Holly Cook: As UK-based investors, we tend to be focused on UK companies. To help me identify some opportunities in the UK stock market, I’m joined today by Ian McVeigh, manager of the Jupiter UK Growth Fund.
Ian, nice to have you with us.
Ian McVeigh: Good to be here.
Cook: So, as manager of the UK Growth Fund, perhaps you can set the scene for us first by explaining how do you actually define growth?
McVeigh: Well, we’ve – I’ve been running the fund for 10 years, and we’ve always defined it as very general capital growth wherever we can find it really, in recovery or value or technology. So, it’s a very broad definition of capital appreciation over the long term.
Cook: So, what is the role of this capital growth then in a broader portfolio versus, say, income?
McVeigh: Well, the only difference, one is always reminded to say these days, is the difference between capital appreciation and income is that one is taxed at 28% and the other is taxed probably at 50%. So, capital gains versus income is something we think about a lot, and it’s gone out of fashion in a way. Income has been the sort of safe way to play the market. Capital growth has been a bit more volatile, but that to us is the opportunity, that’s really where we think the attractive value opportunities for returns now lie.
Cook: So given the sort of strong run that we’ve seen in the UK stock market recently, is it becoming hard to find those opportunities?
McVeigh: Well, I think that arguably the kind of ‘easy money’ has been made. I think at the start of last year, there was so much pessimism around, that one thought that barring economic Armageddon for the world that things would recover quite sharply, and things like Lloyds Bank (LLOY), which were then at 30p, went up to sort of currently 60p. So, it’s harder than it was. But bear in mind, the stock market has been – it’s pretty much still at the level it was 10 years ago at a time after a period of enormous profits growth. So, valuations are higher than they were, but they still don’t look stretched and we still don’t find it hard to find interesting things to buy.
Cook: And you mentioned Lloyds there; financial services do make up quite a large portion of your portfolio. What role are they playing there?
McVeigh: Well, we call it, slightly tongue and cheek, the sort of triumph of low expectations – that the fund goes where angels fear to tread, and banks are going to be an important part of a recovering globally, never mind the UK economy. They are going to have a role; they’re going to have to make profits; they’re going to have to lend to people. Conventionally, if you can buy any share on a book value, then you’ve got a great chance of making money, all the research tells you that. Lloyds Bank, for example, is still trading at less than book, and RBS (RBS) is at about 30% less than book. So, there’s still a great deal of pessimism priced in there, and that to us is the opportunity.
Cook: So, you mentioned pessimism there. What sort of thing keeps you awake at night worrying when you’re looking at the UK stock market?
McVeigh: Well, I think the themes are global, that we used to see a spike in the oil price as one of the big risk, as obviously that squeezes the consumer’s income, but maybe that’s a diminishing one. I think now the risks – the visible risks are that China slows more than people think. Obviously, it’s been a great magnet for global demand, or that the American recovery falters. Now, I think the China one is probably more likely. I think the American recovery is starting to gain a bit of momentum, and obviously it’s an enormous engine for global demand. So, we think that the market generally is pricing less risk in Europe, less risk in America, and I think that’s appropriate, but they haven’t gone away for sure.
Cook: So, when you are actually stock-picking, as you said, you have been managing this fund for a decade now, have you got any sort of top tips, what’s the first thing you look for to try and identify a juicy opportunity?
McVeigh: Just endlessly, that people get far too pessimistic; at the bottom companies get written off, the companies that actually do have a reasonable franchise, do have a reasonable business model. Dixons (DXNS) is one of the biggest shareholdings that we have, and that was assumed to be heading the same way as HMV, and we thought there are a whole host of reasons why that wouldn’t happen and since we bought them, the shares have trebled. It’s a business that has a future, and it was assumed that it didn’t and you get so many opportunities like that, an extreme over-pessimism. So the market in aggregate may be efficient long-term, but short-term it’s wildly inefficient, providing lots of that sort of opportunity.
Cook: Well, Ian McVeigh of Jupiter, thank you very much for joining me today.
McVeigh: Okay, great pleasure.
Cook: For Morningstar, I’m Holly Cook. Thanks for watching.
