Brexit and the UK consumer with Investec UK Alpha
Managing Director, Darius McDermott, discusses Brexit uncertainty and choppy outlook for 2019 with...
This weekend will mark the two-year anniversary of the UK’s vote to leave the European Union and, despite the fact that markets don’t usually like uncertainty, UK equity funds have performed well.
There was a sharp sell-off within the first few days after the vote, but a fall in sterling proved to be good news for the global-facing FTSE 100 UK equity index which, over two years, has returned 31.41%*.
Even so, the stars of the show have been smaller company funds over the last two years, with the IA UK Smaller Companies sector returning an average of 48.62%*, compared to the IA UK All Companies average return of 30.55%*.
Simon Moon, who runs the Elite Rated Unicorn UK Smaller Companies fund, said investors were becoming cautious in the run-up to the referendum and, by May 2016, shares in small UK businesses were trading at more than a 20% discount to the FTSE 100. Today, he said they’re trading on a discount of less than 10%.
“This was in part down to the ‘world not ending’ post the referendum, and the market seeing attractive valuations for domestically-focused stocks as the business fundamentals stayed the same,” he told me. “We also saw an increase in merger and acquisitions over the period, especially from overseas buyers taking advantage of a weaker sterling and lower valuations; small companies tend benefit from M&A more than their larger peers.”
Anthony Cross, co-manager of Elite Rate Liontrust UK Smaller Companies, added that smaller, newer companies are often exposed to emerging trends and have greater scope for growth. They are on the path to disrupting stale sectors full of capital-intensive businesses. So the out-performance is perhaps due to structural and secular changes to the economic backdrop.
Ken Wotton, manager of Elite Rated LF Livingbridge UK Micro Cap Growth, said that smaller listed companies are also actually less vulnerable to macro uncertainties because they operate in more niche areas of the economy. “Smaller companies can be more agile than their larger peers allowing them to react better to trends and opportunities and potentially benefit from any upsides and and avoid significant risks.” he concluded.
Meanwhile, European equity funds fared even better, with European smaller company funds returning an average of 48.79%* and European multi-cap funds returning 39.71%*. This means that anyone panicking about a Leave result and its impact on European and UK equities – frankly, has had little need to.
Below, we take a whistle-stop tour of the UK and European Elite Rated funds to have achieved top-20 returns since the referendum, compared to all other funds that invest in their respective regions*.
Managers Guy Feld and Giles Hargreave look for “growth stocks on a value rating”, and believe the best place to find these is down the very lowest end of the market cap spectrum. In fact, the fund only tends to buy companies which are less than £250 million in size. To minimise risk, the fund has a highly-diversified portfolio of around 280 holdings.
Manager Daniel Nickols looks for three types of company: stocks which can grow their earnings regardless of where we are in the economic cycle, stocks which have had their potential earnings underestimated by analysts, and cheap stocks which are set to benefit from a positive change, such as a new management team.
This fund uses Anthony Cross and Julian Fosh’s ‘Economic Advantage’ process, which seeks out companies which have difficult-to-replicate features such as intellectual property, strong distribution channels and recurring businesses.
Managed by Ben Griffiths, this fund is Pan European and currently has more than one-third of its portfolio in UK equities. Ben picks stocks based mostly on company visits, and prioritises finding innovative companies. He is willing to hold companies which are as small as €100m in size.
This fund can invest across the cap spectrum, but mostly focuses on smaller companies. Manager David Walton prefers small companies because they are often under-researched by the broader market, and so can achieve strong growth while remaining attractively priced.
Alexander Darwall’s fund is very concentrated, and will hold between 30 to 40 stocks at any one time. These are all chosen based on their individual company fundamentals; the manager looks for very high quality businesses which have dominant positions in their respective markets as well as high barriers to entry.
This fund is quite different from its peers, in that manager Ben Nicholson has a very concentrated portfolio and focuses on finding the ‘hidden champions’ which other fund managers have missed. Ben combines using 13 different quant screens with company visits when deciding on final positions for the portfolio.