U.K.’s Top Stock Picker Bets on Pubs, Housing as Economy Falls
Paul Spencer, the U.K.’s best stock picker over the last five years, likes to stay local. The 45- year-old money manager lives in Halifax, northern England, where he was born and works less than 15 miles away in Leeds.
Having beaten rivals by betting on stocks that get most of their earnings from overseas in 2010, Spencer says now’s the time for investors to return home. As the economy shrinks, inflation climbs and policy makers consider raising interest rates, he’s buying pub chains such as JD Wetherspoon Plc and house builders such as Bovis Homes Group Plc. Other managers at BlackRock Inc. and Old Mutual Plc disagree.
“Many U.K. stocks are already pricing in a very, very bleak environment so anything slightly better than that could give some of these domestic-facing stocks quite a lot of scope to perform well,” Spencer said in an interview at his office in Leeds, nearly 200 miles north of London. “I’ve probably taken a contrarian stance here.”
Spencer has run Rensburg Fund Management Ltd.’s U.K. Mid- Cap Growth fund since 2006 and has returned 86 percent since then, beating all other U.K. equity funds with assets of more than 350 million pounds ($562 million), according to Morningstar Inc. The 390 million-pound fund, which invests in FTSE 250 stocks, has also outperformed all its rivals, including Fidelity International Ltd.’s Special Situations Fund, formerly run by Anthony Bolton, over three, five and 10 years. The FTSE 250 is made up of U.K. firms with a market value of 100 million pounds to 3.4 billion pounds.
An investment of 10,000 pounds in Spencer’s fund five years ago was valued at 18,600 pounds as of Feb. 14, compared with 12,700 pounds for the average U.K. equity fund, according to Morningstar, the Chicago-based fund researcher. The same investment in a fund tracking the FTSE 250, Spencer’s benchmark, was worth 12,630 pounds.
The Bank of England said yesterday the U.K.’s growth outlook has worsened and inflation will rise to 4.4 percent this year, more than twice its target. The forecast assumes its key bank rate will rise to 1 percent by the end of this year and 2 percent by the end of 2012 from 0.5 percent today. Separately, the government also reported that unemployment claims unexpectedly rose in January.
Spencer said he pays little attention to macroeconomic forecasts. “Market forecasters only exist to give astrologists a good name,” he said, paraphrasing economist John Kenneth Galbraith, author of “The Great Crash: 1929.” Instead, he said he picks stocks he considers are undervalued by the market.
About 50 percent of Spencer’s fund is now made up of U.K. firms that get most of their revenue at home compared with about 40 percent in the third quarter of 2010. The balance is made up of stocks that get the majority of their earnings from overseas. Spencer made the change late last year as the U.K. economy shrank 0.5 percent in the last three months of 2010 and inflation accelerated to almost double the Bank of England’s 2 percent target.
“I can find businesses trading on valuations that presume life will remain pretty tough and in some cases get worse for a few years,” he said. “You’ve got an opportunity to buy businesses whose price expects no upside surprises whatsoever.”
Richard Plackett, manager of BlackRock’s U.K. Special Situations Fund in London, the No. 2 performer over the last three years and fourth-best over five years, disagreed.
“The U.K. is facing a very significant structural adjustment,” he said. “A huge proportion of U.K. GDP is made up of either government spending or consumer expenditure. In both of those areas, growth is heavily constrained. You don’t want to be betting against the economic forces in the world right now.”
Plackett, 47, whose 1.4 billion-pound fund has returned 40 percent over the last three years and 48 percent over five years, said software-maker Aveva Group Plc and engineers Victrex Plc, Rotork Plc and Spirax-Sarco Engineering Plc will be winners this year, bolstered by sales in the U.S. and emerging markets.
Richard Watts, manager of Old Mutual Plc’s 900 million- pound U.K. Select Mid-Cap Fund in London, has returned 56 percent over the last five years, making it the second-best performing British fund over the period, agreed with Plackett in preferring overseas-earning firms.
“I personally think they’ve got further to run,” he said in an interview. “But I would suggest it’s more about stock selection within that particular part of the market that’s going to drive your relative return this year.”
“Top-line growth will be difficult to come by for a lot of the consumer-facing businesses in the U.K. market,” he said. “It’s hardly the most exciting outlook for U.K.-focused businesses.”
The FTSE 250 Index climbed 26.3 percent in five years, compared with a rise of 3.8 percent in the Standard & Poor’s 500 Index and a 4 percent increase in the MSCI World Index.
Spencer studied economics at Nottingham University and in 1987 joined a brokerage named Battye, Wimpenny & Dawson, which later merged with Rensburg. His open-plan office, where he sits with fellow U.K. fund managers, overlooks the Leeds-Manchester canal, a relic of the city’s 19th century industrial heyday.
Canal Wharf, as the area is known, was gentrified in the 1990s and now hosts thousands of newly built flats as well as Wal-Mart Stores Inc.-owned Asda’s U.K. headquarters and a shopping center. The father of two boys says U.K. consumer stocks may be in line for a similar revival.
Pub chains, house builders and some retailers have fallen so much they present a good opportunity to benefit should Britain’s economy rebound more quickly than expected, Spencer said.
He now owns pubs with low debt such as JD Wetherspoon and Mitchells & Butlers Plc and firms with high levels of cash reserves including house builders Bovis and Persimmon Plc and Greggs Plc, Britain’s biggest bakery chain.
“I’m not expecting a Phoenix-type recovery from the U.K.,” he said. “Quite the opposite. Things will be very, very tough. But there comes a valuation point at which you say, ‘is this factored in?”
Spencer posted a 32.6 percent return last year, beating his benchmark FTSE 250 Index by 3.5 percentage points and more than 80 percent of his rivals after investing in engineering firms such as Weir Group Plc and Spectris Plc, which get most of their earnings from outside the U.K. Both firms have risen by more than 50 percent in the last six months. That growth is unlikely to continue, Spencer said.
“We felt there’s a very, very crowded trade participating in overseas earners,” he said. “If there’s the slightest slip up in emerging markets or demand from China, how quickly will these stocks fall?”
A major risk to U.K.-focused stocks is if the Bank of England’s Monetary Policy Committee raises interest rates from the record low of 0.5 percent, according to Derek Stuart, who manages Artemis Management Group Inc.’s U.K. Special Situations Fund in London, the fourth-best performer over the last decade.
“They may go up as a warning sign to say that inflation is an issue, but I think it’s a real risk for the economy,” he said.
Stuart is countering this by buying large firms such as Vodafone Group Plc and BAE Systems Plc, which will benefit from economic growth outside the U.K. Both firms’ dividend yields are more than 5 percent, within the highest 15 percent of FTSE 100 companies, according to data compiled by Bloomberg.
Spencer agreed that a rate rise would hurt his investments.
“I’m hoping the MPC errs toward the growth bias rather than trying to act to damp down inflation,” he said. “The elements that are prompting inflation at the moment aren’t going to be influenced by rate rises: Food and fuel and tax increases. Putting rates up wouldn’t have any great influence on any of those items.”
London and Johannesburg-listed Investec Plc sold Rensburg last month to San Mateo, California-based Franklin Templeton Investments, which has $670 billion in assets. The firm will move offices later this year -- to another site in Leeds.
“I like living in Yorkshire,” Spencer said of the county where he lives and works. “We’re probably quite contrarian as well as being deeply skeptical. Being outside London probably suits our style.”
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