Investors who overlook UK stocks because of Brexit fears are missing out on ‘really exciting growth opportunities’, according to Rathbones fund manager Alexandra Jackson.
While Citywire A-rated Jackson (pictured), who runs the Rathbone UK Opportunities fund, admits to being ‘nervous’ about the domestic economy, she believes fund managers and analysts are making a mistake by tarring all stocks with the same brush.
Referencing a Bank of America Merrill Lynch survey which showed UK stocks are a ‘consensual short’ among fund managers, Jackson said the UK domestic economy has been a ‘tough proposition’ for asset allocators.
But she added: ‘I don’t think valuations look egregious at all. We saw a lot of things get sold down, and yet I see all these global businesses who only have a small percentage of their revenues in the UK.
Jackson said she does not want to be ‘loading up on UK-focused stocks’, but rather on firms listed in the UK that make most of their money elsewhere, and are not reliant on the overextended consumer.
A prime example Jackson highlights is FTSE 250 listed stock Alfa Financial Software, which has a market cap of £1.4 billion and at one point had only three analysts covering it.
The finance systems supplier counts a range of giants, including Uber, Barclays, Mercedes-Benz and Bank of America, among its customers.
Jackson said: ‘It’s a really good tech story in the UK, and frankly we haven’t had many of those. It’s listed in the UK, but only a small portion of its revenues come from the UK. It has great growth potential internationally and fantastic management.’
But for investors keen to purchase Alfa, Jackson also had a word of warning: ‘Alpha’s a common name and there were three IPOs last year for firms called Alpha, so it’s easy to get caught out. You have to be a bit careful when trading them to make sure you don’t buy the wrong one!’
Another stock pick Jackson singles out is identity management company GB Group, which has a £600 million market cap, and she describes as a ‘small but very ambitious firm’, with the remit of new CEO Chris Clark to expand its business internationally.
‘There are all these regulatory requirements that firms have to go through, but they still need to make the experience smooth for the consumer,’ she said.
‘They help a wide range of companies do that, and actually their new CEO has come from one of their customers, Experian.’
Besides companies that make most of their money internationally, Jackson also believes there are growth opportunities to be found in real estate investment trusts (Reits), especially those involved in developing light industrial estates.
This, Jackson said, is a great way to play the growth of online retail, avoiding the higher valued online retailers as the demand for logistics grows.
She added: ‘The demands for space are just huge. The amount of space Amazon in particular has taken, especially in the so-called ‘Golden Triangle’ of logistics in the Midlands, has made the UK market really tighten, so we’ve seen that rental growth coming through.’
UK high street
But one area Jackson is definitely avoiding is the traditional high street retailers, most of which are predominantly focused on the UK domestic economy, which faces a whole host of macroeconomic headwinds.
‘There are signs that inflation will stay close to 3%, the oil price looks like it’s staying sticky and we’re not seeing wage growth coming through,’ she said. ‘The consumer feels pretty tight. Consumer confidence is moving down and there have been a lot of headlines recently about government posturing over Brexit, which is not good for business confidence and is making companies postpone investment in the UK.
‘So that keeps me on the sidelines for the domestically-focused dinosaur retailers, who haven’t come to grips with the need to be a multi-channel retailer.’
Jackson is also avoiding UK banks, which she said are ‘not trading on particularly intriguing valuations’ and also face a lot of headwinds going forward, despite the likelihood of an interest rate rise in May.
The fund’s focus on growth stocks is a tweak to the mandate from six months ago, when it was called the Rathbone Recovery fund, and focused on stocks which were out of favour with investors, but had long-term potential.
Jackson said her main skill is identifying growth opportunities and that value investing is not her style, with the ‘recovery’ name therefore leading to ambiguity over the fund’s approach.
Former co-manager Jo Rands left the fund last year at the time when the name and mandate changed, and has since been replaced by analyst James Workman, who provides support to Jackson.
Over the three years to the end of January, the fund has returned 34.7% compared to the sector average of 26.3%.