Walker runs the five crown-rated Invesco Perpetual UK Growth portfolio, which has benefited from his contrarian sector bets in the past 18 months or so.
Many managers have been talking up the fortunes of the domestic UK market in recent weeks, but Walker was well ahead of them: he added names such as Dixons, JD Wetherspoon, ITV and N Brown 18 months ago, which have helped drive his fund to the top of the performance tables.
According to FE data, his fund is the second-best performer in the IMA UK All Companies sector – which has almost 300 constituents – over one year, and eighth best over three years.
Performance of fund vs sector and index over 3yrs
Source: FE Analytics
Walker (pictured) still thinks there is upside potential in the UK domestic sector, but is tipping another area to keep his fund firing on all cylinders.
"Mining and oil and gas – yes, absolutely this is one area where investors need to be looking," he said.
"I hold BP and BG, which are both significantly undervalued, and I’ve been buying Rio Tinto this year. It’s the first time I’ve held it in 10 years."
Both BP and BG are top-10 holdings with Walker, with a weighting of 5.28 and 5 per cent, respectively. Rio Tinto has a 3.4 per cent weighting.
Walker explains there are three reasons why he has not held Rio before: one, because he was sceptical about valuations compared with the direction of metal prices; two, because he doubted how good miners were at allocating capital; and three, because miners were heavily correlated, making it very difficult to add alpha.
All three, he says, are changing.
"The correlations have recently broken down and miners like Rio Tinto have seen changes at the top, and the new management is much more shareholder friendly," he explained.
"Iron ore is priced at $135 a ton and I can justify holding Rio if this falls to below $80. This is a big change."
On a similar basis, he admits that BG may not be as well run as a more expensive company, but says the fact it is trading on only eight times earnings gives him more than enough protection on the downside.
Walker says he could well add another mining or oil and gas company to his portfolio in the foreseeable future, but at the moment he is comfortable with his exposure.
"Will these areas drive the performance of the fund? Absolutely yes over the next 12 to 18 months," he added.
FE data shows that BP and Rio Tinto have significantly lagged the market so far this year, though BG has done a little better, with returns of almost 18 per cent.
Performance of stocks and index in 2013
Source: FE Analytics
He believes waiting for a catalyst to drive a turnaround in the performance of Rio Tinto or BP is pointless, as usually they are "only identified after a stock has rebounded". Focusing on valuations, he says, is the most effective method of finding hidden gems.
The manager does not expect the UK market or his fund to perform as well next year as this one, as he believes the opportunity he found in the domestic UK sector was "a clear opportunity to exploit".
He thinks high single-digit returns from the market are realistic next year, but would not be drawn on what kind of return investors can expect from his fund.
"My fund is up 28 per cent so far this year – one thing I can guarantee is that it won’t be up by that much next year."
Performance of fund, sector and index in 2013
Source: FE Analytics
"The market is trading on 13.5 times, but that number is compressed by areas of the market that have done particularly badly. The median of the market is 15 times, which I would say is fair value, but there’s not as much opportunity."
"From here I think we will see capital values go up in line with earnings growth, which will be helped by global economic growth. Nominal GDP growth of 6 per cent will be a tailwind for corporate earnings, and as confidence in the UK remains at a reasonable level, I think we will see companies invest more of their capital, which will also help."
"JD Wetherspoon has held back on its dividend as it wants to put money back into the business, which is a good sign," he added.
As mentioned previously, Walker still likes the domestic UK sector and includes names such as Rentokil Initial in the top-10 of Invesco Perpetual UK Growth. He also likes the financial services industry, with major weightings to the likes of L&G, Resolution and Schroders.
He prefers this area of the market to "expensive defensives" such as Diageo and Unilever, which he believes are susceptible to earnings downgrades.
"These reliable growth names have been very popular," he said. "The argument in the past has been that emerging markets are the only area where growth is occurring and so the companies selling into them like Unilever have been in demand."
"The problem is that these companies aren’t as reliable as investors thought. They are expensive because of the perceived reliability associated with them and so they get hit hard when there is only a little bit of disappointment."
"The counter argument is that a company like N Brown is trading on 17 times earnings, which is similarly priced to Diageo, but if you believe we are experiencing some kind of economic expansion at the moment, a smaller company like N Brown has much more capacity to grow. Diageo is relying on pricing alone, which is fine – as long as it lasts."
"There is still scope for upgrades for N Brown and though I don’t think Unilever or Diageo will lose a lot of money, I can see them underperforming for a decent period."
N Brown is a FTSE 250 company that specialises in plus-sized clothing – an area of the market Walker says is underserved, and growing. It has already returned 44 per cent so far this year.
Performance of stock in 2013
Source: FE Analytics
Walker’s style is very different to that of his colleagues Neil Woodford and Mark Barnett, who also run UK equity portfolios at Invesco. They are currently defensively positioned, with a bias towards solid dividend payers.
The manager says he will move back into this area of the market if he believes valuations on UK domestic companies go too high, but says he is under no pressure to align himself to any "house view".
"If we get to a point where Unilever gets battered and domestic stocks keep getting re-rated, I will change," he said.
"We are along that road already, but I think we have a long way to go yet."
"As a group, we discuss positions and the system is very collegiate, but the great thing about the Invesco culture is that you are allowed to make your own calls, as long as they are in keeping with the various risk metrics laid out."
"There is no house view, and that’s the reason why managers have such longevity at Invesco. I’ve been here 14 years, Neil’s been here 25 years, and Mark has been here 17. It’s no coincidence."
As well as Invesco Perpetual UK Growth, Walker runs Invesco Perpetual UK Aggressive, which he took over at the beginning of this year. He explains the two funds are very similar, but UK Aggressive is more concentrated, with a smaller number of stocks overall.
Invesco Perpetual UK Aggressive has an even better record than UK Growth, delivering top-decile returns over one, three, five and 10 years. The latter, which has been run by Walker since 2008, is second decile over five and 10 years.
Performance of funds, sector and index
| Name | 1yr | 3yr | 5yr | 10yr |
|---|---|---|---|---|
| Invesco Perp - UK Aggressive | 50.92 | 73.64 | 118 | 212.85 |
| Invesco Perp - UK Growth | 35.88 | 66.35 | 92.67 | 145.22 |
| IMA UK All Companies | 22.01 | 36.36 | 67.76 | 131.13 |
| FTSE All Share | 17.43 | 32.39 | 64.48 | 136.41 |
Source: FE Analytics
The UK Aggressive fund is included in the FE Select 100. Both it and UK Growth have ongoing charges of 1.7 per cent and are available for a minimum investment of £1,000.
