fundtruffle

Alpha in the UK, it’s coming sometime maybe

David Stevenson, 03/02/2021

One of the most unloved regions from an asset allocators perspective, the UK’s 'old economy' FTSE 100 has lagged behind the more tech driven indices across the globe. As one of the managers of Saracen Fund Manager’s UK Alpha Fund David Clark observes, some fund managers think any company which doesn’t end ‘.com’ or has any tech bias is essentially ‘not interesting’. What then is interesting about Mr Clark’s fund?

This fund has a very wide spectrum of UK-listed companies in terms of market cap and sector. Keeping to the 'old economy' theme, it contains Barclays, one the FTSE 100’s banking stalwarts which has had its share of problems. However, as Mr Clark observes, it is incredibly cheap compared to its rivals and seems to be having a resurgence which is why he said that it won’t be sold as he thinks its got time to deliver to both its shareholders and investors in his fund. At current estimates, the bank is trading on 0.4-times price-to-book making it the cheapest of all mainstream financials.

The fund is also curious in that it contains two asset managers in its top holdings, Premier Miton and Standard Life Aberdeen. Regarding the former, Mr Clark said the firm has been invested in the asset manager since before the merger and despite some setbacks, such as losing top rated value managers George Godber and Georgina Hamilton to Polar Capital a few years ago, remains hopeful over the company’s prospects.

He is not the only fan of the AIM-listed asset manager, Nik Lysiuk, a research analyst at broker Finn Capital said he “couldn’t think of a more attractive asset manager’ due in part to its 2.2-times share price increase over the course of last year. Mr Clark is in contact with the management team and was pleased with the merger leading to the entity Premier Miton. M&A is becoming a hallmark of asset management and as said, he also holds Standard Life Aberdeen, the result of a 2017 merger between Aberdeen Asset Management and Standard Life. Some view this merger as less of a success as it led to a large drop in AUM and hefty share price drop, although the company has enjoyed a share price rally in the last few months of 2020.

At the other end of the spectrum is Premier Foods, a company dismissed by many professional investors due perhaps to the basic nature of the company’s products. One area the company supplies is tinned food, which Mr Clark says will be eaten by our grandchildren’s grandchildren so is future proofed and therefore ‘silly’ to dismiss. Mr Clark bought Premier when it was trading on just 7-times price-to-earnings, a valuation he doesn’t think is justified for the aforementioned reasons.

One company in the portfolio which may raise an eyebrow is Chemring, an arms company. However, the firm has changed its profile quite drastically in recent years, selling its ammunition business and its commodity based energetics division. The company now focuses on counter-measures and the roll-out of the F35 fighter jet programme should really benefit Chemring for years to come given the company has supplied the plane’s counter-measures. The US and many other countries have ordered the jet so the company has a decent visibility of earnings going forward.

Old versus new economy

One of the criticisms of the FTSE is that it contains too many ‘old economy’ companies, involved in oil and mining. Mr Clark views the FTSE 100 as ‘the dullest index in the world’ but makes the point that many ‘new economy’ companies still rely on ‘old economy’ firm’s products. He owns mining giant Rio Tinto, which he says has outperformed the index by 50 percent in the last 12 months. He says that the 4-5 percent growth in global GDP forecast this year will be heavily driven by China which is ‘still buying what Rio Tinto has to offer’.

While some bemoan the slowdown in Chinese growth compared to the early 2000s, in reality it’s highly unrealistic to expect a multi-trillion dollar economy to grow by double digits every year. Mr Clark makes the point that China’s growth rate of over 6 percent is still impressive compared to other major economies.

Regarding the future of the FTSE, Mr Clark suggested that its make-up could very well change from its current form. Although the index hasn’t seen any unicorn IPOs enjoyed by markets in the US for instance, firms such as Deliveroo might list on the exchange which may spice up things. He suggests that the FTSE may even become a bit more ‘techy’ which is perhaps one of the reasons that the UK’s main market has the dubious honour of being one of the only major indices in the world not to finish last year up, a lack of tech stocks.

As for the UK Alpha Fund, while it seems to have a fairly high turnover rate of between 30-40 percent, it has a concentrated portfolio of between 30-35 holdings. If and when an exciting IPO does occur in the UK, Mr Clark can give some of his top performing stocks a haircut and make room for a new company. Given this is a boutique firm, it has the nimbleness sometimes lacking by the larger players so should be able to move with the times a bit easier.

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