The UK equity market has struggled over recent years on a relative basis as Brexit uncertainty has clouded the investment horizon. Under the surface of the headline index returns there has been an even starker divergence between performance of those companies most reliant on the domestic economy and the more internationally exposed businesses benefitting from a weaker sterling. This has been evident in the outperformance of ‘growth’ investment strategies over ‘value’.
These trends reversed in October as more clarity emerged around the Brexit negotiations. The EU approved Boris Johnson’s amended withdrawal bill and a ‘flextension’ was granted to delay the deadline for Brexit to 31st January next year. This caused sterling to rise as the market seemingly discounted the chance of a messy ‘no-deal’ scenario, leading to a sharp reversal in the types of stocks that outperformed.
This style reversal is best demonstrated through the performance of a couple of the underlying mandates in the MISM UK Equity fund; one managed by Nick Train a growth investor and the other by Alistair Mundy a value investor. The LF Lindsell Train UK Equity fund (managed by Nick Train and the basis for our segregated mandate) had outperformed the Investec UK Special Situations fund (managed by Alistair Munday and similarly the basis for our segregated mandate) by 8.7% over the year to the end of September as internationally exposed growth stocks continued their outperformance of recent years. In October this reversed sharply, and the Investec fund outperformed Lindsell Train by over 6.5% in just one month.
These underlying market gyrations have provided a good test to the premise of our MISM funds; i.e. to combine complimentary investors to produce a fund more robust to market rotations. Whilst the relative performance of the underlying strategies has varied significantly over the year, the outperformance of the MISM UK Equity fund has been more stable. The fund delivered an outperformance of the FTSE AllShare over the first 9 months of the year of 3.4% when they growth style was leading the market, and also managed to outperform in October’s sharp rotation by 0.4%.
Both managers are sticking resolutely to their investment beliefs. Nick Train retains exposure to the best quality companies he can find trusting that the short-term price action does not reflect the operating outlook for these businesses, and it is this that will determine the long-term outcome for the share price. Whilst Alistair Mundy continues to find his investment opportunities in the laggards hoping that October’s rotation marks the start of a longer-term revival of his value style. This divergent thinking is why we combine the two in our MISM UK Equity fund.
Past performance is not a guide to future performance.
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