Asset manager shares may have recovered from a rocky 2018, which inflicted double digit slides in sector indices, but are still priced to reflect a much rockier road ahead.
From an average valuation rated in the mid-to-upper PE multiples in recent years, UK fund groups currently trade at an average 12.4 times forecast earnings.
As much as the peak multiples looked toppy then, the sector now appears to have been beaten up beyond justification, says Chris Murphy, lead manager of Aviva Investors' £953 million UK Equity Income strategy.
His team took advantage of the late 2018 sell-off to snap up discounted exposure to sector mainstays Schroders and St James’s Place.
SJP accounted for 3.12% of the fund and Schroders 2.2% at the end of April.
While the house has banked double digit returns over the year to date, he believes the discounted price of both made for a decent entry point.
Schroders ‘has excess regulatory capital’ while St James’s Place ‘continues to grow’, Murphy (pictured) said. ‘We’d owned Schroders, sold it and bought it back lower down. We had confidence in the story evolving.
‘We had a lot of stocks in financial services and it was a question of does it fit in the portfolio at the time? We had confidence in long-term dividend growth. That was the case with SJP as well.’
He added: ‘After the end of the summer last year, when there were worries about global macro growth and a US slow down, we had a sell-off in global markets, and UK investors had concerns about what politics would mean for stocks. A number of stocks, particularly in industrials and financials, were affected, and we took advantage of that.’
Evolve or die
Where its rivals have struggled to adapt to changing client demands, SJP has provided high quality service for clients, Murphy said.
‘The world of financial services is evolving. If you look at SJP client satisfaction, it’s very high. They have a strong network – advisers are well regulated internally and focus very heavily on training. That’s continuing to drive growth.
‘We think there’s enough pent up assets to come onto the books. Everything that’s gone on with pressure on IFAs over the years, they’ve struggled to offer broad spreads – SJP plugs that gap. In brief periods, things can slow in terms of growth, but we think, structurally, it’s well placed.’
The UK Equity Income fund has returned 33.1% over three years versus a UK Equity Income peer average of 25.7%, while over five years the fund is up 35% versus 26.5%.
The house is keen on the financial sector more broadly, accounting for more than a fifth of the fund’s assets. Investment managers stood out as an area of secular growth within that, Murphy said.
‘It’s a space we’re reasonably overweight in quality names, and one with a long-term hat. Market gyrations, clearly on sell-off, will roll over, but the long-term story is to own the right names. We try to be as agnostic to the structure of the market as we can.’
The second largest holding in the fund is specialist credit investment manager Intermediate Capital Group at 4.21% of assets, just behind top holding BHP. The fund also holds Life policy consolidator Phoenix and global insurance giant Prudential within its top 10.
‘We see both [Schroders and SJP] as long-term investments and can’t see anything that would lower my holdings in them at this stage. If they became overvalued then we’d reassess, but we don’t see they’re close to that stage at the moment. If the story isn’t changing then we’re happy to stick with them,’ Murphy added.
Playing the long game
Bemoaning the ‘very short-term view’ industry colleagues take on returns and when to ditch equities, Murphy emphasised a more patient approach.
‘When we start, it’s a three to five-year holding. Sometimes we do have to wait longer for it to perform. People are very short-term.
‘If you buy a stock today, and something comes tomorrow that changes everything, then sell it’, he said.
There are currently 50 stocks in the fund, which Murphy describes as a normal amount. ‘We don’t want to get overly concentrated’, he said.
Comparatively little trading has not stopped Murphy and his team scouting out companies.
‘We met a number of companies we don’t own in the recent weeks, like Ultra Electronics, who’ve had a change of management. We don’t own them but keep in contact with businesses like that. One day the thesis might come into place.’
He also praised DFS, a holding he keeps because, no matter how committed to our phones we are, ‘the internet can’t get in the way of buying a sofa’.
Shoppers want to sit on the sofa before they purchase it, whereas buying it online might result in product dissatisfaction and a difficult returns process, he explained.