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Brexit won't happen but it's yielding cheap buys, says Aviva’s Murphy

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Brexit won't happen but it's yielding cheap buys, says Aviva’s Murphy

Christopher Murphy doesn't believe politicians will be able to deliver on Brexit, but the manager of the Aviva Investors UK Equity Income fund is happy to pick up cheap UK shares in the meantime.

‘My personal view has always been it'll never happen because it's just too complicated,’ said the manager of the £937 million fund.

Murphy has been seizing on the stock market uncertainty driven by fears over Brexit to pounce on cheap UK shares, taking advantage of what he believes has been an indiscriminate marking down of London-listed stocks. 

‘You could say everything in Britain is rubbish but it's just not true - Weir is good, Unilever (ULVR) is good, Reckitt Benckiser (RB) is good, BHP (BHPB) and Rio Tinto (RIO), in terms of the assets they’ve got, are good and yet they're all sitting down there as cheap,’ he said. 

Even taking fears over the prospects for the UK domestic economy at face value, some stock with heavy overseas earnings were being punished just as much, he added.

‘Take the FTSE, where 70% of earnings are overseas. Melrose (MRON), their auto business, I think they only had one manufacturing plant in the UK.’

Cheap buys

Murphy (pictured) used negative investor sentiment towards the UK and overplayed global growth fears to add to positions in real-estate investment trust Land Securities (LAND), soft furnishings retailer DFS (DFS), brick maker Ibstock (IBST), asset manager Schroders (SDR) and turnaround specialist Melrose.

According to the fund’s latest annual report, DFS made up a 0.8% position at the end of October, Ibstock accounted for 1.1%, while Schroders made up 1.5% of the portfolio. Melrose is a 3.9% position, according to the latest factsheet.

He highlighted Ibstock's resilience given the brick maker supplied the breadth of the house building sector and so was unaffected by the varying fortunes of different builders.

Its price-earnings ratio of nearly 14 times was significantly below the market and the brick supplier also had good free cash flow, as well as dividend yield of 3.7%. 

Melrose earlier this month reported a loss of £550 million after its hostile takeover of engineering firm GKN, but Murphy was optimistic about its prospects of turning around the business over the next few years. 

‘[Melrose] is trading on 11 times, it has a growing dividend, the free cash flow that they generate they would pay it out as a dividend stream, so I think we would see good dividend growth from it,’ he said. 

More recently he said he had bought a position in pump and valve maker Weir (WEIR), which focuses on the oil, gas and mineral sectors. 

Shale gas bottlenecks in the Permian basin of west Texas had been holding back Weir shares recently, he said, but that these were slowly being resolved. 

‘Then we'll see an improvement in the oil and gas business. I wouldn't be surprised if once we've got a margin of profit recovery, they'll probably look to split the business up and then you'll just have a very good, high quality minerals business and it's probably one of the best in the world,’ he said. ‘So we think probably the business will be re-rated.’

Murphy sold out of Vodafone (VOD), on the other hand, because it had been over-distributing dividends and he believed the mobile communications giant needed to be more ‘prudent’ with its cash flow. 

Hargreaves Lansdown 'vindication'

Aviva Investors UK Equity Income was added to the Hargreaves Lansdown ‘Wealth 50’ funds buy list in January. Murphy said he felt this was ‘vindication’ for his team and hoped this would continue to raise the profile of the fund. 

Should the fund see more inflows as a result, Murphy said he would use the money to buy more shares in Schroders, specialist assert manager Intermediate Capital (ICP) and insurance business Phoenix Group (PHNX). Intermediate Capital is currently his top holding at 4.6%, while Phoenix is a 3.4% position. 

Aside from financial services businesses, Murphy was keen to add to Cineworld (CINE), a 1.5% position in October, which yesterday reported a surge in annual profits, up 125% to £262 million, following the purchase of US rival Regal Entertainment. 

Murphy was undeterred by the hefty debt, of three-and-a-half times earnings, the cinema chain took on to buy the US business. 

‘I was slightly surprised they went into the US but I think the US cinema market, though they've got Hollywood, actually it’s amazing how the cinemas are so underinvested,’ he said. 

‘The management have done it before in terms of doing deals. Net debt to earnings is higher than a lot of businesses but I think in terms of them as operators of cinemas, you'd need a massive slowdown and shock to the business to cause real concern.’ 

Murphy has run the Aviva Investors UK Equity Income fund for a decade, delivering a return of 178.4% in that time against a sector average of 158.3%, according to Citywire data. James Balfour came on board as co-manager on the fund in 2016. The fund has historic yield of 4.6%. 

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