The macroeconomic and political backdrop of the UK means that its stockmarket is no longer an “outlier” relative to its European counterparts, but is now “very much in the pack”, according to Liontrust’s Imran Sattar and James de Uphaugh (pictured).
The managers, who have headed up the £1.2bn Edinburgh Investment Trust (EDIN) since 2020 and earlier this year respectively, say their stock shortlist is “pretty long” currently, with UK-domiciled companies remaining attractively priced compared to “like-for-like” overseas names.
“There are no longer good reasons why the UK market is trading at a material discount to global markets,” Sattar says. “Investing in the UK stockmarket is not synonymous with investing in exposure to the UK, because only 25% of earnings in the UK are domestic. The rest are very much international.
“When you look at some of the global names in the UK stockmarket and compare them to overseas names, they are trading on a material discount. That’s not right.
“The market will close that discount and, to some extent, we have already seen the beginnings of that. We think there is a lot more to come.”
In addition to solid company fundamentals, the managers point out that inflation data and interest rates are no longer significantly divergent from other developed market economies. And, while the UK’s political backdrop is “far from perfect”, Sattar argues that both Labour and Conservative parties have “moved closer towards the centre” in terms of their beliefs.
“We have been somewhat of a political outlier between 2016 and 2021, given Brexit. But there are lots of other extreme political outcomes across the rest of Europe now that the market has to think about,” the manager explains. “I would say, if we have been a bit of an outsider over the years, we are now very much in the pack.
“Is our political backdrop perfect? Of course not – it is never going to be perfect. But we are no longer an outlier on the political spectrum.”
Pieces of the puzzle
Despite keeping an eye on the macro, both managers select stocks for the trust on a bottom-up basis, with between 40 and 50 companies being held in the portfolio at any one time. De Uphaugh and Sattar do not lean towards any specific style bias, instead prioritising companies which offer a competitive advantage relative to their peers, an ability to take market share and improving returns on capital.
“We like businesses to be run by smart capital allocators who make good decisions for the long term,” Sattar says. “We like chief executives to be taking three-to-five-year decisions, not running the business based on what it will look like over the next six months.”
De Uphaugh likens choosing companies to invest in to “analysing a large jigsaw set”. “At any point in time, you know the type of company that you want to hold but the pattern isn’t quite there yet. So, you have to find a piece that falls into place,” he explains.
“In terms of [the trust’s third-largest holding] M&S, it could be an article in The Grocer, or a snippet from a competitor. But it is one piece that feeds into your fundamental research that you have done, in order to appraise the valuation of the company. And, as your confidence builds in a stock, you buy more.
“And, on the selling side, you might have evidence of hubris, or capex that isn’t being spent very well. You might have a manager change.”
The trust, which resides in the IA UK Equity Income sector, also adopts a total return approach to investing, as opposed to focusing specifically on high-yielding stocks. The portfolio currently yields 3.96% – the same as the FTSE All-Share index, but it has comfortably tripled the performance of its average peer in the sector, in total return terms, since de Uphaugh took to its helm in March 2020, having gained 46.3%. This, according to data from FE Fundinfo, means the trust is the second-best performer within the 20-strong sector.
Passing the baton
Earlier this year, De Uphaugh announced that he would be retiring from the industry, fully handing the reins over to Sattar from February next year. While Sattar has only been listed as co-portfolio manager of EDIN since October, the duo point out that they have worked closely together for years – not just at Majedie, which was purchased by Liontrust in 2020 – but back in the late nineties, when both managers worked together at Mercury Asset Management.
“We’re at the stage where the baton is about to be passed to Imran to manage the trust,” de Uphaugh says. “I have managed this trust with the team for three and-a-half years and, during that time, I have worked closely with Imran – at our predecessor company, Majedie, as well.
“I am very confident that the style that the team and I have cultivated over this period is going to be in a similar vein going forward.”
See also: “Kepler: Edinburgh IT’s succession plan ‘one of continuity’ in run-up to de Uphaugh’s retirement“
Sattar explains that, while trust has been led by de Uphaugh, it is run using a team-based approach, and that this team remains the same.
“It will be led by me, but it is very much a collegiate approach,” he says. “Yes, you do need somebody to pull the trigger on certain things and a fund manager who is accountable for the trust, and that’s going to be me, but the most important thing is that our team of investment professionals is not changing .
“The other thing to note is that, from the start, James has very clearly articulated our total return approach to the trust’s board. We are not about chasing high-yield shares. And again, that is not changing. It has served the trust very well over the last three and-a-half years.
“So, there are clearly things that are very similar between James and I, and the team-based approach is not changing. Of course we are not the same person – not all fund managers are created the same, so there will be some stock-specific change. But the broader portfolio construction of the trust is not changing.”
Next steps
When asked about his medium-term plans for EDIN, Sattar says his focus will be to narrow its discount to net asset value which, according to AIC data, stands at 8.1%.
De Uphaugh explains that, when the team first took on the trust three years ago, the aim was “very much to get that first phase of rehabilitation in place”.
“Because when a trust comes up for review, the board wishes to have a change. That is when we put forward our total return-type strategy based on fundamental research,” he says.
“We were gratified – the numbers since then have been good in absolute and relative terms. That has helped to heal the initial outsized discount, which was at the low teens and has now moved to high single digits.
“We would all say there is more to do here. Part of that will relate to continuing to perform well, part of it is also spreading the word in terms of what Edinburgh Investment Trust offers investors. We want to move the trust back to where it was, which was the ‘go-to’ investment trust choice for UK equities. I think that is a realistic goal.”
