The political crisis in the UK has created a value opportunity in domestic assets, writes Tony Yarrow.
One of the timeless truths about investment is that retail investors arrive too late in a market rally.
Over decades of investing, I have often witnessed investors leaving markets at the point of maximum opportunity, for example, during the global financial crisis, and now it looks as though UK investors are avoiding the opportunity offered to them by Brexit.
This year, UK investors shunned the usual seasonal rush to fill their stocks and shares Isas. According to the Investment Association, net retail sales were negative in January, with £859 million of outflows from UK-authorised and recognised funds.
Withdrawals continued in February, with investors pulling £156 million out of funds, compared with last year’s £1 billion of inflows.
Brexit uncertainty appears to have put the UK market in quarantine since the EU referendum – confirmed by the large outflows from UK equity funds.
Investment Association data show that during the 31 months since the referendum, UK equity funds experienced outflows of £11.5 billion, compared with inflows of £5.6 billion in the 31 months preceding the referendum. In searching for havens amid uncertainty, retail investors have preferred the safety of cash Isas.
Apart from truly catastrophic market events such as the global financial crisis, where the FTSE-100 index shed 48% from peak to trough, and the dotcom bubble, which saw the index plunge by 50.4%, selected UK shares are as cheap, both in absolute terms and relative to alternatives, as they have been in my 35-year career as an investor.
The media, feeding us a diet of endless negativity, has not helped. But the companies that we have spoken to recently report that they are in robust health and trading strongly. Two of them, a brick manufacturer and a pipe supplier, had more orders last year than they could cope with.
The UK economy is in remarkably good shape given the circumstances. Employment, at 32.7 million, is at an all-time high, while the unemployment rate of 3.9% – compared with the EU average of 6.5% – is at its lowest for more than four decades.
Meanwhile, government finances are at their strongest since before the global financial crisis. Inflation, at 1.8%, is running close to the Bank of England’s target rate.
We have a flexible remit, which allows us to invest in income-producing assets anywhere in the world, in the proportions that are judged most appropriate for the achievement of the fund’s long-term goals. So, why do we invest in the UK?
The political crisis in the UK has created a value opportunity in UK assets, particularly in the shares of companies that serve the domestic economy. The opportunity has occurred because international investors, unsurprisingly, are avoiding the UK while the outcome of negotiations with the EU remains unclear.
Meanwhile, domestic investors prefer companies whose fortunes are not tied to the UK economy. We have taken the opportunity offered by this period of weakness to add to our positions in UK shares, which pay dividends and offer the prospect of attractive returns over the medium to long term.
For example, the share price of Henry Boot has languished during the year, on concerns about Brexit, the UK, house-building, etc, but has scope to re-rate. The firm puts land through the planning process and sells it to housebuilders, as well as having a development arm, a small housebuilder and a tool hire business.
Henry Boot is still very much a family business, with prudent finances – debt is currently 6% of the asset value – excellent execution, and careful, long-term planning. Last year’s results were slightly below 2017’s, which were boosted by the early completion of a couple of large construction projects, but were still the second-highest in the company’s 133-year history.
The dividend was increased by 13%, but at the higher level is still covered over three times by profits. The company has seen no slackening in activity, but is suitably cautious on 2019.
As long-term patient investors, we are prepared to look beyond the short-term “noise”, of which there is no shortage at present. The fund’s current yield, 5.4%, reflects the considerable value we continue to see in the market.
Markets always move before an event, which is why the idea of waiting for a resolution to the Brexit crisis before investing is likely mistaken. Since the start of the year, TB Wise Multi-Asset Income has made a return of more than 11%, as global investors start to look beyond the Brexit crisis.
Tony Yarrow is co-portfolio manager of the Wise Multi-Asset Income Fund.