JOHCM UK EQUITY INCOME FUND: Times are tough – but outlook for UK equities is still positive
Investment fund manager Clive Beagles is in a bullish mood. Despite the tough measures introduced by the Government in Thursday’s Budget to close the £55billion black hole in its public finances, he believes the outlook for UK equities is positive.
‘The Government tried exciting and failed,’ he says, referring to the botched attempt by Liz Truss and Kwasi Kwarteng to grow the economy through tax cuts.
‘Now is the time for a period of dull politics, however hard some of the Budget measures will be on household finances.’
With the financial markets backing Rishi Sunak’s Government and the pound holding its own against the dollar, Beagles believes the conditions are being created for investors – both overseas institutions and those based in the UK – to start backing UK stocks again.
Beagles is joint manager of £1.7billion fund JOHCM (JO Hambro Capital Management) UK Equity Income, a fund which he has run with colleague James Lowen since launch in 2004.
He says the pair have ‘rarely felt so strongly’ that the time to put money into the fund is now.
It offers a dividend equivalent to six per cent a year – and Beagles believes the fund can keep growing it at around nine per cent a year: the average over the past 18 years.
The fund manager’s view is that rafts of the UK stock market remain chronically undervalued. ‘It’s crazy that the market value of a US stock such as Apple is worth more than the combined value of the entire UK stock market,’ he says.
Beagles and Lowen hold 59 companies in the fund, comprising stocks from across the market: FTSE 100 companies through to smaller firms.
But JOHCM UK Equity Income’s portfolio is dominated by two themes: financials – and commodities and oils. These account for half of the fund’s assets. The financials’ component comprises holdings in banks (the likes of NatWest, Barclays and Standard Chartered) and insurance companies (Legal & General, Phoenix and Aviva).
Beagles’ opinion is that the banks are far more resilient than they were in 2008, going into the financial crisis – and have scope to increase profits as interest rates remain high, enabling them to make money from the difference in interest rates they charge borrowers and give to savers. Share prices in the sector, he says, could double in the next three years.
Insurance companies, Beagles adds, are likely to benefit from the purchase of defined benefit company pension schemes from businesses looking to offload the risk of running them themselves.
He also believes they are likely to play a key role in funding long-term infrastructure projects as the Government takes a step back to sort out its own finances. In the commodities and oil sectors, the fund’s emphasis is on businesses such as BP and mining giant Glencore which are respectively focused on diversifying away from oil; and metals (such as copper and cobalt) crucial to the move from hydrocarbons.
With other key holdings including the likes of car dealer Lookers, media companies WPP and ITV, and furniture giant DFS – all undervalued – Beagles is convinced the fund can make investors a tidy mix of capital and income return over the next three years. Certainly far more than the 7.4 per cent return it has generated over the past 36 months.
On ESG (environmental, social and governance) issues, Beagles says its strategy is focused on companies striving to improve their ESG credentials. Nearly a quarter of holdings have improved their scores over the past year.
The fund pays quarterly dividends and its stock market ID code is B03KR50. Annual charges total 0.83 per cent.