This article is part of Morningstar’s Guide to Your Financial Education, providing our readers with the tools they need to become a successful private investor.
Emma Wall: Hello and welcome to the Morningstar series, Why Should I Invest With You? I am Emma Wall and I am joined today by Chris Morrison, manager of the GAM UK Diversified Fund.
Hi, Chris.
Chris Morrison: Hello.
Wall: So here today to talk about the U.K. It's looking a little better this week than it has done in recent weeks, but if we look back over the last month there has been quite a lot of volatility. How concerned have you been about that?
Morrison: Yeah, no doubt. There is a huge amount of volatility in the wider market. You look at Japan yesterday and it was a biggest move of all time up, and today it's down.
We are a long-term investor, and so we try and distance ourselves as much as we can from sort of short-term volatility. But I think you have to acknowledge what's going on outside; so in China, specifically and how that impacts the U.K.
To a degree you could say we are protected in terms of, well, we actually export more to Belgium than we do to China. But on the flip side, we have a skew towards basic materials and energy. So we are going to be impacted by China. And so, it's important to have a view on it at least.
Wall: Because 70% of the revenues of the FTSE 100 come from outside of the U.K. and that's why of course there is a truly global market, not looking just at China but looking at Europe as well, which is on small stable ground than it has been. Is that a concern for you as a U.K. investor?
Morrison: Yeah, that's clearly the biggest export market from a macro point of view. The macro itself in the U.K. looks to be holding up. GDP is good, unemployment is low, inflation is low, real wages are coming through as well. But like you say, it's that trade balance which is unhealthy in a sense exports are down and imports are up. So that is the concern indeed.
On top of that the growth looks relatively unbalanced in the sense it's coming from the consumer side as well. So, domestic – or the consumer has more money in their pockets, so spending more, but actually the company's exporting aren't doing quite so well. So it is something you have to be aware of indeed.
Wall: And taking all those things into consideration; the threat from China, the wobbly Europe, but the strong macro story in the U.K. Are there certain companies or certain sectors, which lend themselves better to that sort of smorgasboard?
Morrison: Yeah, the way we go about selecting stocks, we typically have a sort of value recovery bias to the fund. So we move away from these popular areas. It's interesting to see now the defense – and the growth these names have done very, very well, really since the crisis. On the flip side of that, the value recovery hasn't done so well, since the crisis. Maybe you're getting a bit of a washing out of the system in the sense that those value recovery names might start to do better now, which is looking quite interesting.
Also I guess, linked in with that is the large cap, small cap. The small midcaps have outperformed the large cap for over a decade now and the large caps have really lagged. And those are the guys who do exports to Europe and have been struggling in that side of things and still playing good yields, although some of those are now questionable with commodity moves.
Maybe that is shifting, that sentiment is shifting. If you do get some big moves within the basic material and dividend cuts and other things going on which we're starting to see with Glencore and Anglo's is being very aggressive in cutting its debt, then maybe there is a shift towards large cap.
Wall: Chris, thank you very much.
Morrison: Thank you.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
