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 Chris Morrison, Investment Manager of the GAM UK Diversified Fund.
Hi, Chris.
Chris Morrison: Good morning, Emma.
Wall: So, U.K. equities, pretty challenging environment to be investing over the last year. How have you as a U.K. equity investor negotiated those sorts of geopolitical challenges?
Morrison: I think the core of our fund or the philosophy of our fund is to be contrarian. And so, naturally, we're looking at those areas which are out of favor which are unloved and we're avoiding those really popular areas. So, actually, through Brexit as the expensive defenses, if you like, did very well, the fund wasn't particularly well-positioned, but the contrarian nature of it we held a lot of gold mining shares and things like that more than offset this performance.
And then more recently you've seen that steepening yield curves and Trump's election have actually been very beneficial for the banks and this is the contrarian era where we are overweight the fund. So, there are things from a fund perspective which tend to be working at the right time.
Wall: Of course, we are coming to the end of one year which always takes us to pause and outlook for the next year. We've just had Theresa May yesterday speaking to the CBI vowing to keep corporation tax at the lowest of 20 countries. Do moves like that by the government make you feel more confident about the outlook for U.K. equities in 2017?
Morrison: Yeah, I think, in short, yes. It's important as well when there is uncertainty around that you have a steadying hand. And reducing corporation tax is important in the short term. Whether long-term it makes a big difference, I'm not sure. But it does promote earnings and net profits for companies and hopefully, that will filter its way back into investments as they have greater cash flow. I guess there is a question mark about that because that's more of a two, three, five-year view of companies. But in the short term, I think, yes.
Wall: And if we have a look at what has provided a massive uplift for U.K. equities year-to-date, it has been actually the devaluation of sterling. Now, your fund has returned 14% year-to-date to investors. How much of that is due to currency shifts and how much of that is due to stock selection?
Morrison: Yeah, I think, as I was sort of mentioning earlier, we're not in those popular areas. And typically, it has been those expensive bond proxies, if you like, which have done well, the ones with lots of overseas earnings and a cost base in the U.K. and typically, we're not exposed to those, those sort of tobaccos, for example. So, I feel that a lot of the performance from the fund has come down to those contrarian calls, those special situation investments where the restructuring and the rehabilitating is actually working, which is really encouraging from a fund management perspective.
Wall: And then looking into 2017, what is your outlook for U.K. equities and more specifically, how are you playing that within the fund?
Morrison: I think we typically take a sort of three to five-year view on stocks. So, I think for next year there are few moving parts. Typically, the valuation of the U.K. market is becoming quite diverse. So, you have the FTSE 100, the large cap index which I still think of as reasonable value. We're in a very different place to where we were back in the financial crisis and the market is back at that level again. But the underlying earnings, if you like, there's a lot have gone on at these companies.
So, that's okay, the FTSE 100. I think an area which might be sort of you're a bit late to the party, if you like, the FTSE 250, the mid-cap and the small-cap space, which I think has done incredibly well. So, looking into '17, I think, that's an area we'll continue to avoid.
Wall: Chris, thank you very much.
Morrison: Thank you, Emma.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
