Emma Wall: Hello, and welcome to the Morningstar series, "Why Should I Invest With You?" I'm Emma Wall and I'm joined by Colin McLean, Manager of the SVM UK Growth Fund.
Hello, Colin.
Colin McLean: Hello.
Wall: So, despite your fund and indeed the FTSE doing very well over the last 12 months, you remain bullish on U.K. equities. Why is that?
McLean: I think we've had quite a boost from this devaluation. I think also the U.K. has a lot of stocks that differ a bit from others globally. So, there's a lot of companies that we see some self-improvement, there's some self-help going on with and the background is not a bad one for them at all.
Wall: And differently from the U.K., other U.K. equity managers and indeed the FTSE you describe your hunting ground as that mid and smaller companies sphere. Why do you enjoy investing in those types of companies versus those, sort of, multi-billion pound conglomerates?
McLean: I think the very biggest FTSE companies aim or the top half of the market are really driven by global trends and they are very widely researched, too. So, it's much harder to add value to those. They also suffer some of this global disinflation pattern. There's some bad stuff going on globally that they are fighting against.
Once you come away from that, you start in the lower half of the FTSE, the upper half of the mid-250 to find a lot more interesting companies where management can make a difference. You can meet management and you can find what edge they've got and they are not so widely researched. They are starting to attract more research as they move up. So, that's a really interesting area to pick stocks in.
Wall: And those stocks that are larger, however, have benefited from sterling devaluation. How much does that play into your investment process, the idea of currency and what it's worth against the world?
McLean: We do maintain a balance in portfolios. So, portfolios, say, have a growth and value balance, say, and while there are some sectors, I think, longer-term, we're not sure whether we can see growth in commodities. We do maintain companies that are exposed in that area. So, we have some balance that benefits from that. But there's also some companies further down, say ones like Ashtead, with lots of U.S. earnings. So, we do have some mid-cap and some of the smaller FTSE companies that have been able with a lot of non-sterling earnings to come through this quite well.
Wall: And of course, we've had the budget this week and The Chancellor opened his speech with very positive talk on the U.K. economy. His forecasts were better than expected growth for this year, slightly downgraded for a few years and then back up to 2% for 2020 and 2021. How much does domestic growth impact your decision-making as a fund manager?
McLean: I think it has an impact, particularly in a lot of the U.K. mid-caps, say, these consumer cyclicals, discretionary businesses. But the concern, I think, we have much more is what happens in real wages. And you can go through periods where if inflation does pick up towards 3% over this year and next and wages are a lot tighter, we'll see a little bit more of a squeeze happening there and that starts to affect some of the media, retail and other businesses.
So, we're more exposed to real earnings growth than perhaps to economic growth and I think we're going to see a couple of subdued years there that's been boosted more recently by consumer credit and that's not sustainable.
Wall: And other than inflation, are there any sort of negative points on the horizon for you as a U.K. equity manager?
McLean: I think those concerns are not so much about the current European elections, but I think there are still forces playing out against the euro. In the medium term, I think it's going to be quite difficult to hold that part of Europe together. And so, I think that's the concern. But Europe is picking in growth. So, that's satisfactory. In China, debt has risen quite a lot.
So, they have really boosted growth, particularly over the last year with an awful lot of borrowing and that's unsustainable too. So, that's much further out in the horizon. But I think the global economy is looking this year or next at quite reasonable pickup.
Wall: Colin, thank you very much.
McLean: Thank you.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
