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The Share Centre: Why we’re backing UK stalwarts Penny and Woodford despite Brexit

25 September 2018

Investment manager Sheridan Admans explains why he remains bullish on UK equities and highlights two fund managers he is using to play the market.

By Jonathan Jones,

Senior reporter, FE Trustnet

UK assets look good value regardless of the outcome of Brexit, according to The Share Centre investment manager Sheridan Admans, who has been building up an overweight position to UK funds for nearly a year.

Brexit has understandably dominated the headlines since the referendum on continued EU membership in June 2016, with the state of ongoing negotiations are moving forward hard for UK-based investors to ignore.

“This has seen sentiment towards investing in UK equities sink with outflows from active UK managers reaching into billions over the course of the last few years,” Admans said.

Indeed, fund manager surveys have revealed how unpopular the UK has become despite the resilience of the FTSE All Share has been in absolute terms – although it remains some way off the wider global equities MSCI World benchmark.

Performance of indices since Brexit vote

 

Source: FE Analytics

He added: “Yes, Brexit is likely to continue to be a drag on investor confidence in the interim however, the economic situation has been better and more resilient than many expected – the wheels haven’t come off.”

In Philip Hammond’s spring statement, the chancellor of the exchequer raised the UK growth forecast to 1.5 per cent up from 1.4 per cent, while borrowing expectations were revised downwards and a small current surplus expected for 2018/19.

“All the while, the forward [price-to-earnings] P/E on the FTSE All Share index is around 13-14x earnings well below the long-run average and rates are still likely to remain below historical norms for some time to come,” Admans said.

However, a key draw for the UK market is that not all companies are domestically-focused, with the blue-chip FTSE 100 index generating around 75 per cent of its revenues overseas. Even the domestically-focused FTSE 250 generates around 50 per cent of its revenues from abroad.

The investment manager said: “We have a mix of UK and overseas revenues which help to diversify some of that risk away and that comes back to the point that if we get a ‘no deal’ Brexit or something else and we see sterling weaken, overseas earners should do quite well out of that.

“On the flipside we get a good Brexit – although I’m not sure what a good Brexit is – investors start coming back to the UK and that would be the upside.”


As well as this, the fall in sterling has meant that UK companies are now being the subject of takeover bids, with the likes of Sky and Randgold Resources two high-profile examples in recent weeks.

This is because, on a look through basis, UK stocks are now on cheap valuations relative to the rest of the developed world.

“Valuations have been trading sideways for some time and I think it has been while we have seen them trading in this range,” Admans said.

As such, the investment manager has been buying back into the UK, adding significantly since November 2017 and expects to continue to do so.

But with an economy that is likely to lag the rest of the world, he added that this competing set of factors means investors should be taking an active approach to the home market.

He said: “[We are looking for] managers that can navigate us around that space so we can partake in the upside but if the UK markets takes a turn for the worst our downside is not as great as it could be.”

One such manager he continues to back is FE Alpha Manager Neil Woodford, with the Woodford Patient Capital investment trust held in its portfolios.

Despite losing 14.25 per cent since its launch in 2015 compared to a 32.2 per cent rise for the average peer in the IT UK All Companies sector, Admans is sticking with the trust.

Performance of trust vs sector since launch

 

Source: FE Analytics

“We are looking for managers that are quite nimble around the market and can look for opportunities that are a bit more broad than mid- or large-caps,” he said.

Around two-thirds of the trust’s portfolio is held in unlisted pharmaceutical and biotechnology companies, which plays into a key theme for the investment manager.

While these companies are fairly illiquid, these companies are not listed and therefore will likely be less correlated to any Brexit-related falls in the market.

“The underlying companies have got ‘angel’ type investors rather than lots of market participants that can easily access those businesses,” he noted.

However, as the investment trust itself is listed, it will not be completely unaffected by investor sentiment.


Another fund he is expecting to buy into is the new CRUX UK Special Situations fund run by former L&G Investment Management fund manager Richard Penny.

“We followed him at L&G in the Alpha and Special Situations funds and we think that it is a good environment for Richard,” he said.

The fund manager has a value bias in the stocks that he chooses and is a highly active manager across the entire market capitalisation spectrum.

With a myriad of factors potentially impacting the UK market over the next 12 months, this environment should be one in which he can find numerous opportunities, Admans said.

“For us that go-anywhere value bias is an interesting opportunity and suits this environment which has got a lot of question marks and concerns hanging over it,” he added.

Penny ran the L&G Alpha Trust from its launch in 2005 to the end of last year – before he moved to CRUX. During this time he achieved a total return of 319.2 per cent, beating the average IA UK All Companies peer by 157.24 percentage points.

Performance of fund vs sector under Penny

 

Source: FE Analytics

“Penny is a UK asset manager that has proved in his previous tenure that he has what matters and the expertise for investing in mid- and small-cap equities,” said Admans.

He is seeking out businesses that are under-researched and under-priced, that are in recovery mode, which may have valuation anomalies or previously fallen short of expectations but crucially that have catalysts for change that should re-rate the share price.

This can could include refinancing, M&A activity, secular growth opportunities or event-driven strategies.

“All which I believe provide ideal characteristics for picking winners in this market,” Admans said.

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