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29 March 2018 marks exactly one year since Theresa May triggered ‘Article 50’: the clause in the European Union’s Lisbon Treaty that outlines the steps to be taken by a country seeking to leave the bloc voluntarily.
The date also marks exactly one year until we officially leave the EU but despite being halfway through the allotted negotiation time period, it seems there is little clarity about what our departure will actually mean for the value of sterling, the UK stock 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*.
Of course, just because a stock market underperforms it doesn’t mean there aren’t opportunities for investors.
We outline four contrarian fund ideas investors may wish to consider as we enter the Brexit home-straight.
UK smaller companies funds saw huge outflows after the EU referendum and the money has not yet returned – they remain very much unloved. However, in terms of valuations, they are looking attractive: compared with the UK’s larger companies they are 30% cheaper and, in technical terms, are at their ‘widest discount’ since 2001! So, we have chosen the UK’s very smallest companies as our first contrarian bet. We like this fund as it is high conviction, is managed by a specialist team and invests in largely unexplored ideas.
This fund is multi-cap but has a bias towards small and medium-sized companies. The managers look for firms with ‘intellectual capital’, which includes strong distribution networks, recurring revenue streams and products with no obvious substitutes. Another important factor is how key employees are motivated, with the preference being for direct ownership of the company’s equity. Crucially, this means the resulting portfolio consists of businesses which can grow their earnings independently of the wider economy.
Manager Neil Woodford has had a torrid time of it lately, but he is a very good manager with a strong long-term track record. 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.
Just across the sea is Ireland – where Brexit is also the elephant in the room. The Irish economy is in rude health too and is forecast to grow by some 3.9%** this year. One manager who is taking advantage of the opportunities presenting themselves on the Emerald Isle is Niall Gallagher, who runs GAM Star Continental European Equity. He has 13.5%*** invested in the country, which is 12.5% more than than the index weighting.
*Source: FE Analytics. Total return in sterling terms. Correct over one year to 22 March 2018
**Source: CSO Data, December 2017
***Source: fund fact sheet, 28 February 2018