The UK market has been out of favour with investors for years but with a Brexit deal finally struck and a vaccine programme well underway, is now the time to look to the country for growth?
Alongside Brexit, a weak currency and a global pandemic, the UK market suffers from its association with industries of yesteryear. The FTSE 100 is dominated by oil, gas, banking and pharma stocks – none of which are known for their growth prospects, and all of which face serious challenges from tech disruptors and an increasingly carbon-conscious society.
Julian Cane, manager of the BMO Capital Investment Trust (BCI), says this is why it’s important to look beyond the mega-caps on the stock market when seeking opportunities. “Indices tend to have their biggest weightings in industries of yesterday. If we think back to the FTSE 30, for example, that was dominated by textiles companies.”
Looking across the market-cap spectrum and at a range of industries, seeking newer players over traditional names, and focusing on fundamentals are just some of the techniques the professionals use when investing in this unloved market.
Milena Mileva, co-manager of the Baillie Gifford UK Growth (BGUK) trust, adds: “We aim to pick some of the best, most attractive British businesses, but wildly successful companies aren’t built in a day – it takes time and patience for investors to benefit.”
So where are these managers finding opportunities?
Financials
The UK financial sector isn’t just about legacy giants such as HSBC and Barclays, says Cane, who prefers newbie OneSavingsBank (OSB), which has grown its dividend by 91% since 2016. Another top holding is Intermediate Capital (ICP), which invests in private debt and has a growing fund management arm.
It’s a sector that the Ballie Gifford team are also interested in; the trust holds investment platforms Hargreaves Lansdown (HL) and AJ Bell (AJB) which has benefited from the increase in do-it-yourself investors in recent years. AJ Bell was a recent stock of week at Morningstar and saw its customer numbers rocket 30% to more than 312,000 last year. Mileva says: “We want companies which may actually be stronger coming out of the pandemic than they were going into it.”
Property
Even in a pandemic year, UK house prices went up, and a nationwide shortage of housing means more new properties are needed. Cane particularly likes housebuilder Countryside Properties (CSP) because it works with local authorities rather than being a purely private developer and this, he says, means it has predictable, steady revenues.
And there are other ways to play the building boom; the trust also invests in brickmakers Forterra (FORT) and Ibstock (IBST), whose shares are up 47% and 34% respectively over the past year.
Warehouse operators have undeniably been winners of the past 12 months as the rise in online shopping has ramped up demand for logistics space. One way to play that trend, says Iain McCombie, co-manager of Baillie Gifford UK Growth, is through equipment hire firm Ashtead (AHP). "Companies need to regulate the temperature in these warehouses and keep them clean and it's much more efficient for them to hire the tools to do that than buy them."
Marketing
4imprint (FOUR) was added to the Baillie Gifford UK Growth portfolio in April. The company makes marketing merchandise – items you pick up trade shows, exhibitions and company meetings – an area which clearly struggled in 2020, with corporate events cancelled across the board.
Mileva adds: “The firm safeguarded long-standing relationships with suppliers, cut marketing and didn’t let any staff go. These things spoke loudly to us about the long-term success of the business.” Despite a difficult year, which saw pre-tax profit plunge 92%, the stock is up 35% over 12 months.
Fashion
Boohoo (BOO) shares fell in 2020 when the company became embroiled in a controversy over modern slavery and how its factory workers were treated. That was enough to send many investors running for the hills, but Mileva has stuck with the stock: “It’s a very exciting company in a lot of ways.” But while customers have been happy with its products and prices, and shareholders have been happy with their returns, Mileva says the firm failed to look after “another important group of stakeholders – its workers”.
However, she adds: “To Boohoo’s credit, it has moved quickly to address the recommendations for a review into its supply chain. There is more to be done but it’s doing well.” The stock has delivered incredible annualised returns of 50.4% over five years and, despite last year’s issues, are up 58% over 12 months. While the concept of "fast fashion" has become more controversial in recent years, Morningstar equity analyst Jelena Sokolova says few shoppers are yet willing to pay more for sustainable alternatives.
