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Don’t write off UK stocks

Standard Life’s UK equity unconstrained fund has been picking the winners in the UK market and is focusing on quality firms

I have often berated insurance companies and banks for the dismal performance of their unit trusts but as ever there are exceptions to the rule.

Standard Life Investments is one, and their range of UK equity funds has been particularly impressive. I have covered the UK equity unconstrained fund before but I feel an update is warranted. The fund is run by Ed Legget who joined Standard Life Investments in 2002 after graduating from Cambridge. He went on to become the fund manager of UK equity high-alpha fund from October 2006, proving his skills in that role. He then took over the UK equity unconstrained fund in April 2008, where he endured a very difficult first year, but the fund bounced back strongly in 2009 and became on of the top UK funds.

Despite all the bad news on the economy, David Cumming, head of UK equities at Standard Life with responsibility for around £30bn, is very bullish on the UK market. He believes the FTSE 100 has every chance of reaching 6,000 this year from around 5,300 at the moment. Given his view, it is interesting that many people have written off the UK completely, with the popular area being emerging markets.

Now don’t get me wrong, I like emerging markets as a sector but it has become rather fashionable of late and I find the contrarian view on the UK an interesting one.

It is important to note Standard Life have a team-based approach. The start and end point for all their research is the matrix system. This computer-based analysis produces a buy list of ideas by sifting stocks for characteristics such as value and price momentum. In addition, the members of the team use their own sector research, backed by company meetings, to choose their favourite ideas. This forms their “winners’ list” of 20 shares – all FTSE 350 companies outside the biggest 20 stocks. According to Standard Life, the winners’ list has outperformed the market since 2000 by 12 per cent a year, excluding costs.

As you might imagine, the fund can invest anywhere in the UK stockmarket. In 2009, Mr Legget supported many of the rights issues made by companies seeking extra funds, which is not always a recipe for success. However, in 2009, many of these stocks appreciated by 30 or 40 per cent as investors recognised that they were not going bust, they were just cheaply priced. At present, he is focusing the portfolio on higher-quality names, which he believes will perform well in a lower-growth environment and where their views differ from the consensus. This means the portfolio is more broadly positioned but still poised to benefit from a global economic recovery.

One stock he holds is Northgate, the number one van rental business in the UK and Spain, with over 100,000 vehicles. A collapse in residual values in cars and vans led to a rescue fundraising last year. Mr Legget now expects significant improvement in earnings as well as a resumption of dividend payments. Another example is DS Smith, an international paper company focused on corrugated packaging and office products. This does not seem very exciting but demand for these goods is recovering well after a sharp fall in profits in 2009. The firm is also a major beneficiary of the weak pound.

With its exposure to smaller and medium-sized companies, the fund tends to be fairly volatile.

Given this strategy and the present fund size of around £180m, I would not be surprised to see Standard Life limiting new investments at some stage. I would therefore suggest that investors look to buy the fund on any market dips as Mr Legget feels there is still plenty of opportunity within the UK market.

I would also remind investors not to equate the UK economy (which I believe looks dreadful over the next few years) with the stockmarket – the two are different. Even though I anticipate a period of market uncertainty from the impending general election, the more people who write off the UK stockmarket, the more bullish I become.

Mark Dampier is head of research at Hargreaves Lansdown


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