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Man GLG's Dixon eyes 30-year UK value opportunity

Man GLG's Dixon eyes 30-year UK value opportunity

Man GLG UK equity manager Henry Dixon has identified a real opportunity after the 'unprecedented exodus' has left stock valuations languishing at 30-year lows.      

The investor stampede for the door comes amid the huge uncertainty surrounding Brexit. However Dixon, who runs the Man GLG UK Income fund and is A-rated by Citywire, believes 'valuations and sentiment towards the UK look extreme' now that billions has left the market.  

Brexit worries, along with a tightening monetary environment, combined to devastating effect in the fourth quarter. This left the FTSE All-Share sitting on an overall loss of 9.5% for 2018.

The antipathy towards UK equities has been prevalent since the European  referendum in June 2016. 

According to the Investment Association, UK equity funds have seen more than £10 billion in outflows since the public voted for Brexit. 

Last year also saw the third worst derating of UK share prices in percentage terms in 28 years, after a 23.6% fall in P/E ratios – with only 2008 and 2002 seeing faster drops.

Drawing on history, Dixon (pictured) feels there could be a real opportunity here. ‘As we look at the major deratings since 1990, we would note that all have been greeted by a rerating of 18% on average in the following year, and an average total return of 24%,' he highlighted. 

Dixon also emphasised that the UK economy is currently experiencing record job vacancies, rising wages and falling inflation, which ‘is not the basis for despair domestically.’

‘This combination of events is starting to pave the way for a meaningful improvement in income available for discretionary spend which is forecast to return to levels not seen since 2014 and 2015, a period when the UK would be the fastest growing G7 economy,’ he added.

When it comes to opportunities, the fund is currently overweight the real estate, insurance and materials businesses.

‘Housebuilders, for example, are almost all in strong net cash positions and while we acknowledge the more opaque nature of the banking sector’s balance sheet, we take great comfort from the fact that the loan to deposit ratio is at levels not seen since the mid-1980s,’ Dixon explained.

‘The bond portion of the fund is also trading at a meaningful discount to par which has the potential to add pleasing capital upside to what is an attractive running yield.’

Dixon also noted dividends are forecast to be a record £103 billion for 2018, with a trailing yield of 4.3% versus the 20-year average of 3.5%

However, the ratio of dividends to profits is seen as worryingly low at just 1.7x, while concentration is another concern – five of the 39 sectors in the UK accounting for 50% of market yield.

Combined with Brexit, this certainly gives investors food for though. 

However, he does not believe the harm done to domestic valuations is not justified by the risks, considering ‘the balance sheet in some of the sectors that might be worst affected looks to be extremely strong.’

He added: ‘What is more valuable, in our view, is to try to gauge both the sentiment towards the UK as well as the value opportunity.’

The Man GLG UK Income fund has returned 37.1% in the three years to the end of January compared to an average of 16.8% for the UK equity income sector. It is ranked 5/104 in its peer group. 

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Henry Dixon
Henry Dixon
5/91 in Equity - UK Equity Income (Performance over 3 years) Average Total Return: 36.97%
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