Emma Wall: Hello, and welcome to the Morningstar Series, "Why Should I Invest With You?" I am Emma Wall and I'm joined today by Simon Murphy, manager of the Old Mutual UK Equity Fund.
Hi, Simon.
Simon Murphy: Good morning.
Wall: So, let's take a look at the fund you had two incredible years in 2012/2013, 20% returns to 30% returns. The years, since you've had positive, but they've been far more muted. I mean, is that just the nature of the U.K. market?
Murphy: Yes, it is. I mean, we did actually outperform in the U.K. market in both 2014 and 2015, albeit modestly in 2015. But, yes, the market returns have been much more muted and that's really characteristic of an aging bull market. I think we've had some great years over the last six or seven years and the market is now coming to, I think, the end of this particular cycle.
Wall: Of course, you have an all-cap mandate which means you can go up to 20% in smaller caps. So, are you utilising that at the moment? Where are you seeing the best opportunities?
Murphy: Actually, quite the opposite, actually, because I'm slightly concerned that we are coming to the end of this particular cycle and perhaps, we're in for slightly trickier markets. I'm doing what I always do at this stage of the cycle, which is, actually to go back up to the market cap spectrum and so, right now, I'm close in the 80% of the fund actually in the FTSE 100 which is the highest weighting it's been for a number of years.
Wall: I mean, one of the reasons that you said that you're feeling bearish is because we've had such a fantastic run. I suppose the other thing to bear in mind is that we have uncertain macro backdrop, don't we? Although we have had figures this week which suggest growth is a little better than expected, we've got Brexit the horizon. There are a lot of unknowns out there, aren't there?
Murphy: There are. I mean, it's very important to remember, of course, that the U.K. stock market, particularly at the larger end, is much more about the global economy than it is about the U.K. economy, but nonetheless Brexit is definitely something that investors are starting to worry about. We've seen sterling weakness over the last few months as people are starting to worry about the outcome of the referendum.
So, it's definitely a factor. And then more broadly, globally, I think there are some worrying signs out there. Economic activity is still just very lacklustre. It's not very strong really and corporate earnings, which is my big fear, look to me like they are starting to roll over in America, in particular, and I worry about that in the outlook for the equity markets.
Wall: So, if you are bearish, as you say yourself, how does that influence your investment decisions or you just sit tight and ride it out?
Murphy: It's tricky because ordinarily when you are cautious, you perhaps rotate your portfolio into obvious defensive areas like utilities or consumer goods companies. But actually, many of those companies are really expensive now because they've been – actually the driving force behind this bull market, the whole bond proxy type investment case. So, it's actually a really tricky thing to find, particularly defensive areas of the market right now.
Two areas that I do like and I do think are defensive are telecoms and healthcare. Telecoms because I think we are starting to see some industry repair in Europe and we're starting to see some price pressure come back in, which is good, and in healthcare, I think we are on the journey towards the sector being perceived to be a growth sector again. We are seeing ever-increasing number of new drug discoveries, and in particular, in immuno-oncology, we're seeing some real break-throughs in the treatment of cancer, I think, is very exciting for the industry.
Wall: But investors should be warned that perhaps they are not going to see the returns from U.K. equities that they might have done over the last few years?
Murphy: I think that's right and that's only natural. Economic cycles come and go; stock market cycles come and go. As I said earlier, we have had some great years. I think it's right to just be a bit cautious for now. This will pass as well and when it does, there will be some great opportunities again. But for now, for me, it's about capital preservation and being really a big conservative.
Wall: Simon, thank you very much.
Murphy: Pleasure. Thank you.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
