Emma Wall: Hello and welcome to the Morningstar series, 'Why should I invest with you?' I'm Emma Wall and here with me today is, Chris Kinder, manager of the Threadneedle UK Absolute Alpha Fund.
Hello Chris.
Kinder: Hi. Good morning.
Wall: So, U.K. equities, in particular, U.K. equity income have been extremely popular this year with both retail investors and financial advisers. Sometimes investors can be acute of being behind the story and inflows mean that something's reached its peak. Is this the case with U.K. equities?
Kinder: Yeah, that wouldn't be our view at this point. I think it's quite right to ask that question given the strength of equity markets in the last couple of years, last year's return being particularly strong, probably stronger than most people would have thought.
But I think the truth is, when one looks around the range of available asset classes, equity is still a pretty good place to be, primarily the dividend yields, the dividend growth, the relative strength of corporates relative to governments and consumers and also, the things that the companies can do with their cash. So, overall, we think equities are okay, pretty good place to be, but really focus on stock picking. There will be some real differentiated performance in the market over the next couple of years, we think.
Wall: And one of the things that is threatening U.K. equities – I mean, your colleague, Simon Brazier, says this himself – is the concept of rising interest rates.
Kinder: Yeah, very much so.
Wall: Last week we heard that this isn't going to happen for a while, but may well happen next year. I mean is that something you're concerned about?
Kinder: Honestly, no. First and foremost, I think the point that would be that rising interest rates should be considered as normal. Interest rates are 50 basis points, have been so for several years now; that is unsustainable, way, way too low and a function of the emergency situation we were in a few years ago. So, any move away from that emergency situation is positive undoubtedly.
I think the real threat in Simon's point earlier is, how far do they go? And I think it's that's what when you would worry because there is still a huge amount of debt in the system; but I think the point is, they are going to go up probably quite quickly but to a very, very low level by historic standards. I think the idea of rates going up too far is something we should be aware of, but in fact quite unlikely to happen.
Wall: You've said two things there to be aware of.
Kinder: Yeah.
Wall: Number one, the fact that markets have risen quite considerably and number two, this interest rate risk. Does that perhaps mean that you're looking at different sectors now for opportunities than you were a year ago, two years ago?
Kinder: It's not some sectors for us. I mean, as a group, we're very much focused on the underlying stocks. So, we just spend all our time, quite frankly, appraising companies, working out what they are worth and trying to buy them when they are traded at a big discount to that fundamental value.
We don't really run sort of a style metrics where, as rates move, you move into a different sector. That's a little bit – sounds a bit silly, but it would be too simplistic for us, we'd rather just do the work on the stocks and own the companies that we like and avoid those that we don't.
Wall: So, what would be your flag then for something that you don't like? Is it all to do with price?
Kinder: It's valuation. I mean, as I said earlier, we work out what we think businesses are intrinsically worth and if a share is trading at a premium to that, quite frankly, you can leave it alone.
Wall: And is there any sort of thematic exposure there that you're looking at? With interest rate rises does that mean that some stocks will be off the cards, the house builders perhaps or the banks?
Kinder: Yeah, again, I think if you were to tell me that how the interest rates were going to go, to say, 4% in 18 months, I think the house building sector would come under huge pressure. But given my more benign view of where interest rates end up, I actually think the environment is still pretty good for house builders. Now, we've been long time supporters of Persimmon (PSN). We've quadrupled our money since we owned it and strangely, we still think there is quite a lot more to go for, not least around the cash returns. So, yeah.
Wall: And what about the pressures that that puts the U.K. consumer under? Do you think that we will feel the squeeze once these interest rates rise?
Kinder: At the margin, undoubtedly, yeah. But I think in a way because everybody is so aware of that including the governor and they are very, very focused on sort of real wage growth and so on, anything that they might do to really pressure that even further, would be so damaging to the economy, they probably won't do it.
Wall: So, it's a case of very slowly we will see the effects and by then we'll already know what it is about?
Kinder: Yeah. And it's going to be consistent with the growth. So, if there is no growth, there is no rate rises. So, it sounds uncomfortable and probably a little bit consensual, but I think the interest rate risk is real. We should think about it, but it's not going to derail the equity story, I don't think.
Wall: So, all in all, you're bullish about both the U.K. economy and U.K. equities?
Kinder: I'm more bullish on equities than I am on the economy.
Wall: Chris, thank you very much.
Kinder: Pleasure.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
