I am sometimes asked whether I feel constrained by having to invest the majority of the portfolios I manage in UK assets. In general, I believe fund managers operate most effectively in an environment where constraints are kept to a minimum but, in this particular instance, I do not mind being compelled to invest the majority of the portfolios in the UK.
First and foremost, the reason for this is that I consider myself to be a UK investor. I have been investing in the UK stock market for the best part of thirty years and I regularly draw on this experience in the context of prevailing market conditions. Whether it’s revisiting old ideas, previously quoted companies coming back to the market or management teams I’ve backed before in new settings, the bank of knowledge on which I can draw is an incredibly valuable resource. Experience counts in this profession.
Secondly, the job of managing a global mandate is very different. The investment universe of the UK stock market is big enough – for a global mandate, the universe is unmanageable, in my view. Filtering and screening techniques are required to bring the investment universe down to a more practical size. I have always been against using this sort of filtering process, because it necessarily relies on quantitative data and can prevent you from becoming aware of investment opportunities which may look extremely attractive on any other measure.
Thirdly, and perhaps most importantly, the UK stock market is by no means a direct reflection of the UK economy. The UK stock market is home to some very large, globally-diversified businesses, some of which barely touch the UK economy at all.
We recently conducted some analysis to calculate the CF Woodford Equity Income Fund’s geographic exposure by the revenues of the underlying companies into which it has invested. This isn’t as easy as it sounds – every company reports geographic revenues in its own way and simplifying all of the variations involved some painstaking analysis and a reasonable amount of assumption. This pie chart is the end result and we believe it is a good indication of the fund’s true geographic spread.
In terms of stock market listing, well over 80% of the fund’s assets are invested in the UK. On the basis of underlying revenues, however, the figure is broadly half that number. The fund also has a healthy revenue exposure to the US economy, which has of course been performing much better than most other economies in the recent past and we would expect that continue, albeit with potentially a more modest growth rate going forward.
The fund also has a reasonable exposure to Europe and emerging markets, which implies a much greater level of geographic diversification than country of listing would suggest. Growth prospects for these regions may look somewhat less robust but it is important to note that our strategy has intentionally focused on dependable sources of growth, investing in businesses that do not need a buoyant economic environment in order to deliver sustainable long-term growth.
Despite this geographic diversification, the portfolio is actually much more UK-centric than the FTSE All Share index. This is down to our lack of exposure to oils, miners and other major global-facing businesses, which in aggregate account for a substantial part of the UK index, but the vast majority of their revenues are sourced from outside the UK. Estimates of the FTSE All Share index’s UK exposure vary, but most analysts suggest that it lies somewhere between 25-35% by revenue.
In general, the ‘less constraints = more opportunity’ mantra is very important. I will always consider myself as a UK fund manager but equally, I am delighted to have the scope to invest overseas where my knowledge of UK businesses lends itself to an overseas context. For example, tobacco and health care are globally consolidated industries where individual companies can have strong similarities and be exposed to the same broad influences. Hence, we have been able to build greater exposure to these industries by investing in attractive overseas businesses, than a UK-only mandate would have been able. This additional flexibility is welcome and will, I believe, add considerable long-term value.
This article first appeared in Money Marketing on 12 November 2015.