Clive Beagles describes the last five years running a UK equity investment fund as “like riding an escalator” – very hard work. However, he believes the bearish switch may have been turned off, potentially heralding a period of attractive UK stock market returns.
Beagles, joint manager of the £1.6bn JO Hambro Capital Management UK Equity Income fund, says a heady mix of factors bodes well for UK shares. These include lower inflation, interest rate cuts before the end of the year, an improving economy and recognition by a growing number of investors that UK shares represent good value for money. .
“Life has been bleak for both UK fund managers and investors for quite some time,” he says, “but I feel the environment is improving.”
Although the continuation of the conflict in the Middle East could upset the apple cart, he sees no reason why the Bank of England should not make a couple of rate cuts this year.
He says if this happens, higher consumer confidence could lead to higher spending, driven in part by the savings many households built up during the pandemic. This, in turn, would help boost shares in some of the fund’s retail companies, such as furniture retailer DFS, DIY specialist Wickes, Marks & Spencer and electrical goods retailer Currys.
“If we could see consumers spending again like they did in 2019,” says Beagles, “these retailers would do well thanks to the significant market share they have in their respective sectors.”
The fund has stakes in 60 companies and generates an attractive dividend yield, equivalent to around 5 percent per year. In fact, its dividend track record is exemplary, with average growth of 9 percent annually over the nearly 20 years the fund has been in operation.
Beagles says focusing on dividends ensures the fund stays away from the worst collateral damage caused when stock market bubbles burst. It also forces him and his colleague James Lowen to focus on undervalued stocks that tend to provide the most attractive dividend yields.
Unlike some of its rivals, the JOHCM UK Equity Income fund is not entirely focused on dividend-friendly FTSE100 stocks. Just under half of the portfolio by value is in FTSE250 or small cap stocks, areas that have long been ignored by most investors.
Beagles says the shares of many small-cap stocks resemble “coiled springs,” while most bank stocks are seriously undervalued and “could double from now on.” Barclays, NatWest and Standard Chartered are among its top ten holdings.
Beagles is baffled by the decision by Coutts Bank – part of NatWest – to embark on a £2.7bn UK share sale. The bank has justified the measure by claiming that it needs to diversify its investment portfolios and improve profitability.
“It’s understandable in some ways,” Beagles says. ‘US stocks now account for 65 percent of global indices, but the US market will not always outperform. We still see many opportunities to make money in our target stock market.’
Over the past 12 months and five years, the fund has returned 18 percent and 37 percent. The respective returns of the FTSE All-Share Index are 11 and 36 per cent, while the average UK equity fund has generated total returns of 11 and 31 per cent.
The fund’s total annual charges are reasonable, just under 0.7 per cent, while dividends are paid quarterly.
