Q: You took over the UK Growth fund in June after Ed Burke stepped down. Did you make any large changes?
A: When I took over the fund I stated I would not slash and burn the portfolio and carve it up in the first week. This is because volatile market conditions are not the best time to be making large changes, so the changes I made were more gentle.
The fund has a core of good value defensive companies, such as GlaxoSmithKline, AstraZeneca, Vodafone and BT. However, above this, at the edges, markets have allowed me to add some more risk to the portfolio.
Ed [Burke] had positions in a number of banks, which I have sold out, namely HSBC, Lloyds TSB and Alliance & Leicester but I have not been de-risking the portfolio. Instead I have tightened the number of bank holdings and made them more focused. I now have two bank stocks HBOS, which I increased the fund’s holding in after taking over and the Royal Bank of Scotland (RBOS) which is a new holding.
Q: The fund is ranked fourth quartile over the past 12 months. What are the main factors that have caused this?
A: When I inherited the fund it contained a large number of biotech holdings, which have performed awfully over the past 12 months and have been a drain on the fund’s performance.
I am generally not predisposed to these types of companies but right now is not the time to sell them. This is because in terms of development the stocks we own are ending their phase-two trials, which is when the upside starts to come through.
Another factor behind performance is that Ed went into global cyclical stocks too early. I have since reduced exposure to cyclical opportunities in favour of more defensive sources of growth. However, some cyclicality does remain in the portfolio, where the savage market conditions have unearthed attractive opportunities. For example, the general retailer DSG International, leisure company Carnival and life insurer Aviva have all been added to the fund.
Q: After taking over UK Growth it was announced the group intended to merge it with the UK Opportunities fund you also manage. Has this happened?
A: Not yet, we expect it to take place in the middle of this month. However, this is of little relevance because I run the funds in close to an identical manner. I took over three funds from Ed, UK Growth, an offshore equity fund and the UK equity component of the International Equity fund. I run all these funds in the same way.
Q: How would you describe your overall investment process and style?
A: I follow a conviction-based approach, which tries to be contrarian and uses a valuation discipline. The investment process has no inherent style bias that favours particular sectors, stocks or market caps.
Ed was more of a bottom-up driven manager meaning some of the ideas I inherited were very much “Ed Burke stocks”. These include the IT business Psian, which I have already sold. There was also a number of mid cap stocks in the fund, which I have also sold, the proceeds of which have been reinvested in undervalued large cap stocks. I am more of a large cap stock investor than Ed, although I am happy to look across the field.
Q: Given the slowdown taking place in the economy what type of strategy are you adopting on all your portfolios?
A: There are weaknesses in the economy but these have been well discounted by the market. Every time I listen to the business reports on the radio I hear the world is going to hell, so the problems have been well discussed. However, the equity market as a whole right now is cheap. At about 6% equity risk premiums are at 20-year highs.
There is still risk in the resources sector as there could be more downside in the oil price, but we don’t hold any of the big mining companies, but we do own BP and Shell. In my view the oil stocks are pricing in lower oil prices in the future, possibly falling to about $60-70 a barrel.
BP and Shell still have quality assets and they should be trading at a premium and over time I expect the market to start to discount their quality.
So overall I am bullish on the market. Companies like BT offer lots of value and HBOS is very cheap. There will be more bad news and businesses will be challenged, but this is more than reflected in their share prices and they should rally if there is a year-end rally in the stockmarket.
Q: The Bank of England is trying to balance the risks of rising inflation and slowing economic growth. In the face of slowing retails sales and falls in the housing market what are you expectations for interest rate moves?
A: If I were the Bank I would have cut rates already. However, it wants to ensure that the largely commodity driven inflation in the CPI [consumer prices index] does not shift into wage price demands and secondary price inflation.
By summer next year inflation will be last year’s story, we could even start to be fretting about disinflation but that very much depends on the future direction of commodity prices.
Geopolitical events aside I think the Bank of England will wait until the end of the year before cutting rates, but if the market senses an improving inflation outlook it’s unlikely to wait to discount falling rates and therein lies the scope for a year-end rally in markets.
Q: What is your expectation for British GDP growth this year and next?
A: I don’t really have a strong view. I find looking at GDP growth as somewhat of a backward looking indicator. My gut feeling is there is a good chance of a technical recession, that is two consecutive quarters of negative GDP growth, but I am not sure how much difference this will make to me. What matters to me are valuations and earnings.
Q: Finally what legacy do you think Ed Burke has left behind during his tenure at the group?
A: I have been at Invesco Perpetual for nine years and Ed and Neil [Woodford] have been at the firm during all of that time. Both have been formative in terms of shaping my investment approach and outlook.
In term’s of Ed’s legacy he has been very influential in my career and his entrepreneurial approach to fund management lives on with me.
MARTIN WALKER joined Invesco Perpetual in 1999. He took over the UK Growth fund in June following the retirement of Ed Burke.