Despite a bidding war for UK small and mid-cap companies, James Burns, co-manager of Smith & Williamson Investment Management’s MPS, remains positive on the UK market.
UK small and mid-cap companies have been involved in a number of bids this year, with several firms taken over by private equity or corporate buyers at levels much higher than the market is pricing.
For Burns, however, the UK remains cheap compared to almost every other market in the world.
“The UK market has a lot going for it, and as such we believe the UK domestic play is still in place. The Bank of England continues to hold interest rates. Even if they do decide to hike rates next year, it will be a very slow move.
“In terms of inflation, it has the potential to top out early next year before falling to more normal levels, albeit higher than they have been in the last 15 years. Generally, we’re very positive.”
But this sentiment is not shared by the rest of the market, with the UK appearing under appreciated. Burns believes this is due to earnings profiles being dominated by larger companies, leaving many of the UK’s smaller and medium-sized companies undervalued.
“Earnings profiles are being skewed by some of the larger companies, such as the oil giants, resulting in many UK domestics being under appreciated.
“Coupled with this is a considerable amount of money in the US market, which continues to make great strides. Understandably, asset allocators are sticking with the US and not diversifying away. However, the longer this lack of diversification continues, the more opportunities there are for private equity businesses to come over and reduce our already shrinking market.”
To access the opportunities that remain in the UK, Burns and the MPS team have a small-cap and mid-cap skew in the managed portfolios.
“We have been keen on the UK for a while, and this is reflected in the range of domestic focused funds held in the MPS. We have a comfortable position with the managers wherein we allow them to allocate where needed, within reason.
“BlackRock Smaller Companies Trust has been held in the range since inception, mostly in the more growth focused portfolios. In the past 6-8 weeks, the investment trusts in the smaller company space have seen their discounts widen, but fundamentally, they’re doing a great job. This particular trust has a phenomenal long-term record and has continued to perform under its new manager, Roland Arnold.
“To add a different style to the mix, we also hold Premier Miton UK Multi-Cap Income. Whereas BlackRock Smaller Companies Trust is more growth focused, Miton has more of a value tilt to it, and it sits within a part of the market we’re happy to have money allocated to.
“While some UK strategies more recently haven’t covered themselves in glory, from March to September this year our strongest holding was Troy Income & Growth Trust, which has more of a quality growth style. This diversification of styles has been essential to the portfolio, as over the last year the quality growth theme has done less well thanks to the vaccine news of last Autumn. Although this has reversed somewhat since the first quarter, we believe that UK value will remain the place to be going forward.”