Courtiers head of fund and asset management Caroline Shaw is stepping into the new year with renewed optimism as beleaguered UK value stocks start to regain some of their shine.
The Courtiers UK Equity Income Fund is now top-quartile in its IA UK Equity Income peer group on a three- and six-month view, as well as over three and five years. During the past three months alone, the fund has returned 32.2% – more than double the 14.9% sector average.
Like most value-based strategies, until very recently performance had been “a shocker”, says Shaw. “Value has had such a horrible period but our view is that it will come back. For the people who left it behind, they won’t pick up the benefits, and then they’ll wish they’d stayed.”
Courtiers Global ex UK Equity Income mandate, which also employs a deep value strategy, has performed decently, though not quite as well, returning 11.2% in three months versus the IA Global Equity Income sector’s gains of 8.6%.
More value than value
Both strategies, which have around 30 positions each, correlate highly to the MSCI deep value indices “which are even more value than value”, Shaw says. Positions are equally weighted at 3%, which she believes is a strong discipline to have. “It means you either have it in the portfolio or you don’t, so you can’t just like it a little bit. And there’s no benchmark hugging.”
British Airways parent International Airlines Group, airport cafe operator SSP, Stagecoach and chemicals company Elementis have been among the UK Equity Income Fund’s biggest winners following the initial Pfizer/Biontech vaccine fuelled euphoria.
Though UK markets continued to climb on the back of Brexit certainty and the roll-out of the Astrazeneca/Oxford jab, Shaw isn’t making any changes. “We continue our search for attractively valued companies, and we assess those companies to ensure they fit well alongside existing positions, as well as ensuring we avoid the value traps: companies that look good value but are on the way down and out for a range of reasons.”
Rotating away from US and into UK stocks
Shaw has been at Henley-based wealth manager Courtiers since 2000 and has been its head of fund and asset management for the past six years. Together she and CIO Gary Reynolds manage the DFM’s six strategies, which also include the Investment Grade Bond Fund as well as the Total Return Cautious, Balanced and Growth portfolios. On top of this, they oversee a fund-of-funds ethical strategy for clients.
Shaw has been rotating out of the US, a core position in the Total Range portfolios for a number of years, and now favours opportunities in the domestic market. UK equities currently account for over a third of the growth fund, 30% of the balanced fund and 22% in the cautious mandate.
This move has proved extremely beneficial during the past several months as the UK market, the great laggard for most of 2020, has come roaring back. Since the flurry of vaccine-related news on 6 November, the FTSE All-Share has risen over 16%, more than twice as high as the S&P 500, up just 7%.
Shaw has particularly taken a shine to the beaten-up UK commercial property sector. Ahead of the November vaccine rally she initiated stakes in the BMO Commercial Property Trust and the UK’s biggest Reit, Land Securities. Since then both stocks have risen by close to 30%.
“Commercial property’s taken a bit of a battering, but you get to a point where how much worse can it get? These are decent properties – they’ve got a value and mostly the tenant is still able to pay.”
Courtiers initiates stake in former Woodford favourite
Another successful score was buying the Newriver Reit. Shaw scooped up shares in the closed-ended vehicle when they were trading at 50p around mid-September and added to her position when the price dropped again the following week, to 48p.
Since then, shares in the Reit have shot up close to 70% at 80p, though this is still a long way off from their 197p price tag a year ago.
Shaw and her investment team had been looking at the stock for years but avoided purchasing after they saw who was on the shareholder register: fellow Oxford-based investors Neil Woodford and his Invesco protégé Mark Barnett.
“I looked at it three years ago and really liked the investment narrative. I didn’t like the fact that Neil Woodford and Mark Barnett, between them, owned 50% of the business,” Shaw recalls.
“At the time there was no way we were buying because we couldn’t be part of what we thought was going to happen – which of course eventually did happen,” she says, referring to the collapse of the Woodford Equity Income Fund in 2019. “You could see those liquidity issues a mile off.”
‘We’re thinking about inflation rising and bonds getting absolutely killed’
Diversifying her multi-asset portfolios away from the traditional bond/equity split has become increasingly important for Shaw who believes investors are underestimating the threat of rising inflation. “For us, a really big risk we’re thinking about is inflation and rates rising, and bonds getting absolutely killed,” she says.
“This safe haven could just disappear and people who have had these lovely balanced portfolios could find that, not only do their equities get hit, their bonds get hit, too.”
As such, she has been favouring short-duration assets in her multi-asset funds. While this has not helped returns, Shaw says she would rather keep her powder dry and interest rate risk low.
Open-ended property funds are a no-go
Though she has had recent successes with Reits, investing in open-ended property funds is out of the question for Shaw. “I’ve hated them for a number of years for all the obvious reasons.”
She spied the first signs of trouble back in 2006. She and Reynolds were about to launch their first product and were in London meeting various fund managers.
There were billboards everywhere advertising the New Star International Property Fund, which was soon to become one of the most high-profile casualties of the 2008 crash.
“We said, ‘Everyone is telling us property is the next big thing’, so we got home from London and sold our position. It was like that story from the 1929 crash where if the shoeshine boy is telling you to buy stocks, you know you’re in trouble.”
It’s a decision she hasn’t regretted as the major property funds have continued seizing up in times of economic stress like after the Brexit vote in 2016 and, more recently, following the Covid-19 pandemic.
“I can’t understand why these companies keep them in the open-ended format. I guess they’re greedy for inflows but it’s time to move on to a better format.”
Ethical vs ESG
Amid the chaos of the pandemic last year, Shaw spent a lot of time reflecting on a subject she has been passionate about for many years: ethical investing. During the first national lockdown she received the UK certificate in ESG investing from the CFA UK.
Courtiers has been ahead of the curve among wealth managers, offering clients fund-of-fund ethical strategies since 2005.
Historically, she has preferred managers who take a more exclusionary approach as opposed to investing in ESG factors. This had led to her booting out certain funds over the years, including the BMO (F&C) Responsible UK Equity Income Fund and L&G Ethical trust, for owning borderline stocks and having mandates that would be too lenient for clients.
Shaw hasn’t changed her tune on this topic, although she thinks ESG and ethical investing will both be key considerations in client portfolio construction moving forward. “My broad view is that ESG should be in every person’s investment management process and analytical process. I cannot see why any decent analyst would not consider governance, environmental and social factors.
“But what you will then get is people taking some of those themes to a more extreme level, so ethical will be an exclusionary screening on top of ESG.”
She regards the recent flurry of ESG product launches in 2020 with some scepticism. “If you’re suddenly launching an ESG fund, what the hell does that mean for the other stuff you are already doing?”
