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Some fund managers have started to give up on Britain’s stock market. Professional investors were more pessimistic about the UK than any other market in the world this month, according to a survey by Bank of America Merrill Lynch.
But British shares have had a good year as investors flocked to “value” companies – those that trade at a low share price relative to profits.
The £1bn Artemis UK Select fund has benefited from this, returning 37pc over the past year and beating rivals’ average gain of just 25pc. Ed Legget, who has co-managed the fund with Ambrose Faulks since 2015, thinks British stocks have rarely looked more attractive, despite their recent good run.
“The London market is trading at the biggest discount to the US and Europe in 20 years,” he said.
Mr Legget tells Telegraph Money why British stocks are being overlooked by professional investors and which ones he thinks will spearhead the recovery next year.
Who is the fund for?
Investors who want a manager to pick the best British stocks. We are not like other funds that will invest in overseas companies that are just listed here. We are looking for British businesses that will benefit from a strong British economy and that will return more than the average stock on the London market.
How do you pick stocks?
We choose companies of all sizes that have a strong market position and a significant opportunity to grow. We end up with a relatively small selection of about 50 to 60 stocks.
Why do you think investors should buy British?
The market has lagged its peers around the world and the pandemic hit it hard. London does not have many technology stocks, which has contributed to poorer returns.
But there is a strong recovery. Commodity prices have gone up, which is good for London’s miners and oil and gas companies, and the British economy is recovering better than expected.
Is there more to come from the recovery?
We think higher levels of consumer spending will drive the economy next year. There are big opportunities for investors here. We have invested in the airlines Ryanair, International Consolidated Airlines, owner of BA, and Jet2. These businesses struggled under travel restrictions last year but, because some of their competitors have gone under, they can capture the excess demand once customers come back.
We have also invested in Mitchells & Butlers, the pub chain. There are significantly fewer pubs around these days – those that have survived can perform even better now that they take up a larger share of a smaller pie.
What pressures do British stocks face?
Inflation is a big worry. I think the high figures at the moment are transitory and will fade once supply issues resolve themselves. But the growth in wages looks more permanent.
Persistently high rates of inflation will lead to a rise in interest rates, which would actually benefit our stocks in the financial industry.
Banks are awash with cash, which they can use to lend out at a higher rate and make a bigger profit. Our investments in Barclays, NatWest and Standard Chartered stand to gain.
What sectors do you avoid?
We usually avoid areas such as biotechnology and pharmaceuticals, because we do not have enough expertise in that area. We also avoid investing in outsourcers within the construction industry, because it is difficult to assess the impact of wage inflation on them.
What have been your best and worst investments?
Our best was Asos, the online clothing store, which we bought at the beginning of the pandemic last year. It was an opportunity to buy into a company that we had admired but never owned.
It recovered very well, and lockdown habits actually worked in its favour, as loungewear products have higher margins. We held it for about nine months and made about 320pc.
Our worst was International Consolidated Airlines. We’ve lost 74pc but we still hold it because we’re confident that the company will grow now that the industry has fewer players in it.
What would you have been if not a fund manager?
I studied engineering, so I think I would have gone into that. I would have specialised in manufacturing.
I always like to see British companies in that sector, as I think it is an example of where the UK has a very strong edge.