Investment trusts gearing up for Brexit bargain stocks
UK facing investment trusts are using gearing to take advantage of what many managers perceive as a swathe of Brexit bargains among UK listed stocks.
‘Our belief is that there continues to be good, medium term value in UK equities, especially if interest rates stay low and sterling remains at these low levels,’ said William Meadon and Callum Abbot, joint managers of the JPMorgan Claverhouse (JCH) investment trust.
Gearing is employing debt to bolster the available funds that can be used to invest.
Meadon and Abbot said ‘good stock selection and being geared into a rising market’ were key to the investment trust delivering a 16.7% total return in the six months to 30 June, outstripping the 12.9% return of the UK Equity Income benchmark.
‘This is reflected in the portfolio which remains geared by 8.9%,’ a figure which has been pushed out to 17% most recently, according to data from the Association of Investment Companies.
This may appear at odds with the slew of negative official data coming from the Bank of England and Office of National Statistics (ONS) recently. In the second quarter to 30 June the UK economy shrank for the first time in almost seven years, plunging the pound to near-10 year lows.
‘Investors are seeing a perfect storm brewing,’ said Nigel Green, founder of the financial advisory business the deVere Group.
Investors are increasingly concerned about the UK’s ‘slowing economy, weak global economic growth, the pound at a 10 year-low, the increasing possibility of an interest rate cut and the risk of a no-deal Brexit pushing the UK into a recession,’ said Green.
Yet JPMorgan Claverhouse’s managers accept the multiple uncertainties facing the UK and investors right now, but they also see opportunity.
‘Relative global valuations strongly favour equities over bonds and within this, the high yielding UK equity market looks particularly good value,’ even after dividend horns have been pulled in by several blue-chip companies. FTSE 100 firms to cut payout to shareholders this year include British Gas-owner Centrica (CNA), Marks & Spencer (MKS) and Vodafone (VOD).
JPMorgan Claverhouse is not alone in its optimistic medium-term view of UK stocks. It is one of 13 of 42 within the UK Equity Income and UK All Companies AIC sub-sectors to currently be running double-digit levels of gearing.