Julian Cane, manager of CT UK Capital & Income Investment Trust, part of Columbia Threadneedle Investments, discusses why performance of the UK market lagged that of many other countries, despite its recovery since October 2022, and outlines investment opportunities to be had.
Despite the apathy surrounding UK equites, Julian Cane at Columbia Threadneedle Investments believes that there are some great bargains to be had.
“It is difficult to remember a time when the feeling around the UK market has been so dull,” Cane said at a media event last Thursday. “Over the years, there has been a steady selling pressure on UK equities. UK pension funds historically held 50 per cent of their assets in UK equities and now this is closer to 2 per cent. This is a result of UK pension legislation, as well as accounting and risk aversion.
“Other reasons investors don’t find UK stocks very attractive is because we don’t have a material exposure to a lot of tech stocks, artificial intelligence being the flavour of the month or of the year. The UK index is heavily skewed to natural resources, notably mining and energy stocks. It’s very commodity related which is why some investors may be slightly cautious,” he continued.
He highlighted how valuations of UK equities are at remarkably low levels, with the UK being the cheapest global region on a median stock basis. The UK market relative to the world market has traded at a 20 per cent discount to the World Index. “We have less tech stock which are highly valued and more commodity stocks which are low valued. In recent years, that discount has widened considerably,” he said.
“The UK is trading at a substantial discount compared to the US and Europe ex-UK, due to the apathy and buyers' strike in UK equities. International investors may also think that the UK economy is more vulnerable to a market set back,” he continued.
“The UK has been expected to have a recession for some years now, but it hasn’t happened. In fact, the Bank of England revised its forecasts two weeks ago, getting the UK out of recession and towards growth. We are still not in a strong place but Germany, for instance, has gone into recession,” he added.
“The economic models we have may have worked over the past decade but they are not working now as well as had hoped. We have moved to a situation now where the Bank of England makes decisions on the basis of last month’s inflation figures,” he said.
“Anyone putting money into equities should anticipate an economic slowdown but there may be good periods too. Investors have to think whether they are investing at the right price, rather than worry about the economy. Private equity firms and other companies are looking to take advantage of the value that is out there and the low multiples and bargains around,” he continued.
“Firms are also starting to look at listing in other markets like the US as they can get better valuation for their business. In our CT UK Capital & Income Investment Trust, we are UK investors in UK equities but we can also invest outside of our benchmark and can hold firms like Ferguson which we have had a number of years," he said.
CT UK Capital & Income Investment Trust
The trust seeks to generate long-term capital and income growth from a portfolio consisting mainly of FTSE All-Share companies, and has outperformed its benchmark over the long term under Cane for over 25 years.
Top 10 holdings include consumer staples like Unilever and Diageo as well as AstraZeneca in the health care sector. One of its larger investments is financial firm Burford Capital which performed well in April, after a US senior district judge found in favour of Burford in its litigation against Argentina.
The trust also published its half-yearly results on Wednesday, outperforming its benchmark, despite macroeconomic disruptions. The London-based investment company said that net asset value per share total return for the half year ended 31 March was 12.4 per cent, slightly outperforming the FTSE All-Share index benchmark total return of 12.3 per cent. This NAV total return marked a significant rise from negative 1.3 per cent at the same point last year.
The company said its NAV per share was 305.29 pence, up from 277.66p on 30 September last year. However, CT UK Capital's NAV per share was down from 320.49p at this point last year. The company also announced a dividend for the first half of 5.50 pence per share, up 3.8 per cent from 5.30p the previous year. Cane said that it has increased its dividend every year since its launch in 1992, with dividend growth well ahead of inflation.
Chair Jonathan Cartwright added: "The recovery of the company's share price and net asset value per share, together with a further increase in the dividend, are indicative of the robustness of our investment strategy which continues to provide the opportunity to deliver attractive longer-term investment returns to shareholders."