Important information: The value of investments and the income from them, can go down as well as up, so you may get back less than you invest.
There are a number of reasons why the UK market is a strange one. Its preponderance of value-focused sectors - services, industrials, financials, etc. - can be a hinderance during economic downturns, but a boon in quickly rising markets when economies reopen. Throw in Brexit and a slow initial response to the pandemic, and you’d be forgiven for wondering when the UK will ever return to favour.
But for Ed Legget, manager of the Artemis UK Select Fund, one of our Select 50 favourite investments, the UK’s oddities also present opportunities. Paying little attention to the benchmark index, Legget is free to scour this “very odd” marketplace for companies whose performance he feels can deviate meaningfully from the sectors which dominate it.
I recently caught up with Legget to discuss his investment approach.
Legget bases his investment approach on a “very simple concept trying to achieve a very simple outcome: to compound up returns through time that are materially different from the UK market.”
Very simple, but what exactly does it mean?
The UK market is skewed both by its value-focused sectors - commodities, financials, and so on - and also by its top 20 stocks. That makes it relatively easy to see what’s driving performance and, by extension, how to better it.
But for Legget, that’s not enough. Given the influence of those top 20 stocks, he explains how the average UK stock is itself “significantly” outperforming the market. For Legget, what’s important is outperforming that average stock in the market, not just the market.
That leads him to a “best ideas” investment style that pays little heed to the benchmark, both in terms of size and sector.
It’s important to Legget that active idea generation rather than a benchmark index is what guides stock selection. He explains how investors who want to simply track the UK market can do so “much more cheaply through a passive strategy”. His investors, on the other hand, are “buying our ideas, and that’s what this fund is all about”.
This means he’ll only look to invest in companies where he feels he has a “powerful investment insight.”
He explains: “If we don’t have a strong view on a company we don’t invest. That doesn’t mean we get every investment right. But through time, if we just invest in companies where we do have a bottom up insight, we think we can deliver something very different from the market.”
This means he’s free to hold a relatively concentrated portfolio - typically the fund holds around 40-50 stocks. While investors should note that more concentrated portfolios do typically come with added risk, Legget feels comfortable at this level. He looks to construct his portfolio with around 1-5% allocated to each stock, recognising that not every insight will be equal - both in terms of appreciating their upside and recognising their downside.
He’s also willing to be flexible with stocks’ allocations. In the case of William Hill, Legget made a small initial investment in the company last year when sports betting companies were shut for business and the business looked cheap. Despite the short-term problems created by the pandemic, he was still impressed by William Hill’s market position. He cites William Hill as an “example of a company we put in at a small position in the fund and then gradually as things recovered, it became a larger and larger position.”
One thing investors should note is that Legget has the ability to hold “short” positions on companies. Shorting involves the managers borrowing a stock, selling the stock at market value, then buying the stock back at (hopefully) a lower price to return it to the lender. Investors short stocks they believe will fall in value, so they can buy back the stock at a lower price than that at which they previously sold it.
Shorting is inherently riskier than the conventional ‘long’ positions most funds take, and it’s a risk Legget is very aware of. In his eyes, shorting is “another string to the fund’s bow” rather than the bedrock of his investment approach. He explains that while “99%” of his time is spent looking for long positions, he will occasionally encounter an opportunity where he sees significant change and a shorting opportunity. Doing so allows him to “add returns to the fund from those insights where we wouldn’t otherwise have had access.”
For investors who are comfortable with that added degree of risk, the Artemis UK Select Fund is an interesting approach to a peculiar market. Investors should expect it to differ from the index, but can hope for some meaningful outperformance as well.
More on Artemis UK Select Fund
Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. Select 50 is not a personal recommendation to buy or sell a fund. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. The Artemis UK Select Fund invest in a relatively small number of companies so may carry more risk than funds that are more diversified. The fund may use financial derivative instruments for investment purposes, which may expose the fund to a higher degree of risk and can cause investments to experience larger than average price fluctuations. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to a Fidelity adviser or an authorised financial adviser of your choice.
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