The UK stock market: where the City’s smart money is investing

I recently met a group of UK equity fund managers from a number of fund houses including AXA Framlington, Invesco Perpetual, Schroders, Neptune & JO Hambro. The fund managers run over £3.5 billion of investors' money between them.

What they all have in common is that they run UK equity funds. So what is their view (the so called 'smart money') on the prospects for the UK stock market in the coming months? What parts of the UK market have them most excited? Not only do these managers run billions of pounds worth of money between them but they also have access to an army of analysts and economists. DIY investors are never privy to what the City really think, or at least they weren't. Below I give 80-20 Investor subscribers exclusive access to what some of the top fund managers are doing and where they see opportunities to make money

One thing they are all nervous about is the Election (plus its aftermath) and the impact it could have on the UK market. Don't forget that these guys don't need an excuse to talk up their book, after all they are UK equity managers, so their nervousness was very sobering.

To make the insights more accessible I have given each manager his own section and bullet pointed the key comments from the meetings.

Fund Manager: Chris St john

Funds managed: AXA Framlington UK Mid Cap Fund

Total assets under management: £94.7m

• He still believes that the FTSE 250 part of the UK stock market (called the mid caps) has strong earnings growth potential which is being underestimated by investors
• Improving economic confidence is increasing the number of mergers and acquisitions in this portion of the UK stock market which will boost equity returns
• Balance sheets (which give an idea of what a company owns, owes and the amount invested by shareholders) are much stronger than before the financial crisis
• He doesn't think mid caps are cheap but they are certainly not expensive.
• While not a screaming 'buy', the market is in a similar position to as it was back in 2007 before the financial crisis and those who bought then are sitting on profits, even after the market sell-off in 2008

Fund Manager: Alex Savvides

Funds managed: JO Hambro UK Dynamic

Total assets under management: £303m

• Believes the best value lies in small cap stocks (so FTSE Small Cap) rather than mid sized companies
• Believes that a good strategy for the UK right now would likely be a portfolio with exposure to smaller companies and one with exposure to the biggest FTSE 100 firms (referred to as the mega caps)
• Thinks that there is now value in mining company shares such as Anglo American, Acacia mining & Rio Tinto

Fund Manager: Mark Martin

Funds managed: Neptune UK Mid Cap & Neptune UK Opportunities

Total assets under management: £555m

• Would like to see a 20% correction before being bullish on UK stock market
• He is very concerned about the impact of the General Election
• Believes currency weakness in the UK will encourage merger and acquisitions in the UK which will be positive for share prices.
• Versus the US the UK is looking particularly attractive
• Thinks the best value lies in smaller companies' shares or in the very largest (mega caps)

The chart below shows where the value lies in the UK stock market. In simple terms if the current valuation of the market (the black diamond) is above the coloured bars (which represent the historic range for that portion of the market) then the market is expensive. Only smaller companies shares are attractive.

 

 

 

Fund Manager: Paul Marriage

Funds managed: Schroder UK Dynamic Smaller Companies & Schroder Absolute UK Dynamic

Total assets under management: £712m

• Also thinks the greatest value lies in smaller companies and not mid-sized companies
• Sees mergers and acquisitions picking up which will be good for the share price of smaller companies.
• Earnings forecasts for smaller companies are now much more realistic than they have been which could help drive up this portion of the stock market.
• 2014 was a poor year for funds investing in UK smaller companies in terms of returns and a lot of investors pulled their money out. However, this trend has now stabilised. There is now much more interest in smaller cap shares which means that you should not have problems selling if you bought into this portion of the market (i.e. liquidity is good)
• In the manager's view the next 12 months could be good for smaller company stocks.

Fund Manager: Martin Walker

Funds managed: Invesco Perpetual UK Growth Fund, Invesco Perpetual UK Aggressive & Invesco Perpetual Childrens

Total assets under management: £1.825bn

• Believes that the current valuation of the UK stock market is fair at best. Most investors would be inclined to buy defensive (bond like) shares as a precaution against a market dip. Martin Walker advises against doing this.
• This is because he believes 'bond like' shares which have driven up the market are due a correction when the over inflated bond market inevitably collapses. So that means avoiding shares in pharmaceuticals and utility companies in favour of more cyclical industries.
• Believes there are plenty of positive surprises which will all be good for UK shares later this year. These include economic growth in Europe and China as well as increases in UK wages and inflation.
• Thinks there is a strong case for buying shares in oil companies after their cost cutting efforts and he is bullish on the oil price.
• He is also bullish on miners and likes financials.

Conclusions

So what can we draw from all this? Well the managers universally agree that the best value in the UK stock market lies in smaller company shares where the outlook is positive. So perhaps if you are looking to invest in the UK then look at the UK Smaller Companies funds (which only buy smaller company shares) rather than UK All Companies funds on the 80-20 Investor Best funds by sector list.

Yet given that they are all UK equity fund managers none were particularly bullish on the short term prospect of the UK stock market, with one even hoping for a short term correction to improve its attraction. Also not all areas of the market are equal and with the market hitting all time highs they are turning to unloved sectors such as mining and oil companies for ideas.

So in short, the apparent 'smart money' is looking to buy smaller company shares and the shares of mining companies.