nings is a theme
uably run its course,
true exposure to
ge
wisdom has been to seek
exposure to higher-growth
overseas markets, especially
in the BRIC economies.
But the slowdown in global
growth may lead to a more
significant fall in emerging
markets, which could have
been disproportionate beneficiaries
of quantitative
easing and leverage.”
He believes the FTSE
Fledgling Index has proved
a good indicator of the UK
economy’s next area of
growth and is currently
showing domestic stocks
with a superior outlook to
overseas earners.
l Going abroad
Not all fund managers see
overseas exposure as a
one-way bet for outperformance
and several high-
profile names have moved
towards domestic plays of
late. Paul Spencer from
Franklin Templeton, for
example, shifted his UK
Mid Cap Fund to a 50/50
domestic/overseas operating
profits split late last
year, from 65/35 in favour
of the latter.
“While some might
question the timing, we
believe differing economic
outlooks have been fully
discounted by the relative
valuations,” he says.
“We feel a crowded
trade has developed in
firms with overseas exposure
and at the same time
some genuine valuation
anomalies have emerged in
those reliant on the health
of the UK economy.”
Where Spencer took
new positions in domesticfacing
companies, he
looked to invest in financially
robust, well-managed,
strategically valuable
businesses. Examples that
remain in the portfolio
include Travis Perkins,
Persimmon and Mitchells
& Butlers.
Schroders’ small-cap veteran
Rosemary Banyard is
broadly seeking companies
with overseas exposure in
what she sees as a twospeed
world but acknowledges
domestic opportunities
in some areas. In spite
of negative headlines, she
says not every firm reliant
on government spending in
the developed world is
doomed to fail, for
example.
l Austerity plays
She also notes chinks of
light for the UK consumer,
as long as investors target
specific growth areas. For
example, less than 1% of
the UK population has
used a pawnbroker and, in
this age of austerity, it is a
strong growth area.
She adds: “With banks
unwilling to lend to consumers,
other lenders are
stepping in to satisfy
demand. Pawnbroker Albemarle
& Bond lends money
to customers who pledge
gold as security. As the
price of gold increases, the
company benefits twofold
as its security goes up in
price, which in turn means
the value of the available
loan rises, enabling customers
to borrow more.”
Dalton Strategic Partnership’s
Glenn Pratt remains
an advocate for domesticfacing
UK housebuilders,
claiming UK mortgages as
one of the very few areas
where financing is becoming
less onerous.
800
600
400
%
200
0
-200
Dec ’08 Jun ’09 Dec
Source: Morningstar
“The number of mortgage
products where
buyers can put down just a
10% deposit has doubled
in the past 12 months so
transactions are starting to
rise, admittedly from a low
base,” he says.
“Demand is there, funding
is ever so slowly
increasing and housebuilder
margins are improving
due to the lower cost of
land.”
Among fund pickers,
few are buying the domestic
UK story as yet, seeing
it as still a largely contrarian
play with a fairly poor
economic outlook expected
for 2012.
INVESTMENT STRATEGIES UK DOMESTIC
l Weak outlook
James Calder, head of
research at City Asset
Management, says there
are obvious risks with consensual
trades – as stocks
with overseas earnings
have become – but consumer
weakness and ongoing
deleveraging argue
against a major allocation
to domestic-facing stocks.
“Our view is that current
problems are nothing
like 2008, with emerging
markets looking solid and
sentiment improving on
the US,” he remarks.
“If we get some certainty
on the European situation,
we should be able
to get to a point where
FTSE Fledgling vs FTSE 100 – 3 years
FTSE 100
FTSE Fledgling
SUMMARY
In times of market stress,
UK investors still tend to opt
for domestic funds as a safe
haven.
Real estate, retailing and
utilities are among the most
domestically focused of
sectors.
The FTSE Fledgling Index
has proved a good indicator
of the UK economy’s next
growth areas and is currently
showing domestic stocks
with a superior outlook to
overseas earners.
“
If we get some
certainty on the
European situation,
we should be able to
get to a point where
people realise the
world is not ending
and consumers will
spend again, at which
point many of these
cheap domesticfacing
stocks could
enjoy a substantial
relief rally
”
James Calder, head of research,
City Asset Management
JANUARY 2012 [www.portfolio-adviser.com] PORTFOLIO ADVISER
Jun ’10
Dec
Jun ’11
Dec
people realise the world is
not ending and consumers
will spend again, at which
point many of these cheap
domestic-facing stocks
could enjoy a substantial
relief rally.”
For his UK exposure,
Calder uses the defensiveminded
John Wood’s
JOHCM UK Opportunities
plus two income funds
from Walker Cripps and
River & Mercantile. On the
latter, Calder said manager
Richard Staveley has some
exposure to domestic-facing
banks, seeing them as
very undervalued, but this
is yet to pay off in performance
terms.
17
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