Markets are as volatile as I can ever remember, moving wildly according to the latest piece of macro data and more often than not on emotion. Valuations have by and large been dumped, perhaps on the basis that if the macro picture is so poor, then valuations cannot be trusted.
As one well known fund manager said to me recently, this is either a once in a decade buying opportunity or Armageddon. On the assumption that it is the former, I believe that Ed Burke’s Invesco Perpetual UK aggressive fund is worth a look.
Burke says market sentiment is worse than he can remember for a very long time. He agrees that the overall picture is not especially good but, crucially, he says he is finding compelling value in individual companies when the FTSE 100 falls below the 6,000 level.
The UK aggressive fund is set up for a short, sharp recession so if you do not believe that will happen, then this clearly is not the fund for you. However, if it does happen, then I would expect to see this fund at the top of the performance tables.
Burke’s long-term record speaks for itself. He has often been the person to buy when markets have hit the skids. He runs an aggressive portfolio where the 10 biggest stock positions sometimes account for more than 50 per cent of the fund.
This strategy relies on his stockpicking ability for success and in this regard he has proved himself exceptionally able. Since the fund was launched in July 2001, it is ranked first out of 216 funds in the highly competitive UK all companies sector. The fund has risen by 131 per cent during that time compared with a gain of just 37 per cent for the sector average.
Burke admits that the last year has been rather more difficult. He has moved the fund up the capitalisation scale into the big companies of the FTSE 100, where he is finding the best bargains.
The market falls of recent months have prompted him to move aggressively into the most beaten-up areas such as financial companies and housebuilders. His move into companies such as Persimmon and Bellway might appear odd given the outlook for the UK housing market but Burke points out that these two companies have strong balance sheets with long land banks. This means they do not necessarily have to buy land every year and if they stopped for just one year, it would save them 500m. On financials – and unlike his colleague Neil Woodford – Burke feels that the exposure of UK banks to the sub-prime problems is not as bad as the market fears. He has bought into Bradford & Bingley, whose share price has suffered due to the fallout at Northern Rock.
However, Burke is convinced that B&B is far more robustly financed and has a much more varied business than Northern Rock. It recently raised more than 6bn cash and is one of the most liquid banks in the UK. Despite this, hedge funds are still betting that the share price will fall. If they change their minds and unwind these positions, the share price could move back upward abruptly.
All things considered, Burke believes that UK companies are in far better shape now than in previous economic slowdowns. For example, British Airways’ debt is very low at 250m compared with where it was in the 1991 recession at 4.5bn.
I always like to ask a fund manager about shares that have performed poorly for them – sometimes spectacularly so. Some squirm in their seat and try to change the subject but Burke is a different breed.
He was forthright in admitting the mistakes he made in buying Northern Rock last year when its share price was around 700p. I like the fact that he quickly realised it was a bad move and sold his holding at about 500p. I am sure that lesser fund managers would have stubbornly held on and watched the price plummet down to the bottom at 63p.
Choosing when to sell is probably a more important decision for a manager than when to buy.
Mark Dampier is head of research at Hargreaves Lansdown