin Walker deploys a bottom-up, valuation-driven approach to stock selection, with valuation at the point of purchase being the key driver of investment decisions. With no inherent stock or sector bias the fund can be positioned to respond to both underlying market conditions and individual investment opportunities. The key advantages include:
- Valuation: investing in attractively valued stock in diverse areas of the market.
- Contrarian view, the fund manager seeks non-consensus opportunities
- Long-term and high conviction portfolio
The Invesco Perpetual UK Growth Fund may use derivatives (complex instruments) in an attempt to reduce the overall risk of its investments, reduce the costs of investing and/or generate additional capital or income, although this may not be achieved. The use of such complex instruments may result in greater fluctuations of the value of the fund. The Manager, however, will ensure that the use of derivatives within the fund does not materially alter the overall risk profile of the fund.
2. What are some of the key issues you discussed with delegates at the event?
The UK equity market has been widely out of favour, as has value investing. This has created very significant value opportunities in a number of areas of the market, which the manager believes provide compelling scope for active value as a strategy to come to the fore. The manager believes that there are great opportunities, not only given the outlook for UK equites, but great opportunities full-stop. The manager would highlight the comments made on the UK Retail sector, where he sees very compelling idiosyncratic stories with fundamentals that are at odds with current market valuations, and his view on the profitability emerging in the oil sector, where he is overweight the benchmark - the IA UK All Companies sector - in a number of key stocks.
Old Mutual Global Investors
Ed Meier, Manager Old Mutual UK Equity Income Fund
- Can you give a brief overview of your fund and how it may work in a client's portfolio?
The Old Mutual UK Equity Income Fund aims to combine a premium yield to the FTSE All -Share Index with low volatility. This is a total shareholder return approach, with yield a core component. Through careful monitoring of income into the fund, the manager can allocate capital between different ‘buckets' of income stocks - a mixture of high yielding shares, recovery situations and growth compounders. By positioning the fund this way, the manager aims to optimise yield, as well as maximise capital performance.
- What are some of the key issues you discussed with delegates at the event?
During the presentation, the manager paid particular attention to the banking and mining sectors. While it would seem that investors believe UK banks are not the most obvious places to look for yield, dividends have been held back by legacy issues; most notably, PPI payments. With the bulk of payments largely settled, and banks' capital buffers restored from the lows of the global financial crisis, the manager believes banks are in a much better place to start restoring, or paying increased dividends to shareholders. This, in turn, should drive improved share price returns. Furthermore, changes in the mining sector relating to reduced M&A activity and capex spending have meant that the cashflow of mining companies has vastly improved. This, in turn, has resulted in increased pay-outs to shareholders and some handsome sector yields. By highlighting the two sectors, the manager was keen to emphasise the point that his fund was not reliant on traditional sources of income when aiming to achieve a premium yield to his benchmark index.
J.P. Morgan Asset Management
James Illsley, Portfolio Manager
- Can you give a brief overview of your fund and how it may work in a client's portfolio?
Our innovative JPM UK Equity Core Fund's low cost, low active risk approach aims to produce consistent returns from the UK stock market by taking many small active stock positions, while reducing risk at the sector level. This fund sticks closely to the index, but unlike a tracker, it aims to deliver small incremental excess returns that add up over time. It does this by taking small overweight positions in attractively valued, high quality stocks with positive momentum, and small underweight positions in stocks that are expensive, low quality and have weak momentum. By exploiting stock-specific opportunities across the market cap spectrum, the fund has delivered consistent excess returns above the index since the inception of the strategy.
2. What are some of the key issues you discussed with delegates at the event?
We discussed which areas of the UK looked cheap relative to global peers. At a stock level, examples include BAE Systems looking cheap relative to US defence prime contractors. At a sector level, UK pharmaceuticals offered investment opportunities with companies such as Shire looking cheap when compared to other global pharma firms. We also covered the outlook for UK investment and the fact that the UK was one of the most unloved markets. The result being that UK equities were trading at attractive valuations on a dividend yield basis and Cyclically Adjusted Price to Earnings (CAPE) basis.
The results of the Bank of America Merrill Lynch survey were discussed. This survey has highlighted where the opportunity lies in unloved areas, such as the UK. The flip side, however, is where investors are most overweight and have seen the most inflows, for example in tech stocks. These areas will be vulnerable to a change in sentiment and with their demanding valuations will not offer much protection.
