Feeling the squeeze? It is not surprising. Prices are rising faster than wages as CPI inflation outstrips income by 3% to 2.2% - and the high street is taking the pain. According to the CBI retail sales have slumped in the past month – and according to one fund manager this trend is set to continue.
Robert Walters shares have risen 70% over the past year
Mike Prentis, manager of the Gold Rated BlackRock Smaller Companies Trust (BRSC), the UK consumer is under pressure.
“We are cautious on the UK economy, but not on the global outlook and have positioned the portfolio accordingly,” he said last week. “We are avoiding sectors sensitive to the domestic economy – GDP growth is falling. Avoid UK consumer stocks. We don’t like retailers or leisure companies as a result.”
Prentis points to the profit warnings issued by companies reliant on the UK consumer; “conservatory builders, sofa manufacturers – people are spending less,” he says.
That is not to say he is holding stocks listed overseas – almost every single one of the 165 stocks held in the portfolio are listed in the UK. But instead he is focused on where revenues are gained, pointing to recruitment company Robert Walters (RWA) which draws 70% of its company income from outside of the UK – particularly in Japan and Singapore. Robert Walters has seen its shares rise an incredible 70% over the past year, and has returned an average of 24% a year to investors over the past five years.
“About 50% of our fund’s revenues are generated from overseas,” says Prentis. “Where we can find growth opportunities we are positive on pockets of the UK – social housing for example which will be a priority for whichever political party is next in power, and housebuilder stocks, which are being propped up by Help to Buy schemes.”
Prentis has taken down his exposure to the UK economy over the past year, but always has a global outlook to stock picking. He says: “We look for stocks which are specialists within their sector, companies whose markets are just as relevant outside of the UK.”
Another example of a global-facing smaller company held in the fund is CVS (CVSG), the veterinary pharmaceuticals firm which makes up 2% of the fund. Prentis reveals how the firm – a dominant player in the UK – is moving into Holland. The share price is up 56% in the past 12 months, and has sustained that level of annual growth for the past five years.
Are We Due a Stock Market Correction?
“I always said I wanted to go into the next recession with less gearing than the last,” says Prentis, whose levels of gearing – when a fund manager borrows money to take bets on particular stocks rising in value – hurt him the last time the market fell significantly. Currently Smaller Companies is 10% geared, potentially meaning he has 110% exposure to a market fall.
“We do have set backs, we do have recessions” says Prentis. “Now does not feel like the right time to increase gearing considering the long bull market we have had. The market downturn will not be comfortable. I can’t see anything around that would lead to another global financial crisis but the UK market might get a bit sticky – and that could happen at any time.”
Prentis urged investors to back “good resilient companies” and reflected that the UK market has “been through worse.”
