Industry Voice: With valuations at multi-year lows and the UK out of favour with global investors, what's the right approach for a UK equity income manager? Chris Murphy, manager of the Aviva Investors UK Equity Income Fund, says there are some rich pickings amid the volatility.
Murphy is clear that the UK has been unloved: "There has been a flow of money away from the UK. Towards the end of last year, there were also concerns over US and world economic growth, which has moved people away from equities in general."
However, he points out, investing in equities is a long-term game and investors are buying the strategy of the company, rather than the UK economy: "Every sector in the UK is on a discount and some significantly so. Not because they are bad companies, but because people have walked away from the UK."
He believes this creates real opportunities, saying he is more excited now by the options available to him than for many years: "I'm not a fan of straight line growth. Companies and investors can become lazy. Our instinct is to sell into that greed." Today, he argues, there is more to look at.
On almost all measures, Murphy says, valuations look good - from price to earnings, or dividend yields to price-to-book ratios, he has rarely seen UK equities cheaper. However, in his view, it is not enough to say that opportunities exist simply because UK equities are cheap. There are areas that are cheap that don't cross his radar. However, he believes the fundamentals for many UK companies look good as well.
This includes some domestic-focused companies. While there is plenty of choice among international focused stocks, domestic companies have been hard hit. However, Murphy is clear there are plenty with good underlying structural stories: "Companies such as Ibstock, which has high free cash flow and a robust business. There is still a shortage of bricks."
He has also added to Tesco, where the Booker deal has helped drive margins. He is even investing in some high street names, continuing to support companies such as DFS. Similarly, companies such as Land Securities have been hit because they hold some high street retail assets, but these tend to be in high-quality shopping centres, where demand is holding up.
Elsewhere, he believes it is important to be holding the winners in sectors that are consolidating. This includes companies such as Ashstead, which is focused on plant hire and construction. He bought it when the share price had seen a 20-30 per cent fall and it has subsequently bounced back strongly: "There are opportunities everywhere."
Webinar: Ten years of a no-nonsense approach - register today for Friday, 17 May, 2019. Chris Murphy will discuss the lessons learned over his ten-year tenure managing the Aviva Investors UK Equity Income Fund and why he believes there is still value to be found in the UK.
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