‘I’m investing in this Brexit basket of stocks’

Political turmoil offers many opportunities, Old Mutual’s Dan Nickols tells Laura Suter

Since the EU referendum British stock markets have soared to record highs. However, there are some companies that are still undervalued – having not rebounded after the dramatic sell-off in markets following the vote. Following this week’s announcement of a general election on June 8, the value of the pound rose, a move that some fund managers had anticipated.

Dan Nickols, manager of the £1bn Old Mutual UK Smaller Companies fund, said this “Brexit basket” of UK companies has the potential to outperform once the pound rises, after Brexit actually happens.

Telegraph Money talked to him about the advantages of investing away from the FTSE giants, what this week’s general election announcement means for stocks and his best ever investment.

How do you pick stocks?

I like to mix finding good companies with how I think the economy will perform. Underpinning the fund is the belief that companies in our area are generally less well researched than larger companies, so there should be better opportunities to identify those that are mispriced.

The average FTSE 100 stock is covered by around 22 analysts, in our world it’s just three. This gives us an opportunity to understand the investment case better than others in the market.

How have you invested since Brexit?

One area we have paid particular attention to is the “Brexit basket” of domestically-focused UK stocks. This grouping of stocks, such as housebuilders, real estate, retail and leisure stocks, is trading at a discount to the wider FTSE 250.

These names are very sensitive to the value of the pound. Given that the economy has performed pretty well since the referendum, I think it is fair to contend that sterling’s fall is due to political developments rather than economic developments. If, over the next few weeks, months or years we get a soft Brexit or an extended transition period, I think that will be very sterling friendly, so very helpful for that collection of Brexit stocks.

Among the stocks we hold in this area are Crest Nicholson, the housebuilder, and Johnson Service, the drycleaning business, which is trading very cheaply.

What does the general election mean for UK stocks?

The calling of the election and the bounce in sterling doesn’t change my overall thinking about the composition of the portfolio. Campaigning ahead of the election may give us a better feel for the outcome of Brexit and the likely impacts, particularly for the more economically-sensitive parts of the portfolio. Many smaller companies will remain unaffected by the nuances of the debate, however.

What other areas do you like and dislike at the moment?

We saw the “reflation” trade at the end of last year [the expectation that inflation will return and boost markets]. That trend is clearly here to stay, even if it is temporarily paused for now. We increased our exposure to oils, mining companies and capital goods. Examples include Vesuvius, Senna, Bodycote, Cairn Energy and Hurricane Energy, although not all are large positions.

One place we are really avoiding is travel and leisure, the pubs and restaurants space. I think they just have a whole host of headwinds that are here to stay for the foreseeable future, such as higher food and energy costs, the national living wage, the apprentice levy, changes to business rates. Life remains very difficult for companies in that space for some time to come.

We also do not hold many storebased retailers. Operating in a conventional high street or retail park is increasingly tough.

What have been your best and worst investments?

Fever-Tree has to be one of the best. We bought at the time it floated on the stock market for £1.34 – now it trades above £15.

Probably the worst was Blinkx, an advertising technology firm that was the subject of an aggressive piece of research arguing that the stock should be shorted. We exited and lost money.

Do you have money in the fund? How much?

Yes I do. I’d rather not say how much, but it’s very meaningful to me and my family.

What would you have done if you hadn’t been a manager?

Teaching would have appealed. How to buy the fund as cheaply as possible The trust has a total cost (the “OCF” or percentage of the amount invested, “TER”) of Be sure to others will apply a flat annual fee. buy the right “share class”, which is Our colour coded tables at “R”. The investment shop through which you buy the fund will also levy a charge. Some will charge a

1.03pc a year. telegraph.co.uk/investing

will guide you to the cheapest fund shop for your circumstances.

www.telegraph.co.uk/funds