Emma Wall: Hello, and welcome to the Morningstar series, "Why Should I Invest With You?" I'm Emma Wall and I'm joined today by Tom Moore, Manager of the Standard Life Investments UK Equity Income Unconstrained Fund.
Hello, Tom.
Tom Moore: Hello, Emma.
Wall: So, what exactly does the unconstrained element to the fund mean?
Moore: Well, unconstrained really means we can go anywhere and what we're interested in is finding the very best opportunities with attractive valuations and good strong growth in the years ahead. And that means sometimes it's not about looking at the most favored stocks in the large-cap index. It's actually about going further down the market cap scale into the mid-caps, into the small-caps because we tend to find that there is better growth among the smaller companies in the U.K. market.
Wall: And does that change depending on what point in the market cycle we are in, because by most admission we're quite mature into this recovery now, aren't we?
Moore: You're right, but actually, when you look back over 20 years, one of the reasons why the FTSE 100 Index is still in the 6,000s today, and when I started in the industry back in 1998 we were at similar levels in the 6,000s, is because there isn't much earnings growth coming out of these large-cap companies.
So, you're right to talk about the market cycle, but I think overriding factor here is that there is also a structural trend towards smaller and mid-sized companies who have got more flexibility, more maneuverability to make sure that they can grow their top-line, their sales, their earnings, and the cash flows and ultimately, that means as an income investor we get a growing stream of dividends.
Wall: And mid-caps in particular have done very well for a few years, but of course this year and in the recent past have come a cropper a bit because of Brexit. Is this a short-term short-lived or is this sort of the phase of things to come?
Moore: Well, actually, I was nervous after the Brexit vote that it could mean a sudden sharp drop in confidence and I think we have seen some surveys, such as the PMI data, which is business confidence surveys, coming off from relatively high levels to historically quite low levels in the space of just one month. But I think there is more to it than that because actually if you look at the consumer data, consumer is feeling pretty good about the world.
Their cash flows are still improving this year from last year. And if you look at the recent commentary from companies, we have intensified our research efforts recently just to keep on top of this, is actually pretty good and life continues after Brexit. So, we are more positive actually about the outlook for some of the mid-caps than perhaps you might imagine.
Wall: And that's slightly contrary to some of the headlines, which showed that mid and small-cap business owners were nervous about how their domestic revenues because of course they are tend to be more domestically skewed, would be affected by Britain leaving the EU. But you are saying actually the companies you've spoken to are pretty positive.
Moore: There is a risk that we have an element of group think, because the people like us here sitting in London, we tend to be nervous because we hear the doom and gloom. Out there in the regions people don't listen to economists.
They just get on with their daily lives. And I think what we're hearing over this is, for example, a double glazing factory, the biggest double glazing plant in the U.K., it's called Safestyle (SFE), and they confirmed that orders are still coming through as expected. That was last week I visited them.
We've heard from Pendragon (PDG); we met Inchcape (INCH), big car dealers. So, some of these big-ticket items that you'd expect would be first things to get cuts in the wake of a big shock like Brexit, actually continue and sales growth remains in the positive territory in all cases.
Wall: Tom, thank you very much. This is Emma Wall for Morningstar. Thank you for watching.
