The one exception is China, where economic conditions appear to be deteriorating further. Our holdings have low revenue exposure to China. This is due to our low exposure to big staples, financials and mining companies, which are driven primarily by Chinese demand. Overall, we have been encouraged by the robustness of earnings in the portfolio and the market as a whole.
Why not simply track the market?
If the UK is undervalued, why not just buy a tracker fund? Because not all UK stocks are cheap, and it pays to be selective. Also, much of the value lies in small and mid-cap companies, where it can be difficult to gain meaningful exposure through trackers and picking individual businesses is key.
That’s why so many of the companies recently added to the Special Values trust are in the small- and mid-cap category, where there are plenty of under-researched stocks with value to unlock. Recent purchases include insurer Direct Line – in the news because of a recent takeover bid – as well as thread manufacturer Coats, specialist engineering group Dowlais and plastics business Victrex. In total, the trust owns more than 100 stocks, and for those who have significant exposure to UK equities, there is little overlap between its holdings and other popular UK funds.
The focus on picking good-value companies means the trust trades on a far lower average price/earnings ratio than many peers. For example, it trades on 8 times forward earnings, versus 20 times for some of the most popular UK funds in the IA UK All Companies sector. The trust is also cheaper using this valuation metric than the FTSE All Share Index, and has lower debt and a stronger profit growth outlook.
What happens next?
In a year of elections and global tensions, little can prevent short-term uncertainty hitting equity and asset markets across the world. But for contrarian investors like myself, uncertainty can create great buying opportunities.
While many stock market participants may have given up on the UK market, others are recognising the value on offer. Whether it’s corporates buying back their own shares or private equity firms and cash-rich US rivals buying up British businesses, savvy investors are taking advantage of their overlooked status. For example, two companies that had already been bid for recently, DS Smith and Spirent Communications, received counterbids, underlining how attractively valued these businesses were.
The recent Spring Budget includes plans to launch a new ‘British ISA’ to encourage investment in UK companies. The proposal is to give investors an extra £5,000 on top of the current £20,000 ISA allowance to invest in UK shares. Whilst admittedly this extra allowance will not add up to a huge sum, it might just be the nudge investors need to rekindle their interest in the UK. I believe it will incentivise investors to look more into UK stocks and funds and realise that many have had decent performance of late, remain very attractively valued and offer good upside potential.
Economic and geopolitical uncertainty will continue. But UK valuations compared to historical averages and other markets – and the large divergence in performance between different parts of the market – means there are attractive opportunities in UK stocks on a three-to-five-year view. Their unloved status means that we not only continue to find overlooked companies with good upside potential across industries and the market cap spectrum, but we also do not have to compromise on quality.
| PAST PERFORMANCE | |||||
|---|---|---|---|---|---|
| Mar 19 – Mar 20 | Mar 20 – Mar 21 | Mar 21 – Mar 22 | Mar 22 – Mar 23 | Mar 23- Mar 24 | |
| Net Asset Value | -29.2% | 57.3% | 9.8% | 5.0% | 11.2% |
| Share Price | -31.5% | 62.5% | 10.5% | -3.7% | 9.5% |
| FTSE All Share Index | -18.5% | 26.7% | 13.0% | 2.9% | 8.4% |
Past performance is not a reliable indicator of future returns.
Source: Morningstar as at 31.03.2024, bid-bid, net income reinvested. © 2024 Morningstar Inc. All rights reserved. The FTSE All Share Index is a comparative index of the investment trust.
Source:
1 Fidelity International, 31.12.2023
