Fund man­ager Mark Bar­nett of­fers an an­ti­dote to UK in­vest­ment blues

The highly-re­spected In­vesco ex­pert eyes dis­counted do­mes­tic stock op­por­tu­ni­ties

Shares - - CONTENTS DISCLAIMER -

For in­vestors feel­ing a lit­tle jaded af­ter a try­ing year for UK eq­ui­ties, Mark Bar­nett pro­vides some wel­come op­ti­mism for value hunters. The In­vesco fund man­ager who runs both Per­pet­ual In­come & Growth In­vest­ment Trust (PLI) and Ed­in­burgh In­vest­ment

Trust (EDIN) sees plenty of op­por­tu­nity in the UK stock mar­ket across both the large cap uni­verse and their mid-cap peers.

‘It’s got to the stage where the equiv­a­lent of £1 of ster­ling rev­enues are now val­ued lower in the UK than in emerg­ing mar­kets,’ he says.

Bar­nett be­lieves the mar­ket is say­ing the long-term qual­ity of UK busi­nesses is ‘re­ally im­paired, and that rep­re­sents an op­por­tu­nity’.

There has been no short­age of is­sues to worry UK in­vestors through 2018. Brexit ne­go­ti­a­tions con­tinue to drag on, UK growth has re­mained stub­bornly pedes­trian and there is grow­ing con­cern that the Bri­tish econ­omy could be plunged into a re­ces­sion sooner rather than later.

These con­cerns and more have dragged on the UK stock mar­ket in 2018 which has re­mained on the back foot. Be­fore the most re­cent sell­off the FTSE 100 had drifted about 2% down on where it started the year at 7,687.77. Those losses have es­ca­lated since 3 Oc­to­ber, and at cur­rent 7,097.48 lev­els (22 Oc­to­ber), the de­cline in the UK’s lead­ing in­dex stands at 7.7% for 2018.

Bar­nett’s in­vest­ment style is very much buy and hold for the longer-haul, and so mar­ket weak­ness may well have proven to be a good op­por­tu­nity to pick up more of what he al­ready likes. ‘We seek com­pa­nies with man­agers that view the eq­uity in their busi­nesses as a pre­cious and rare re­source,’ he says.

UK AT A DIS­COUNT

Dig be­neath the head­line per­for­mance and a more in­ter­est­ing story is re­vealed. The mid-cap FTSE 250 in­dex, which is more heav­ily skewed to the UK econ­omy than the FTSE 100 (about 50% vs 75%),

has fallen 9% year-to-date. Bar­nett high­lights the priceto-earn­ings mul­ti­ple of UK do­mes­tic rev­enues has fallen by a con­sid­er­able amount ver­sus UK com­pa­nies which gen­er­ate sales in the US.

Fun­da­men­tally, Bar­nett be­lieves the wider stock mar­ket has ‘failed to dis­crim­i­nate be­tween the strong and the weak, with a blan­ket de­r­at­ing’ ap­plied to UK do­mes­tic earn­ings, par­tic­u­larly in ar­eas like tele­coms, fi­nan­cial ser­vices, prop­erty and re­tail.

Re­tail is par­tic­u­larly in­ter­est­ing given the del­uge of profit warn­ings and fi­nan­cial stress in the sec­tor over re­cent months. ‘Re­tail is be­ing dis­rupted, we’re all buy­ing on­line; there won’t be much of a high street left,’ he con­cedes.

Even Next (NXT) has not es­caped from the sell-off. For years it was one of the few high street names that in­vestors could rely on. Since June the stock has slid from £62.02 to £51.18 as trad­ing has strug­gled to keep pace with pre­vi­ous ex­pec­ta­tions.

Bar­nett thinks the busi­ness is suc­cess­fully mov­ing with the times and is start­ing to ‘dif­fer­en­ti­ate and pull away from the pack’. Next has proven that it is able to adapt and com­bine the best of on­line and off­line sales.

‘It will not be the same in 10 years but I think Next will be a win­ner,’ say Bar­nett. ‘Next will still be on the high street in some form or other.’

Tesco is also an em­bat­tled re­tail busi­ness that Bar­nett backs for the longer-term, while UK do­mes­tic play­ers BT (BT.A), Le­gal & Gen­eral (LGEN) and prop­erty group Der­went Lon­don (DLN) all fea­ture in Per­pet­ual In­come & Growth’s port­fo­lio.

IN­COME AND CAP­I­TAL GAINS TAR­GET

How im­por­tant are div­i­dends? Mas­sively, based on the re­turns per­for­mance of Per­pet­ual In­come & Growth. Since Bar­nett took the reins in 1999, the in­vest­ment trust has av­er­aged a re­turn of 9.4% a year, which is an im­pres­sive per­for­mance.

More than 60% of to­tal re­turn has come from rein­vest­ing div­i­dends dur­ing the 19 years he’s been run­ning the in­vest­ment trust. Shares in the trust have in­creased by 177.5% in value over the past 10 years, a rough 70% out­per­for­mance over the FTSE All-Share in­dex.

Pa­tience is an es­sen­tial in­gre­di­ent ac­cord­ing to Bar­nett to reap the re­wards of this pow­er­ful com­pound­ing strat­egy. Dis­ci­pline is prob­a­bly right up there too; a ca­pac­ity to stick to a fund’s re­mit even when the stress screws are be­ing turned.

Bar­nett be­lieves this is all part of be­ing a re­spon­si­ble, long-term in­vestor, not one that heads for the hills at the first sign of trou­ble. He would rather work closely with a com­pany’s man­age­ment team to find so­lu­tions to prob­lems and make im­prove­ments to op­er­at­ing mod­els, rather than run away in dif­fi­cult times.

The cur­rent sit­u­a­tion sug­gests the UK eq­uity mar­ket, that’s about as in­ex­pen­sive as any sim­i­lar ma­ture peer any­where in the world, could be ex­cel­lent stock pick­ing ter­ri­tory for the next 10 or 20 years of value cre­ation. (SF)

Newspapers in English

Newspapers from UK

© PressReader. All rights reserved.