JOHCM UK EQUITY INCOME FUND: Outlook for UK equities is still positive

Mutual fund manager Clive Beagles is in an optimistic mood. Despite the tough measures introduced by the government in Thursday’s budget to plug the £55bn black hole in public finances, he believes the outlook for UK equities is positive.

“The government tried excitingly and failed,” he says, referring to the failed attempt by Liz Truss and Kwasi Kwarteng to grow the economy through tax cuts.

“It is now time for a period of boring politics, however heavy some fiscal measures may be for household finances.”

With financial markets backing Rishi Sunak’s government and the pound holding its own against the dollar, Beagles believes the conditions are being created for investors – both foreign institutions and those based in the UK – to get back into UK stocks. supports.

Beagles is the joint manager of the £1.7 billion JOHCM (JO Hambro Capital Management) UK Equity Income fund, a fund he has co-managed with colleague James Lowen since its launch in 2004.

He says the pair have “rarely felt so strongly” that now is the time to put money into the fund.

It offers a dividend equal to six percent per annum – and Beagles believes the fund can continue to grow this at about nine percent per annum, the average over the past 18 years.

The fund manager’s view is that rafts in the UK stock market remain chronically undervalued. “It’s crazy that the market value of a US stock like Apple is worth more than the combined value of the entire UK stock market,” he says.

Beagles and Lowen have 59 companies in the fund, made up of stocks from across the market: FTSE100 companies to smaller companies.

But JOHCM UK Equity Income’s portfolio is dominated by two themes: financials and commodities and oil. These account for half of the fund’s assets. The financial component includes interests in banks (such as NatWest, Barclays and Standard Chartered) and insurance companies (Legal & General, Phoenix and Aviva).

Beagles’ view is that the banks are much more resilient than they were in 2008 when they entered the financial crisis – and have room to increase profits as interest rates remain high, allowing them to make money from the difference in interest rates they charge borrowers bring and give to savers. Share prices in the sector could double in the next three years, he said.

Insurance companies, Beagles adds, are likely to benefit from purchasing defined-benefit occupational pension plans from companies that want to reduce the risk of managing them themselves.

He also believes they will likely play a key role in financing long-term infrastructure projects as the government steps back to get its own finances in order. In the commodities and oil sectors, the fund’s focus is on companies such as BP and mining giant Glencore, which respectively aim to diversify away from oil; and metals (such as copper and cobalt) that are critical to the transition from hydrocarbons.

With other key holdings including car dealership Lookers, media companies WPP and ITV, and furniture giant DFS – all undervalued – Beagles believes the fund can provide investors with a decent mix of capital and income over the next three years. Certainly much more than the 7.4 percent return it has generated over the past 36 months.

When it comes to environmental, social and governance (ESG) issues, Beagles says her strategy focuses on companies looking to improve their ESG credentials. Almost a quarter of the companies have improved their score in the past year.

The fund pays quarterly dividends and the exchange ID code is B03KR50. The annual costs total 0.83 percent.