There has been good and bad news for investors in the UK in recent months. Life has been getting back to normal and the economy has been recovering strongly from the pandemic. However, UK share prices have lagged those of other developed markets. There have also been concerns about issues such as supply chain disruptions, staff shortages, rising energy prices and increasing inflation. JPMorgan Claverhouse’s investment managers see this situation as presenting short term challenges but remain optimistic about the long-term opportunities.
Claverhouse focuses on the UK market. It is one of the few equity income investments trusts to offer a pure UK exposure. Its managers, Will Meadon and Callum Abbot are stock pickers, looking to find the right type of stocks at the right price to enable them to continue delivering consistent capital growth as well as a rising income to investors. They currently believe the UK stock market is offering a “once in a generation value opportunity for investors”.
They point out that the UK market in general is undervalued compared to other developed world markets. They have compared prices across a wide range of market sectors and found that UK companies are trading at their widest discount to other markets since the 1970s. The explanation is that international investors are still holding back from investing in UK shares.
The UK equity market has been unloved since the Brexit vote in 2016, which caused the value of sterling to fall significantly against other leading currencies due to uncertainty about the UK’s future outside the European Union. It was expected that after the UK reached a deal with the EU, and Brexit finally happened at the end of 2020 both the currency and the stock market would rebound. But, although there has been some recovery, UK equities are still looking relatively cheap.
Yet, in a sign of the confidence felt by overseas companies in the growth of the UK economy and in Britain as a place to do business, merger and acquisition activity has spiked upwards this year. Avast, Meggitt, Ultra, Wm Morrison Supermarkets and Sanne Group are among those companies which have received bids in recent months. According to recent Refinitiv data, takeovers of UK companies hit a 14-year high by value in the first seven months of 2021 and there is little indication of this trend slowing down.
Claverhouse’s managers point out that this situation means investors in UK equities have risk and reward on their side. What’s more, their portfolio gives investors exposure to a diversified range of UK shares because they adopt a “barbell” approach - combining both growth and value shares. It means the trust may benefit whichever type of shares are doing well.
Growth stocks such as IT companies and online retailers have been favoured by investors for some years and have become relatively expensive, while value stocks which tend to be more mature companies such as banks and oil companies have been less popular but are now enjoying greater recognition. We believe Claverhouse’s portfolio to be well-suited to benefit from these market style rotations which can be quite rapid.
As well as delivering consistent growth, the other key aim of the trust’s managers is to pay a rising, inflation-busting income to its investors. This is a vital consideration when they are selecting stocks. Claverhouse is one of the AIC’s ‘dividend heroes’, having increased its dividends for every one of the last 48 years. In 2020, when dividend payments by UK companies generally went down due to the pandemic, Claverhouse was still able to increase its dividend due to its strong reserves. It is the only AIC UK equity income ‘dividend hero’ to have achieved dividend growth ahead of inflation every year for the last two decades.
When the pandemic struck and the managers were reviewing the portfolio, they switched out of companies which were likely to have problems with social distancing and working from home. They moved into more resilient businesses which would be able to cope with the tougher times. At the same time, they were looking not just for shares at the right price but companies with the potential to pay good dividends. Among the companies they bought were domestic banks such as Barclays, oil companies including Shell and BP, and miners including BHP.
UK company dividends are now recovering. The latest UK Dividend Monitor from Link Group reported that, in the third quarter of 2021, UK dividends, excluding one-off special dividends, had risen by over 50%. It pointed out that mining, oil and banking dividends made the biggest contribution to this growth vindicating the stock choices made by Claverhouse’s managers.
Such short-term successes are always welcome. However, the main emphasis of the managers is on getting things right over the medium to long term and being an “all-weather trust” that can generate consistent growth and a rising income in all market conditions. Their recent record stands them in good stead.