Three investment ideas for buying British

UK assets are out of favour and could offer good value for those able to take a longer-term view.

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  1. Ben Johnson

International investors have been shunning the UK equity market since the EU referendum result in 2016. For UK investors, weakness in the pound has supported many of the international revenue earners in the FTSE 100 as well as the values of overseas assets. Shares in companies orientated towards the domestic economy, meanwhile, have become less popular, especially smaller and medium-sized companies. This has opened up a wide dispersion in the valuations of shares in the UK market.

The result of the upcoming election could provide the catalyst for a change in market leadership, or an unwinding of some of domestic stocks’ underperformance. For those who anticipate such a scenario playing out we highlight three investments that could stand to benefit.

All three are part of our Foundation Fundlist of preferred options for new investment across the major sectors. They are provided for your information but are not a guide to how you should invest. Before investing in any fund please read the relevant Key Investor Information Document or Key Information Document, and Prospectus.

Aberdeen Standard Equity Income

The manager of this investment trust, Thomas Moore, was on the wrong side of the 2016 referendum result and performance has been lacklustre since this time. Mr Moore is prepared to hunt outside the largest companies to uncover underappreciated ‘dividend growers’ and is drawn to where he sees the greatest value. This has meant he has been buying into unloved parts of the market that trade on lowly valuations but where he believes businesses remain fundamentally sound. In the last few years this has led him to invest more in smaller and medium-sized companies.

At 5.4% the Trust offers one of the highest yields in its peer group, though this is variable and not guaranteed, and the portfolio is cheap versus the market according to various valuation metrics. In addition, shares in the Trust presently trade at discount to net asset value of around 7%, wide by its own long-term average, although there is no guaranteed this will narrow to the benefit of investors and it could also widen.

The Trust’s board recently expressed their disappointment at the last year’s performance. They acknowledge Thomas Moore had made stock-specific mistakes but confirmed he retains their full confidence. We too recognise he has had a tough time, but we still believe him to be a good investor who could do particularly well in a domestics-led rally in the UK market.

GVQ UK Focus

We’re always keen to identify exceptional managers from outside of the major fund groups and we believe Jamie Seaton at GVQ is one that fits the bill.

GVQ’s team is unusual in that they have private equity backgrounds. They believe this gives them a different perspective, with more emphasis placed on cash flow yield (generating high levels of cash at depressed valuations). The process has historically been effective at identifying companies that benefit from merger and acquisition activity, which has been one positive driver of performance as portfolio holdings are purchased by a trade buyer at a premium to market value.

This fund blends well with certain popular funds such as Liontrust Special Situations or Evenlode Income, which primarily focus on companies offering good-quality growth or dividend growth prospects – an entirely different approach to this fund’s value-orientated style, which makes it a good diversifier.

Mr Seaton is by no means targeting domestic exposure explicitly, and the fund does hold several primarily international earners but, given the smaller and medium-sized company bias and valuation focus, we’d expect a more settled domestic picture to provide a useful tailwind to performance.

Aberforth Smaller Companies

Aberforth’s value approach and smaller company focus mean this Trust could be a natural beneficiary of a domestic rally. From a style perspective, the managers are in a lonely place within their peer group which could be helpful; they are looking at areas where few others are bothering. This could give them an edge in terms of uncovering some bargain investments.

The fund is particularly active in “smaller small businesses” within their universe of potential holdings, which tend to be more domestically orientated. The trust’s discount has closed sharply in the last few months from double digits to 3% today. Despite the sharp move in the share price, there could be more to go if there is a ‘favourable’ election outcome, although a less positive or ambiguous result would likely mean a more difficult time for the Trust.

Past performance is not a reliable guide to future returns. This website is not personal advice based on your circumstances. No news or research item is a personal recommendation to deal. Investment decisions in fund and other collective investments should only be made after reading the Key Investor Information Document or Key Information Document, Supplementary Information Document and Prospectus. If you are unsure of the suitability of your investment, please seek professional advice.

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